Annual Report of the Federal Reserve Board, 1980

T&port V L, 1980 .*'.>' (l< )\'f Board of Governors of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter of Transmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 15, 1981 THE SPEAKER OF THE HOUSE OF REPRESENTATIVES Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the Sixty-Seventh Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1980. Sincerely, Paul A. Volcker, Chairman Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Contents Part 1 Monetary Policy and the U.S. Economy in 1980 3 INTRODUCTION 4 THE ECONOMY IN 1980 6 Household sector 7 Business sector 8 Government sector 9 Labor market developments 10 Prices 13 MONETARY POLICY AND FINANCIAL MARKETS 14 Monetary aggregates and interest rates 20 Aggregate flows of funds 24 INTERNATIONAL DEVELOPMENTS 25 Current-account balance 26 Capital transactions 27 Operations in foreign currencies 30 MONETARY POLICY REPORTS TO CONGRESS 30 Report on February 19, 1980 46 Report on July 22, 1980 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 65 v BOA.RH OI c .<)\ ERNORS 87 > Ml)f K \! OPI N M ^k I • »\;\» F, , 167 eo'A, %?. k w . • i. \i> \i ^ MM 167 Introduction 169 Truth in Lending 176 Equal Credit Opportunity 183 Federal Trade Commission Act 187 Home Mortgage Disclosure 191 IMPLLMFNTATION Ol THE MONETARY CONTROI ACT' OF 1980 195 LEGISLATIVE RECOMMENDATIONS 195 Amendments to the Financial Institutions Regulatory and Interest Rate Control Act of 1978 195 Financial transactions with affiliates 196 Expansion of Class C directors 196 Authority for bank holding companies to acquire banks across state lines in emergency and failing-bank situations 197 Amendments to the International Banking Act 198 LITIGATION 198 Bank holding companies—Antitrust action —Review of Board actions 202 Other litigation involving challenges to Board procedures and regulations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

209 LEGISLATION ENACTED 209 Depository institutions deregulation and monetary control 215 Federal Trade Commission improvements 215 Silver futures market 215 Increase in debt ceiling 215 Small business regulatory flexibility 216 Management of the public debt 216 Bretton Woods Agreements 216 Housing and community development and home mortgage disclosure 217 Sunset of credit control 217 Paperwork reduction 218 Farm credit 219 BANKING SUPERVISION AND REGULATION 219 Supervision for safety and soundness 222 Regulation of U.S. banking structure 228 Supervision and regulation of foreign banking operations in the United States 230 Enforcement of other laws and regulations 234 REGULATORY IMPROVEMENT PROJECT 234 Accomplishments in 1980 235 Work in progress 236 FEDERAL RESERVE BANKS 236 Developments in payments mechanism 237 Examination 237 Earnings and expenses 238 Federal Reserve Bank premises 238 Holdings of loans and securities 239 Loan guarantees for defense production 239 Volume and cost of operations 240 BOARD OF GOVERNORS 240 Financial statements STATISTICAL TABLES 246 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1980 248 2. Statement of condition of each Federal Reserve Bank, December 31, 1980 and 1979 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

STATISTICAL TABLES—Continued 252 3. Federal Reserve Bank holdings of U.S. government and federal agency securities, December 31, 1978-80 255 4. Federal Reserve Bank holdings of special short-term Treasury certificates purchased directly from the United States, 1972-80 256 5. Open market transactions of the Federal Reserve System, 1980 258 6. Earnings and expenses of Federal Reserve Banks during 1980 262 7. Earnings and expenses of Federal Reserve Banks, 1914-80 264 8. Bank premises of Federal Reserve Banks and branches, December 31, 1980 265 9. Volume of operations in principal departments of Federal Reserve Banks, 1977-80 266 10. Principal operations of Federal Reserve Banks—Expense, ratio of expense for each operation to total expenses, and average number of employees, 1977-80 266 11. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1980 267 12. Federal Reserve Bank interest rates, December 31, 1980 267 13. Member bank reserve requirements 270 14. Maximum interest rates payable on time and savings deposits 272 15. Margin requirements 273 16. Principal assets and liabilities, and number of insured commercial banks, by class of bank, December 31, 1979 and 1978 274 17. Member bank reserves, Federal Reserve Bank credit, and related items: Year-end, 1918-80, and month-end, 1980 278 18. Changes in number of banking offices in the United States, 1980 280 19. Number of par banking offices, December 31, 1980 282 20. Mergers, consolidations, acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1980 289 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS FEDERAL RESERVE DIRECTORIES AND MEETINGS 292 Board of Governors of the Federal Reserve System 294 Federal Open Market Committee 295 Federal Advisory Council 296 Consumer Advisory Council 297 Federal Reserve Banks and branches 319 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 1 Monetary Policy and the U.S. Economy in 1980 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The U.S. economy in 1980 experi- vices, even though the growth rates of enced wide swings in output and the monetary aggregates over the four employment and a continued high quarters of 1980 were generally near rate of inflation. An exceptionally or somewhat above the upper ends of sharp but unusually short recession in the ranges established by the Federal the first half of the year was followed Open Market Committee early in the by a rebound during the second half. year. On balance over the year, the gross Over the course of 1980, the national product was little changed in growth of money and credit flucreal terms, after a slight increase in tuated widely, responding to sudden, 1979. Payroll employment fell with sharp changes in economic condithe contraction in production in the tions, to the application of selective first half and despite a subsequent in- credit restraints in the spring, and to crease was only slightly higher at variations in public expectations year-end than at the end of 1979; the about inflation. Interest rates also unemployment rate rose sharply showed large swings. They moved to through May and then changed little. record levels in the first quarter when Large increases in prices of energy pressures on credit markets assoin the first half of 1980 and of food in ciated with Federal Reserve efforts to the second half contributed substan- prevent excessive monetary expansion tially to inflationary pressures. were combined with heightened fears However, beyond these special fac- of accelerating inflation. They then tors, continuing poor productivity fell sharply in the spring as a steep performance and rapidly rising com- decline in economic activity and the pensation combined to maintain an imposition of the credit restraint prounderlying trend of unit labor gram cut into the demand for money costs—a key element in pricing—of and credit. Over the second half of more than 9 percent per year. At the year, interest rates again trended year-end, continued strong wage upward as the System attempted to demands were in prospect and a moderate monetary expansion in the renewed surge in prices of energy and face of a surprisingly swift economic foods seemed likely. recovery and continued brisk infla- Progress toward price stability and tion. The change in operating proreduced inflationary expectations re- cedures that occurred in October mains a fundamental precondition 1979, which shifted the day-to-day for sustained and balanced economic focus of System open market operagrowth. Consequently, throughout tions from the federal funds rate to 1980 monetary policy concentrated reserves, may have contributed to a on holding growth of money and prompter response of market interest credit to rates consistent with a damp- rates to emerging shortfalls or overing of inflationary pressures. The shoots in monetary expansion; Federal Reserve's actions clearly did however, the large swings in rates last impose considerable restraint on the year primarily reflected the unstable aggregate demand for goods and ser- economic environment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 Economic activity fluctuated marked- powers of the Credit Control Act of ly over the four quarters of 1980 but 1969, and the Board of Governors on balance exhibited no growth over responded with a set of temporary the year. At the same time, infla- measures to restrain the growth of tionary pressures remained intense, credit. with most broad measures of prices Although the weakening was not and wages rising at least as fast as in fully apparent at the time, activity in 1979.l Real gross national product the consumer and housing sectors had (GNP) grew moderately in the first already turned down by early 1980. quarter and then plummeted at an an- The falloff in these demands reflected nual rate of 10 percent in the second primarily the high cost of credit and a quarter—the largest one-quarter longer-term deterioration in growth decrease in the postwar period. The of real disposable income and housedownturn bottomed out quickly, hold financial positions. The decline however, and a brisk rebound over probably was exacerbated by the curthe second half brought output to tailment of lending and the change in about the level of late 1979. borrowing attitudes that accom- Monetary and fiscal policies in panied the special credit restraint pro- 1980 continued to be directed toward gram. After credit conditions eased damping inflationary pressures. Dur- early in the summer and the special ing 1979 and into the opening months credit restraints were lifted, personal of 1980, private demands for goods consumption expenditures and housand services nevertheless remained ing starts generally reattained the relatively buoyant in the face of high levels of early 1980. nominal interest rates as the public re- In the business sector, real outlays mained skeptical about the prospect for fixed capital fell substantially for containing inflation. This at- over the year, largely in response to titude, coupled with a sharp hike in the weakness in final sales and rethe price of imported oil and concern duced capacity utilization rates. As in that increased defense spending most of the preceding economic exwould result in wider budget deficits, pansion, businesses continued to contributed to a heightening of infla- maintain tight control over inventionary expectations and substantial tories. Still, the severity of the decline speculation in commodity markets in in final sales in the second quarter led the early part of 1980. Against this to some involuntary accumulation backdrop, President Carter an- and forced subsequent liquidations nounced a multifaceted anti-inflation during the second half. program on March 14. The President The foreign sector provided supauthorized use of the extraordinary port to the economy in 1980. Real exports of goods and services rose, 1. Unless otherwise indicated, annual figures reflecting in part the continuing efrepresent changes from the fourth quarter of 1979 to the fourth quarter of 1980. fects of the depreciation of the dollar Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 Indicators of Economic Performance Percentage change, Q4 to Q4 Ratio in 1.7 Inventory-sales ratio 1.6 1.5 Real final sales Millions of units Index, 1967=100 Housing starts 160 Total industrial production Unemployment rate Blue collar 10 Index, 1973 Ql=100 Percentage change Auto sales 15 12 1974 1976 1978 1980 1974 1976 1978 1980 All data are seasonally adjusted at annual rates. Real GNP and real final sales are in terms of 1972 The industrial production index (monthly data) is dollars. Federal Reserve data; the unemployment rate The inventory-sales ratio is based on real (1972 (monthly data) and the change in nonfarm unit labor dollars) manufacturing and total trade sales and invencosts are U.S. Department of Labor data; auto sales tories. are from the Motor Vehicle Manufacturers Associa- GBP prices are measured by the fixed-weight price tion. All other data are from the U.S. Department of index for gross domestic business product (1972 Commerce. weights). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 in 1911-IS. The volume of imports of in previous years had made American goods and services declined after the households increasingly vulnerable to tirst quarter in response to the income and financial shocks. Around weakening in domestic activity. Oil 1977, households began to save a imports in particular were down distinctly smaller fraction of sharply as consumption was reduced disposable income than previously by the rising price of petroleum and and to borrow heavily to finance their weakness in economic activity. outlays, thereby pushing debt In spite of the slower growth of burdens to historically high levels. overall activity in 1979 and the reduc- Moreover, growth of real disposable tion in aggregate demand during the income turned sluggish in early 1979 first half of 1980, inflationary and income prospects became less oppressures remained strong last year. timistic, while sharp increases in the Month-to-month movements in prices of food and energy began to prices often were dominated by cut into the discretionary portions of developments in food and energy family budgets. markets and in costs of homeowner- Reflecting these developments, ship. But, more fundamentally, the consumer spending in real terms fell key determinants of underlying infla- at a AVi percent annual rate over the tionary trends worsened. A further first half of 1980. As in past recesdecline in productivity, together with sions, outlays for more discretionary continued rapid rates of wage in- purchases were particularly affected. crease, pushed up unit labor costs, Purchases of new cars tumbled to an thus adding to price pressures. In ad- annual rate ofl3A million units in the dition, the effects of sharp hikes in second quarter, 2 million below the the price of imported crude oil since pace in the fourth quarter of 1979, as 1978 spilled over to other goods demand for larger-size domestic and services. The fixed-weight price models plunged. Sales of furniture index for gross domestic business and appliances also fell sharply, in product, a broad measure of infla- part as a result of the drop in home tion, rose about 93A percent over the year, slightly more than in 1979, while increases in consumer and pro- Income, Consumption, and Saving ducer prices, at 12Vi and 12 percent Percentage change, Q4 to Q4 respectively, were a little lower than in the previous year. Real consumption JEL Household Sector Real disposable income Spending by the household sector Percent weakened considerably in early 1980. Saving rate The sharpness of the curtailment probably was related mainly to the tightening of credit conditions and the impact of the credit restraint program on consumer attitudes. How- 1974 1976 1980 ever, other factors also played a role. Based on U.S. Department of Commerce data, sea- In particular, a progressive deteriora- sonally adjusted at annual rates. Real consumption and real disposable income are in terms of 1972 Digitizedt ifoorn F RoAf ShEoRu sehold financial positions dollars. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 sales. Moreover, efforts to conserve starts totaled 1.3 million units, the on energy usage held down real out- lowest since 1975. lays for nondurable goods and ser- In contrast to previous cyclical vices, which were about unchanged downturns, the weakening of housing over the first half. activity in 1980 was most evident in Early in the summer, an easing of the single-family sector. Although general credit conditions and the ter- demographic trends remained favoramination of the special restraint ble, the increased cost of home purmeasures helped to foster a revival of chase associated with higher house consumer outlays, and spending in prices and the rapid rise in mortgage real terms rose at an annual rate of 6 interest rates cut deeply into demand percent over the second half. Income for new homes. Single-family starts prospects and consumer confidence fell to 850,000 units in 1980, comalso improved, and households were pared with 1.2 million in 1979. The able to rebuild savings somewhat as rise in home prices slowed substanwell. tially relative to 1978 and 1979; even Sales of domestic autos picked up so, the average monthly payment on a from the depressed second-quarter new home continued to increase level, although steep price increases faster than household income. These on 1981 models and higher financing higher debt-service costs constrained costs apparently deterred buyers in the ability of many homebuyers to the autumn. For the year as a whole, qualify for traditional mortgages and sales of domestic autos totaled 6.6 contributed to the widening use of inmillion units, the lowest level in 20 novative financial instruments, such years; sales of foreign cars averaged as graduated-payment and variable- 2.4 million, about the same as in rate mortgages. 1979, and accounted for a record one- In the multifamily sector, starts fourth of the total sold. totaled 440,000 units, compared with Real residential construction ex- 550,000 units in 1979. This sector was penditures fell 13 percent over the apparently more resilient because of a year, after a decline of 6 percent dur- sustained demand for condominium ing 1979. Movements in housing ac- units as well as the presence of the tivity within the year were heavily in- section 8 subsidy program adfluenced by the course of mortgage ministered by the Department of interest rates. Total private housing Housing and Urban Development, starts dropped from an already re- which supported around 100,000 duced pace of 1.6 million units in the rental units. New building activity fourth quarter of 1979 to 1.1 million weakened significantly in the private units in the second quarter of 1980 as rental market as rent increases the average interest rate on new mort- generally continued to lag behind gage commitments rose to more than rises in energy costs and other 16 percent. Starts recovered with the operating expenses. abrupt easing of credit conditions early in the summer. By September, Business Sector they had approached their late 1979 level, and they remained at that level Business fixed investment fell 4 perthrough the fall despite the return of cent in real terms during 1980, after mortgage rates to the range of 14 to several years of strong advances. The 15 percent. For the year as a whole, weakness in capital spending can be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1980 linked to the emergence of a sizable tions, also were running below yearmargin of unutilized plant and equip- earlier levels. In addition, surveys of ment as a result of the slow growth of plans for plant and equipment spendfinal sales over 1979 and their con- ing taken toward the end of 1980 and traction in early 1980. In addition, the in early 1981 suggested little if any adbusiness sector came under increasing vance in real outlays for calendar year financial pressure in 1980. Long-term 1981. interest rates were historically high, In general, firms attempted to keep corporate operating profits fell well inventories lean in 1980 as they adbelow year-earlier levels, and bal- justed to wide swings in final sales ance-sheet positions continued to against a backdrop of high carrying deteriorate. costs. Total business inventories in The decline in real outlays was constant dollars were about unsharpest in the construction area. changed over the first half of the Spending on nonresidential structures year. However, the sharp drop in fell 6 percent over the year, after an final sales pushed inventory-to-sales average rise of about 11 percent in the ratios up sharply, and by May the previous two years. Cutbacks were ratio for manufacturing and trade especially severe in the industrial had nearly reached the peak attained building category, while increases in in the 1973-75 cycle. Subsequently, petroleum drilling provided some off- real stocks were liquidated as final set. Business purchases of new equip- sales picked up and adjustments to ment fell 4 percent in real terms over production helped reduce overhangs. the year, led by declines in purchases of trucks and cars. On an industry Government Sector basis, capital spending gains slowed Real purchases of goods and services markedly in most of the cyclically at all levels of government increased sensitive manufacturing groups, par- about \Vi percent over 1980, about ticularly nonelectrical machinery, the same as for each of the previous stone, clay, and glass, and rubber; two years. In 1980, however, growth outlays by motor vehicle manufac- was concentrated in federal purturers, however, were boosted by chases, particularly for national retooling for the new small cars. defense. Purchases by state and local Energy and high-technology in- governments remained unchanged, dustries generally continued to ex- on balance, over the year. hibit considerable strength in 1980. The budget deficit for the federal According to currently available in- government on a national income acdicators, business fixed investment is counts basis rose from about $25 likely to remain sluggish in 1981, billion in the fourth quarter of 1979 especially outside the defense and to around $70 billion in the final energy-related sectors. Although quarter of 1980. The widening of the orders and contracts for plant and deficit largely reflected the automatic equipment in real terms rose during stabilizers of the budget. Growth of the second half of 1980, in the fourth tax receipts, at about IW2 percent, quarter they still were below year- was roughly the same as in 1979, but earlier levels. Longer-term com- much of the advance in 1980 stemmed mitments outside the petroleum in- from the imposition of the windfall dustry, such as capital appropria- profits tax on oil company revenues. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 Increases in personal income taxes ments allowed attrition to reduce and social insurance contributions their payrolls. The sector's operating slowed markedly, largely reflecting budget (total balance net of social inthe patterns in employment and in- surance funds) was close to balance comes, and corporate profits tax ac- for most of the year, as it had been cruals declined. At the same time, since early 1979. transfer payments rose substantially as the surge in joblessness raised out- Labor Market Developments lays for unemployment benefits and other income security programs; in Five years of continuous expansion in addition, social security beneficiaries employment were interrupted in received a 14!4 percent cost-of-living 1980, as firms responded to the sharp raise in July. declines in sales during the first half Nonetheless, increased federal pur- by cutting their work forces and chases also contributed significantly shortening workweeks. Between Febto the expanded budget deficit, large- ruary and July the number of workers ly as a result of higher defense spend- on payrolls of nonfarm establishing. National defense purchases rose ments fell 1 lA million. However, the 5 percent in real terms, while non- contraction was short lived and was defense purchases were up about 2 followed by a substantial and widely percent. Grants to states and based recovery in employment in the localities rose 8 percent in nominal second half of 1980. terms, and in real terms probably fell Much of the early cutback in emsomewhat. A further phasing-down ployment was associated with weak of the local public works and public auto sales and depressed housing acemployment programs accounted for tivity. By midyear, about one-seventh most of the slowing. of those employed in transportation In contrast to the federal sector, equipment and primary and fabristate and local governments were cated metals industries had lost their relatively unaffected by the recession jobs; about a third of the total hourly last year. The growth of total reve- auto workers were on indefinite nues, at 10 percent, was slightly layoff. In addition, employment in higher than the advances in the contract construction declined by previous two years. On the spending almost 337,000 between February and side, growth of outlays already had July. Although the ensuing rebound begun to slow in response to longer- in consumer demand led to sizable term demographic factors and public recalls in these sectors, by year-end sentiment to limit spending. In 1980, payroll employment in manufacturthis trend was reinforced by stringent ing and construction had regained financial conditions that led to the only about one-half of the cumulative postponement or cancellation of sev- job losses since their peaks. The eral bond issues early in the year and economic contraction also spilled contributed to a substantial decline in over into private service-producing construction outlays. Also, employ- industries, holding the employment ment rose only 125,000, the smallest gain in that sector to the smallest in gain in three decades, as enrollments five years. in public service employment pro- The contraction of labor demand grams dropped and many govern- in the first half of 1980 led to a jump Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1980 in the unemployment rate from just quarters of the year, compared with under 6 percent at the end of 1979 to an 8 percent increase in 1979. This ac- IVi percent by May, where it re- celeration was most pronounced in mained for the balance of the year. the manufacturing sector, in which The biggest increases in unemploy- cost-of-living provisions are most ment in the spring occurred among prevalent, but almost all other major adult men, and reflected the concen- sectors also posted larger increases. tration of job losses in blue-collar oc- Hourly compensation, which includes cupations; by mid-1980 the unem- employer contributions for social inployment rate for adult males was surance and the cost of fringe almost as high as at the trough of the benefits, rose 10 percent in 1980, 1973-75 recession. The deterioration about Vi percentage point faster than in job opportunities interrupted a during 1979. five-year climb in the labor force par- The acceleration in hourly compenticipation rate. Even the participation sation coupled with the continuing rate for women, which has contrib- slump in productivity pushed unit uted most significantly to the expan- labor costs for the nonfarm business sion of the labor force in the postwar sector up more than 10 percent in period, edged up only slightly over 1980, compared with 11 percent durthe year. ing 1979. With the rapid price in- The cyclical deterioration in pro- creases in 1980 carrying over into ductivity continued into the first half forthcoming wage negotiations and of 1980 as rapid declines in output with new boosts in payroll taxes and outpaced adjustments in the work in the minimum wage, compensation force. However, the growth in pro- is likely to increase rapidly in the ductivity that accompanied the ad- coming year. vance in production during the second half of the year just about off- Prices set the earlier losses, and output per hour in the nonfarm business sector Inflationary pressures continued to was about unchanged in 1980, after a permeate the economy in 1980, in 1 percent decline over 1979. The trend spite of a second year of sluggish rate of productivity growth apparent- growth in aggregate demand. The ly continued at the slow pace that has fixed-weight price index for gross characterized most of the decade, domestic business product rose compounding the effects of large slightly more than 9 Vi percent over the wage increases on unit labor costs. four quarters of 1980, about !4 per- Despite the slack in labor markets, centage point faster than in 1979. The wage rates accelerated in 1980 as price indexes for consumer and proworkers sought to make up for reduc- ducer finished goods advanced about tions in real wages that had occurred 12!/2 and 12 percent respectively last in the wake of sharp energy price in- year. Their growth was a little less creases in 1979. In the private non- than in 1979, although volatile movefarm business sector, wage rates—as ments in mortgage rates and in home measured by the average hourly earn- prices had an especially large impact ings index—rose at a rate of more on monthly fluctuations in the conthan 9Vi percent over the four sumer price index (CPI). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1980 11 Movements in food and energy ditions in the Midwest and South. prices affected the course of inflation The drought added to the upward in 1980, although pressures in these pressures for other farm products as two sectors emerged at different times well. Crop price increases were during the year. In the first half, especially large, and food prices are retail energy prices rose at an annual expected to rise rapidly in 1981 as the rate of more than 30 percent, while effects of these higher crop prices food prices, which had been decel- feed through to the retail level. erating since the beginning of 1979, While price increases for energy slowed even further, to an annual rate and to a lesser extent for food exacerof less than 5 percent. Then in the sec- bated the overall inflation rate in ond half, energy prices rose at a pace 1980, the strong labor cost pressures below the inflation rate, while food experienced over the year also susprices rose more than 14 percent at an tained an underlying momentum in annual rate. price pressures for most sectors. One The surge in energy prices early in measure of this underlying trend, the the year resulted from higher prices fixed-weight price index for personal of imported crude oil and the pro- consumption expenditures excluding gressive decontrol of prices for food and energy, rose more than 9!4 domestic crude oil. By the second percent over the four quarters of quarter, however, prices for most 1980, up from a pace of 7!4 percent energy commodities had stabilized, as in 1979; part of the acceleration was inventories rose with weakened de- due to the passthrough of higher mand. These large stocks helped to petroleum costs. cushion the impact of sharp produc- An inflationary psychology was tion curtailments by Iraq and Iran evident in the flurry of speculative acduring the autumn and of the con- tivity early in the year, particularly tinuing phaseout of price controls on for gold and silver. Moreover, specudomestic crude oil; by midyear more lation spilled over from the precious than two-thirds of all crude metals to several industrial competroleum supplies were selling at modities, especially copper. By early prices at or near world levels. The in- spring, speculation in commodities direct passthrough of sharp increases markets had subsided in the face of in the price of imported crude oil rapidly rising interest rates and since 1979 was evident in the rapid in- declining aggregate demand, but it creases in prices for some inter- picked up again as the economy mediate materials early in the year, recovered. Sharp declines for prices particularly for plastics and rubber of certain sensitive industrial comproducts. modities—particularly steel, alumi- Retail food prices accelerated num, and lumber and wood prodsharply in the second half of 1980, ucts—had a moderating influence on resulting in a cumulative increase of producer prices in the first half of more than 10 percent over the four 1980. The Department of Labor's quarters of the year. Meat prices in- measure of spot market prices fell 13 creased rapidly in the second half as percent from the peak in February to pork and poultry production fell off, the trough in June of 1980. In addiin part because of severe drought con- tion, producer prices of crude ma- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 The Economy in 1980 terials excluding food and energy fell most of the earlier losses, and by almost 10 percent during the same year-end, industrial raw materials period. With the rebound in activity prices in the producer price index in the second half of the year, prices were lOVi percent higher than a year of industrial commodities regained earlier. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 Monetary Policy and Financial Markets Monetary policy in 1980 continued to bond and commodity markets inaim for expansion of money and creased, and a special credit restraint credit consistent with progress toward program was initiated to supplement a reduction in inflationary pressures. traditional monetary policy meas- Monthly and quarterly movements in ures. the money stock were unusually The imposition of the credit revolatile over the year, in large part straint program and the unbecause of the wide swings in ag- precedented contraction in real gregate economic activity. Nonethe- economic activity contributed to a less, growth rates of the monetary ag- substantial falloff in money and gregates for the year as a whole were credit flows in the second quarter. Inclose to the ranges established by the terest rates plunged from peaks Federal Open Market Committee reached around the end of March, as (FOMC) for 1980. the narrow monetary aggregates, Credit flows also varied consid- M-l A and M-1B, dropped in the early erably during the year, in response spring to below their designated not only to changing economic activi- ranges. In view of unusual factors ty but also to special policies affecting reducing the public's demand for credit growth. On balance they de- transaction balances and the greater clined somewhat from 1979; although relative strength in the broader agcredit demands by governments rose, gregates, M-2 and M-3, the Federal both businesses and households re- Reserve decided against pursuing duced their credit usage last year in an policies that would quickly return the environment of credit costs generally narrowly defined monetary aggrewell above those of 1979. gates to their ranges for fear of aggra- Interest rates fluctuated over an ex- vating inflationary pressures. As a traordinarily wide range last year, result, M-l A and M-1B remained reflecting the impact of sharp below the System's announced targets movements in economic activity and for several months, while the broader in prices on demands for money and aggregates remained within target credit, as well as shifting expectations ranges in the first half of the year. about the economic and financial With the decline in the cost of outlook. Early in 1980, short-term credit to the lowest level in two years rates rose to new peaks as accelerat- and the phasing-out of the special ing growth in money and bank credit credit restraint program in early sumcreated demands for reserves in ex- mer, economic activity began expandcess of the amounts consistent with ing again. As inflationary pressures the FOMC's targeted ranges for also intensified, demands for money growth in the aggregates. The move- and credit strengthened and interest ment in short-term rates intensified rates rose sharply through the second pressures on long-term rates that had half of the year; the monetary agaccompanied a worsening of inflation gregates expanded above target expectations. In March, turbulence in ranges, and the provision of nonbor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy Interest Rates Percent per annum Short-term Long-term 16 State and local government bonds 1974 1976 1978 1980 Monthly averages except for Federal Reserve dis- Urban Development; Aaa utility bonds, weighted count rate and conventional mortgages (based on averages of new publicly offered bonds rated Aaa, Aa, quotations for one day each month). Yields: U.S. and A by Moody's Investors Service and adjusted to Treasury bills, market yields on three-month issues; Aaa basis; U.S. government bonds, market yields adprime commercial paper, dealer offering rates; con- justed to 20-year constant maturity by U.S. Treasury; ventional mortgages, rates on first mortgages in state and local government bonds (20 issues, mixed primary markets, unweighted and rounded to nearest quality), Bond Buyer. 5 basis points, from U.S. Department of Housing and rowed reserves fell progressively short volatility during 1980, as the of the requirements of depository in- destabilizing effects on money destitutions. Most interest rates once mand of sharp quarterly swings in the again reached record levels in Decem- pace of economic activity were exber, and monetary growth slowed in acerbated by atypical movements in the final months of the year. the aggregates relative to income and interest rates during the year. Although the ranges established for Monetary Aggregates the aggregates by the FOMC implied and Interest Rates some slowdown in 1980 from the The monetary aggregates, particularly growth rates recorded in 1979, the the transaction-related measures considerable strength that developed M-1A and M-1B, exhibited unusual in the second half brought expansion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 15 in the narrow aggregates to near the considerably below the pace of 1979 pace of a year earlier. Overall growth and, for the year, was near the midin M-1A and M-1B, however, was point of its range. maintained well below that of Long-term interest rates soared to nominal GNP, as monetary policy record levels early in 1980. Inflacontinued to exert a substantially tionary fears were generated by large restrictive influence. Growth in M-2 increases in major price indexes, by picked up a bit in 1980, while M-3 in- indications of further increases in the creased at about the same pace as in federal budget deficit, and by un- 1979. Bank credit expansion over favorable international political 1980, also exceptionally volatile, was developments. Borrowing in anticipa- Reserves and Monetary Aggregates Based on seasonally adjusted data unless otherwise noted, in percent1 1979 1980 Item 1978 1979 1980 Q4 Ql Q2 Q3 Q4 Member bank reserves 2 Total 6.2 2.6 7.1 11.6 4.3 .4 6.7 16.5 Nonborrowed 6.3 .3 7.8 5.1 3.3 7.4 12.4 7.2 Required 6.3 2.4 6.8 10.4 5.1 .7 5.8 15.2 Monetary base 3 9.2 7.8 9.3 7.8 5.2 9.9 11.2 Concepts of money 4 M-1A 7.4 5.0 5.0 4.5 4.6 -4.4 11.5 8.1 M-1B.. 8.2 7.7 7.3 4.9 5.8 -2.6 14.6 10.8 M-2 8.4 9.0 9.8 7.2 7.3 5.6 16.0 9.1 M-3 11.3 9.8 9.9 9.1 8.0 5.8 13.0 11.6 Nontransaction components of M-2 Total (M-2 minus M-IB). 8.5 9.4 10.7 7.9 7.9 8.3 16.4 8.5 Small time deposits 16.2 23.1 15.3 25.8 17.4 23.7 1.0 16.3 Savings deposits -.5 -11.9 -4.6 -21.4 -20.3 -23.3 27.8 -.9 Money market mutual funds shares (n.s.a.) 163.9 324.2 90.3 120.0 151.9 82.7 75.7 -15.5 Overnight RPs and overnight Eurodollar deposits (n.s.a.) 25.4 17.2 21.8 -33.1 9.0 -57.4 135.6 15.4 MEMO (change in billions of dollars) Managed liabilities at commercial banks .. 77.8 57.7 12.4 10.5 11.3 -3.3 -12.5 17.0 Large time deposits, gross 50.4 19.6 22.0 10.7 6.3 6.2 -4.3 13.8 Nondeposit funds 27.4 38.1 -9.6 -.2 5.0 -9.5 -8.2 3.2 Net due to foreign related institutions 6.9 25.1 -23.4 0 -2.3 -8.6 -11.5 -1.0 Other 5 20.5 13.0 13.8 -.2 7.3 -.9 3.2 4.2 U.S. government deposits at commercial banks 3.3 1.5 .6 -4.0 1.6 -1.6 2.9 -2.3 1. Changes are calculated from the average amounts union share draft balances, and demand deposits at outstanding in each quarter. mutual savings banks). M-2 is M-1B plus overnight 2. Annual rates of change in reserve measures have repurchase agreements (RPs) issued by commercial been adjusted for regulatory changes in reserve re- banks, overnight Eurodollar deposits held by U.S. quirements. nonbank residents at Caribbean branches of U.S. 3. Consists of total reserves (member bank reserve banks, money market mutual fund shares, and savings balances in the current week plus vault cash held two and small time deposits at all depository institutions. weeks earlier), currency in circulation (currency out- M-3 is M-2 plus large time deposits at all depository inside the U.S. Treasury, Federal Reserve Banks, and stitutions and term RPs issued by commercial banks the vaults of commercial banks), and vault cash of and savings and loan associations. nonmember banks. 5. Consists of borrowings from other than commer- 4. M-1A is currency plus private demand deposits net cial banks through federal funds purchased and of deposits due to foreign commercial banks and of- securities sold under repurchase agreements plus loans ficial institutions. M-1B is M-1A plus other checkable sold to affiliates, loans sold under repurchase agreedeposits (negotiable order of withdrawal accounts, ac- ments, and other borrowings. 1980 Q4 estimated. counts subject to automatic transfer service, credit n.s.a. Not seasonally adjusted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy tion of further increases in prices and the more general measures of monemore stringent conditions in credit tary and credit control, and they were markets spurred the growth of short- viewed as temporary. A major part of and intermediate-term credit in the the program was a request that bankearly months of the year, and expan- ing institutions and finance comsion in commercial bank credit was panies voluntarily limit expansion of well in excess of rates consistent with their total loans to U.S. borrowers in its annual growth range. Midway 1980 to a rate that did not exceed 6 to through the first quarter, M-1A and 9 percent, consistent with the an- M-1B also began to accelerate, and nounced growth ranges for money the levels of these aggregates ap- and credit. No numerical guidelines proached the upper ends of their for specific types of loans were prolonger-run ranges. As required vided; rather, the institutions were reserves of commercial banks began asked to avoid certain types, such as to exceed the System's provision of loans for speculative or purely finannonborrowed reserves and as the path cial purposes, but to place no special of nonborrowed reserves was reduced restraint on certain others, such as from previously targeted levels in loans to small businesses, farmers, response to the excessive growth of homebuilders and homebuyers, and money and credit, short-term interest auto dealers and buyers. rates began to rise rapidly. The dis- In addition, in order to discourage count rate was raised 1 percentage lending by commercial banks using point in mid-February, and short- purchased funds, the marginal term market rates reached record reserve requirements on managed levels. liabilities of large banks, originally In light of these developments, a imposed in October 1979, were inbroad governmental program de- creased and the reserve-free bases of signed to curb inflationary forces was these banks were reduced; a similar announced on March 14. As part of requirement for large nonmember this effort, the Federal Reserve in- banks was imposed in the form of itiated a series of extraordinary ac- special deposit requirements on intions—some taken under the authori- creases in their managed liabilities. ty of the Credit Control Act of 1969, Also, a surcharge of 3 percentage which was invoked by a President for points was added to the basic disthe first time. The act provides that count rate on frequent borrowings "Whenever the President determines from Federal Reserve Banks by large that such action is necessary or ap- member banks having deposits of propriate for the purpose of prevent- $500 million or more. To restrain exing or controlling inflation generated pansion of consumer credit, a special by the extension of credit in an ex- deposit requirement of 15 percent on cessive volume, the President may increases above base-period levels authorize the Board to regulate and was imposed on credit extended control any or all extensions of through credit cards, check-credit credit." overdraft plans, unsecured personal The special credit restraint loans, and secured credit when the promeasures adopted by the Board were ceeds were not used to finance the colintended to supplement and reinforce latere.l. Finally, money market funds Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 17 Monetary, Bank Credit, and Reserve Aggregates Billions of dollars Billions of dollars Targeted and actual Ml A Targeted and actual M-1B 400 380 380 360 Targeted and actual M-3 2000 1600 9/2% 1800 1500 Targeted and actual bank credit Reserve aggregates 40 1200 Required reserves 36 1100 Nonborrowed reserves 1979 1980 1979 1980 The shaded lines reflect adjustments to the original Special borrowings consist of credit provided to ranges for M-1A and M-1B to allow for larger-than- institutions through the discount window to assist anticipated shifts to ATS and related accounts from them in dealing with relatively severe and persistent existing demand deposits included in M-1A and from liquidity problems. Because there is not the same savings deposits and other instruments not included in pressure to repay such borrowing promptly as with M-1B. By allowing for these unanticipated shifts, the normal adjustment credit, the broader economic imshaded ranges in an economic sense more accurately pact of special borrowing is similar to that of nonborrepresent the intentions underlying the original rowed reserves. targets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy were directed to put up special depos- tions. At the same time, shifts into its equal to 15 percent of the net in- small-denomination time deposits creases in their assets after March 14. rose above the pace of the first Reflecting the substantial increase quarter. The bulk of this growth was in the opportunity costs of holding in 2 Vi-year, small-saver certificates as transaction balances and the onset of investors sought to lock in their a severe economic downturn, the nar- higher yields. (Effective January 1, row monetary aggregates contracted 1980, commercial banks and thrift inin late March and fell sharply further stitutions were authorized to offer in April, to well below the lower end time deposits of any size having a of their longer-run ranges. Although minimum maturity of 2Vi years and a growth resumed in May and June, on maximum yield tied to that on average in the second quarter these Treasury securities.) Shares of money aggregates declined to levels substan- market mutual funds (MMMFs) contially below what would have been ex- tinued to grow at a very rapid, alpected on the basis of the historical though reduced, rate, and M-2 exrelationship among money, income, panded further in the second quarter, and interest rates. In view of the even though its M-1B component reduced pace of credit expansion, the contracted. Despite the collapse of Federal Reserve on May 22 announced demands for bank credit in the seca partial phaseout of the special credit ond quarter, large banks responded restraint measures that had been in to the more rapid decline in domestic place since March, and on July 2 an- interest rates relative to Eurodollar nounced plans to complete the phase- yields by continuing to issue large-deout. (See "Record of Policy Ac- nomination time deposits in volume tions of the Board of Governors," and by transferring a substantial propage 77.) portion of the funds raised to foreign Partly in recognition of the special branches and foreign head offices. factors acting to slow money growth After the unprecedented decline in and also out of concern to avoid pro- the cost of credit during the spring moting inflationary forces, the provi- and the termination of the special sion of nonborrowed reserves in the credit restraint program in July, second quarter was not designed to economic expansion resumed in the foster a rapid return of M-1A and summer—a turnaround that occurred M-1B to rates consistent with the much sooner and more strongly than FOMC's longer-run ranges for these most analysts had anticipated. These aggregates. Even so, both short- and developments, combined with an aplong-term interest rates dropped parent reversal of the special factors precipitously as money and credit operating to damp monetary growth demands fell off and signs of eco- in the second quarter, produced a nomic decline multiplied. The dis- substantial boost to M-1A and M-1B, count rate was reduced a full percent- and both aggregates expanded in the age point in May and again in June. third quarter at record rates. M-1A Although interest rates declined in rose above the lower end of its range the second quarter to their lowest by midquarter, and M-1B exceeded levels in two years, outflows from its upper bound by September. M-2 savings deposits accelerated at both expanded at a 16 percent annual rate commercial banks and thrift institu- in the third quarter, boosted in large Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 19 measure by a reversal of the substan- point above the upper end of its tial savings outflows of the previous longer-run range. quarter. The rapid growth in core The difference between the annual deposits enabled banks and thrift in- growth rates of these two aggregates stitutions to reduce their reliance on was considerably greater than the Vi large certificates of deposit, so that percentage point that was originally the acceleration in M-3 was somewhat assumed and that was reflected in the less than that in M-2. stated growth ranges. That difference As demands for total reserves was based on expectations about the responded to strengthening monetary extent to which growth in automatic growth during the summer months transfer service (ATS) accounts and and as concerns about inflation inten- negotiable orders of withdrawal sified in light of the surprising sharp- (NOWs) in 1980 would draw funds ness of the economic recovery, up- from both demand deposits (depresward pressure on interest rates began sing M-l A) and savings deposits to develop. Short-term rates turned (boosting M-1B). With the passage in upward midway through the third March of the Depository Institutions quarter and the discount rate was in- Deregulation and Monetary Control creased a full percentage point in late Act of 1980 (MCA), which provided September. By that time, long-term for establishment of nationwide rates had retraced a considerable part NOW accounts as of December 31, of their decline during the spring and 1980, banks began to promote ATS early summer months. This process accounts more vigorously. As a was extended through most of the result, actual growth in ATS and fourth quarter as money continued to NOW accounts was greater than expand at rates above targeted originally anticipated. Adjusted for ranges. Near the end of the year, current estimates of actual experience many interest rates reached levels ex- with transfers into ATS and NOW acceeding those of the spring. As the counts, growth rates for both M-l A federal funds rate rose rapidly, the and M-1B were close to the upper end discount rate was increased a full of the ranges set at the beginning of percentage point in both November the year. and December, and the System reim- M-2 growth fell in the fourth posed a surcharge for large banks quarter, to a 9 percent annual rate, that borrow frequently from the dis- as faster growth in small-denomcount window. ination time deposits was more than In response to the higher interest offset by a sharp slowdown in the exrates, growth in M-1A and M-1B pansion of savings deposits and overslowed from month to month in the night Eurodollars and repurchase fourth quarter, and these money agreements (RPs) and by a runoff of stock measures actually declined in MMMFs. For the year as a whole, December. Nevertheless, for the M-2 grew about 10 percent, 1 percentquarter as a whole, growth in these age point above the upper end of the aggregates was vigorous, bringing an- FOMC's target range. Much of the nual expansion of M-l A to 5 percent, growth in the nontransaction compoabout the midpoint of its longer-run nent of M-2 in 1980 occurred in those range; growth in M-1B, at 7!4 per- assets offering market-related yields. cent for the year, was VA percentage As of December, such assets ac- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 Monetary Policy counted for 45 percent of the non- dow as Federal Reserve member transaction component of M-2, com- banks. The act further requires a pared with 28 percent a year earlier. competitive set of prices to be at- M-3 expansion slowed less than that tached to Federal Reserve services, of the other aggregates in the fourth such as check clearing and the proviquarter, owing to heavy issuance of sion of coin and currency. Access to certificates of deposit to fund robust these services, which previously had growth in bank loans. Growth of M-3 been supplied without charge to for the year, 10 percent, was Vi member banks, will be extended percentage point above the upper end under the act to all depository instituof its longer-run range. tions as pricing of services is im- As in the early months of the year, plemented. Finally, the act created the strong expansion in bank credit at the Depository Institutions Deregulayear-end reflected in part a diversion tion Committee, and directed it to of borrowing from the bond markets develop an orderly phaseout of all into shorter-term credit sources. In ad- terest rate ceilings on time and savdition, bank credit was made more at- ings deposits during the six-year tractive relative to other short-term period beginning March 31, 1980. sources of funds by the tendency for bank lending rates to lag rapidly ris- Aggregate Flows of Funds ing money market rates and by more aggressive pricing for large business Net credit flows to nonfinancial secloans. Nevertheless, growth in bank tors totaled approximately $363 bilcredit for the year was well within its lion in 1980, a decrease of about 8 longer-run range. percent from the previous year. Early In the fourth quarter of 1980, the in 1980, credit flows increased as reserve requirement provisions of the economic activity remained strong MCA went into effect. The act im- and demands for credit were augposes federal reserve requirements on mented by both an acceleration in virtually all institutions offering prices and an increase in borrowing transaction accounts or nonperson- by businesses in anticipation of al time deposits, including U.S. rumored credit controls. In the branches and agencies of foreign spring, however, credit flows conbanks. Reserve requirements will tracted sharply when production and become equal among all institutions sales activity weakened, and monefor each type of deposit once the pro- tary restraint, supplemented by the visions are fully phased in over a special credit restraint measures period ending September 1987. This adopted in mid-March, contributed feature is expected to have major to tauter credit terms and reduced benefits in terms of promoting equity availability of funds at many lenders. among financial institutions and The phasing-out of the credit enhancing the effectiveness of the restraint program, the upswing in FOMC's monetary control tech- economic activity, and the persistence niques. In addition, any depository of rapid inflation led to a moderate institution holding reservable transac- increase in credit flows in the second tion accounts or nonpersonal time half of 1980. deposits is entitled under the act to The Treasury raised a sizable volthe same access to the discount win- ume of funds in credit markets in 1980 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 21 to finance the combined deficits of the of a contraction in savings bonds federal government and off-budget outstanding as market interest rates agencies. For the year, net Treasury soared above yields available on these borrowing amounted to about $79 instruments. In contrast, commercial billion, more than twice the total of banks and other private nonbank fithe previous year. The Treasury con- nancial institutions increased their net tinued to meet most of its net financ- purchases of Treasury securities. ing needs by sales of marketable Net funds raised by state and local securities, and Treasury bills ac- governments rose to about $21 billion counted for a larger proportion of the in 1980. The increase reflected in part net cash borrowing from the public a surge in the issuance of tax-exempt than in previous years. Acquisitions revenue bonds to purchase singleof U.S. government securities by family mortgages, as conventional households dropped, in part because mortgage rates rose to record levels. Net Funds Raised and Supplied in Credit and Equity Markets Billions of dollars 1980 ' Sector 1978 1979 1980P Ql Q2 Q3 Q4 P Net Funds Raised Total, all sectors 482 483 434 497 253 454 533 U.S. government 54 37 79 62 67 99 89 State and local govenment 24 16 21 21 12 24 27 Foreign 32 21 30 24 35 27 33 Private domestic nonfinancial 291 321 234 303 119 231 281 Business 128 156 133 163 79 133 155 Household 163 165 101 140 40 126 Domestic financial 81 71 20 72 104 Private intermediaries 40 36 23 32 - 16 33 44 Sponsored credit agencies 23 24 24 34 16 12 36 Mortgage pool securities 18 28 23 21 20 28 24 Net Funds Supplied Total, all sectors . 482 483 434 497 253 454 533 U.S. government 20 23 26 29 30 24 21 State and local government . 15 13 20 18 2 36 26 Foreign 40 -6 22 47 22 27 Private domestic nonfinancial 51 81 28 74 -53 53 39 Business _ j 10 10 8 -12 20 25 Household 52 71 18 66 -41 33 14 Domestic financial 356 373 338 385 224 318 423 Private intermediaries 305 308 285 315 179 293 353 Commercial banking 129 121 104 117 -2 129 171 Thrift institutions 76 56 57 35 27 74 94 Insurance and pension funds 84 90 98 103 108 93 86 Other 2 16 41 26 60 46 -3 2 Sponsored credit agencies . 26 29 25 40 6 24 32 Mortgage pool securities .. 18 28 23 21 20 28 24 Federal Reserve System ... 7 5 9 20 -26 15 1. Seasonally adjusted annual rates. funds, real estate investment trusts, open-end invest- 2. Includes finance companies, money market ment companies, and security brokers and dealers. P Preliminary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 Monetary Policy Late in the year offerings of such Household borrowing in mortgage securities increased in response to markets also slowed sharply in 1980, federal legislation that restricts their as many would-be homebuyers were issuance beginning in 1981 before deterred by both the high cost of barring them outright after 1983. mortgage credit and a stiffening of Tax-exempt yields moved broadly in nonrate terms by major lenders. concert with taxable market interest Average interest rates on new comrates in 1980, but the net rise in mitments for fixed-rate conventional municipal bond rates over the year home mortgages at savings and loan was proportionately greater than that associations climbed to a record 1614 of taxable yields. The increased sup- percent in April. Reduced deposit ply of tax-exempt securities, together flows and shrinking earnings margins with reduced demands by casualty in- as the costs of funds escalated surance companies, contributed also damped the lending activity of to the upward pressure on interest depository institutions. The slowing rates for longer-term tax-exempt in mortgage lending was concentrated obligations in 1980. Commercial in the residential sector early in the banks increased their net acquisitions year, but spread to other sectors of of tax-exempt securities, and issuers the mortgage market in the spring. were induced to shorten the average Rising unemployment and declining maturities of their offerings because real incomes limited the willingness banks are less inclined to purchase and ability of households to take on longer-term tax-exempt issues. additional mortgage indebtedness, The household sector reduced its while businesses reduced their use of borrowings sharply in 1980 from the mortgage credit in association with record amount in the previous year. cutbacks in commercial construction High interest rates and reduced credit activity. Mortgage borrowing picked availability, prompted in some states up in the late summer and fall in conby restrictive usury ceilings, slowed cert with the easing of mortgage inthe growth of installment credit early terest rates, the improvement of in the year. Installment credit then deposit flows to thrift institutions, contracted in the spring by the largest and the spread of innovative mortamount in the postwar period, as fur- gage instruments that permit interest ther credit-tightening measures by on loans to fluctuate with other lenders, a result in part of the special market yields. deposit and other features of the Net funds raised by nonfinancial credit restraint program, curtailed the business fell about 15 percent to $133 supply of credit. At the same time, billion in 1980. Within the corporate the psychological impact of the credit sector, the gap between capital exrestraint program was combined with penditures and gross internal funds of the moderating effect on consumer nonfinancial firms remained sizable, spending of declining real incomes but a reduction in financial uses of and worsening employment pros- funds—including net extensions of pects. Installment credit began ex- trade credit—lowered overall corpanding again in the second half of porate financing needs. Net funds the year, although at a relatively slow raised in markets by these corporapace that reflected both the continu- tions rose in the early months of ing low level of auto sales and restric- 1980, when concern about the future Digitizedt ifovre F tReArmSEsR b y lenders. availability of credit apparently enhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 23 Financing Pattern of contributions into some pension fund Nonfinancial Corporations accounts reduced investable funds of Billions of dollars these institutional investors. On balance, nonfinancial corporations Financing gap concentrated their requirements on shorter-term sources of funds in the Capital expenditures first quarter, especially bank loans and commercial paper issuance. The pattern of financing by nonfinancial corporations shifted dramatically when interest rates declined rapidly in the spring. Commercial banks discouraged buiness borrowing as they became concerned about their earnings margins and Net funds raised in markets meeting the guidelines for loan growth included in the special credit restraint program. Adjustments in the bank prime lending rate lagged downward movements in market interest rates; the relatively high cost of bank credit coupled with a reduction of short-term indebtedness by many 1974 1976 1978 1980 businesses resulted in an overall contraction in business loans at commer- Quarterly data at seasonally adjusted annual rates. cial banks in the second quarter. couraged many firms to build up their Although issuance of nonfinancial liquid asset holdings with borrowed commercial paper continued, total funds. Borrowing then fell abruptly short- and intermediate-term credit in the spring in association with the showed virtually no growth, as a contraction in economic activity and record amount of notes and bonds the credit restraint program. There- was publicly offered. after, credit demands rebounded as Businesses again relied heavily on economic activity began expanding external sources of funds in the late again. summer and fall, and the composi- The upward movement of bond tion of the borrowing shifted back yields early in the year to then- toward commercial banks as mortunprecedented levels discouraged ma- gage and bond yields again climbed to jor industrial corporations from new highs. A large number of nonpublicly offering notes and bonds. financial corporations postponed Although funds made available to issues that were scheduled to be corporations through private place- publicly offered, while other comments of bonds and mortgages in- panies shortened the maturities of creased somewhat, life insurance their issues. Stock prices remained at companies (the major lender in high levels, however, while new private placements of corporate equity offerings continued at a fast securities) sharply curtailed new com- pace and the volume of convertible mitment activity as policy loans and debt offerings by lower-rated inunexpected deferrals of employer dustrial firms rose to a new high. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 International Developments Economic developments in major rose, and the aggregate deficit of nonforeign industrial countries in 1980 OPEC countries was correspondingly were characterized by slack demand, increased. A major exception was the high inflation rates, and major im- United States, which registered essenbalances in international accounts. tially a balanced current account in Inflation was seen as the critical 1980. economic problem, and policy was Foreign exchange markets were directed primarily to restoring price greatly influenced during the year by stability. By midyear many countries swings in U.S. interest rates—against had made some progress against in- a background of relatively stable flation, having absorbed part of the rates in other industrial couneffects of the earlier sharp increases tries—and by contrasting developin oil prices, but the firm monetary ments in the current accounts of and other policies necessary to various countries. The path of the achieve this result, together with the weighted-average dollar exchange loss of real income resulting from value was close to that for the difhigher energy costs, had a pervasive ferential in short-term interest rates: a depressing effect on activity. Even sharp appreciation in March and though world demand for oil was early April followed by an equally sharply reduced in the year, the sharp drop as U.S. interest rates fell current-account surplus of the relative to rates abroad; a period of Organization of Petroleum Exporting stability through the summer; and a Countries (OPEC) soared as oil prices sharp rise from October through mid- December. For the year as a whole, December to December, the weighted- Gross National Product average dollar appreciated about 5 Vi 1970=100 percent. The dollar appreciated against continental European curren- United States cies, especially against the German mark as that country's currentaccount deficit widened. However, the U.K. pound rose against the dollar and other currencies on the 125 strength of an oil-supported currentaccount surplus and tight monetary policy, and the Japanese yen moved 115 irregularly upward as that country registered relatively strong economic growth, a moderate inflation rate, 1976 1978 1980 and a reduced current-account deficit after midyear. Foreign is multilaterally weighted average of the Group of Ten (G-10) countries plus Switzerland, using Foreign monetary authorities sold 1972-76 total trade weights. substantial amounts of dollars in the Data for the United States are from the U.S. Deearly months of the year, when their partment of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 25 Weighted-Average Exchange Value and reflecting several factors. A major Interest Rate Differential element was a reduction in the value Percent per annum March 1973=100 of oil purchased as the volume imported in the latter half of the year was down 20 percent from the first Weighted-average half. The price of imported oil douexchange value bled from the first quarter of 1979 to 90 the first quarter of 1980, and increased a further 15 percent by the fourth quarter. Whereas the value of other 86 imports rose somewhat for the year, there was some decline in volume as the U.S. economy slowed. On the ex- 82 port side, agricultural exports were well maintained, rising considerably • i i Dec. Mar. June Sept. Dec. in value compared with 1979 despite 79 1980 the limitations on sales to Russia. Exchange value of U.S. dollar is the index of Other exports rose substantially in weighted-average exchange value of the U.S. dollar terms of both volume and price, but against currencies of the other G-10 countries plus slackening demand in major markets Switzerland, using 1972-76 total trade weights. Interest rate differential is the interest rate on brought some reduction in export three-month U.S. CDs minus the weighted-average volumes as the year progressed. foreign three-month interest rate for other G-10 coun- Net U.S. receipts from income tries plus Switzerland using 1972-76 total trade weights. on investments were unchanged in 1980, in contrast to a major increase currencies came under selling pres- in 1979. Earnings of U.S. direct sure, and they also sold dollars, foreign investments were restrained though in smaller amounts, toward by weaker economic conditions the end of the year. U.S. authorities abroad and a leveling off of the bought foreign currencies, primarily growth in petroleum industry profits, German marks, in substantial quantities at times when the dollar was in U.S. Balances on Trade and strong demand and, for the first time, Current Account accumulated sizable balances of Billions of dollars foreign currency. This accumulation exceeded somewhat the outstanding foreign currency obligations of the U.S. government. In the first half of the year the U.S. current account registered a deficit on 20 the order of $10 billion (annual rate), but a sharp turn toward surplus occurred around midyear and was 40 maintained, although at a significantly reduced rate, for the remainder of the 1976 1978 1980 year. Most of the change resulted Data are from the U.S. Department of Commerce Digitized ffroor mFR AaS ERdr op in the trade deficit, and are seasonally adjusted at annual rates. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 International Developments while earnings of foreign direct in- of private capital were exceptionally vestments in the United States rose large, notably in the second and third substantially. Net income receipts quarters, when flows through bankfrom other private investments were ing channels expanded rapidly. At the raised by higher interest rates. same time, however, large inflows through nonbanking channels apparently were not caught by the Capital Transactions reporting system and were therefore Several major shifts occurred in U.S. contained in the enlarged statistical international capital flows in 1980, discrepancy. The increased net outcontrasting sharply with develop- flow through banking channels after ments in 1979. Recorded net outflows the first quarter probably reflected U.S. International Transactions Billions of dollars Quarter Year Transactions 1979 1980 1979 1980 Q4 Ql Q2 Q3 Q4 Current account -.7 .1 -1.7 -2.6 -2.4 4.5 .7 Merchandise trade balance .. -29.4 -27.4 -9.2 -10.8 -7.5 -2.9 -6.1 Exports 182.1 221.8 50.2 54.6 54.6 56.1 56.4 Imports 211.5 249.1 59.4 65.5 62.1 59.0 62.5 Investment income (net) 3... 32.5 32.5 8.9 10.1 6.1 8.1 8.3 Other services 1.8 .2 -.2 Unilateral transfers, private 1.9 .3 and government -5.7 -1.6 -1.8 -1.5 -2.3 -7.0 -1.3 Private capital flows, net -5.0 -6.7 6.4 -12.9 -8.5 U.S. bank-reported capital, net -39.8 -24.8 (outflow, -) 6.8 -6.8 6.1 -12.1 -4.7 U.S. net purchase (-) of foreign -35.9 -25.3 securities -4.6 -1.0 -.8 -.4 Foreign net purchase (+) of -3.2 -1.2 U.S. Treasury securities 4.8 .9 3.3 -.3 .9 Foreign net purchase (-) of other 2.7 -1.2 U.S. securities 2.9 7.4 .3 2.4 1.2 1.0 2.8 U.S. direct investment abroad 3.... -24.3 -20.6 -4.1 -5.5 -2.9 -4.1 -8.2 Foreign direct investment in United States 3 9.7 8.2 2.6 1.7 3.1 2.4 1.0 Other corporate capital flows, net.. -.3 n.a. 1.5 -.8 1.5 .9 n.a. Foreign official assets in United States (increase, +) -14.3 16.2 -1.2 -7.2 7.8 8.0 7.6 U.S. government foreign assets, net (increase, -) -4.9 -13.3 -1.5 -4.7 -.7 -2.5 -5.4 Reserve position in IMF (4) -.3 Convertible currencies and other -.2 -1.7 -1.2 reserve assets -.6 -3.2 .6 U.S. government foreign credits and -.9 -6.5 -3.0 other claims, net -.9 -1.5 -1.2 -1.4 -3.8 -5.1 -1.0 Allocation of special drawing rights 1.2 Seasonal adjustment discrepancy... 1.1 1.2 2.4 -.1 1.5 -4.0 2.7 Statistical discrepancy 23.8 8.8 7.1 18.7 6.9 2.8 35.6 1. Details may not add to totals because of round- 3. Includes reinvested earnings. ing. 4. Less than $50 million. 2. Current account seasonally adjusted; other ac- SOURCE. U.S. Department of Commerce, Bureau of counts not seasonally adjusted. Economic Analysis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 27 various actions taken by the Federal foreign currencies, compared with Reserve in connection with the special total transactions of $23 billion credit restraint program, as well as equivalent in 1979. The dollar's the steep decline in U.S. interest trade-weighted average value was rates. However, the positive somewhat more than 5 percent higher statistical discrepancy suggests that at the end of 1980 than it was at the U.S. nonbank borrowers were able to end of 1979; but in early April it was attract large amounts of foreign as much as 10 percent higher, and at funds directly as U.S. credit demand its lowest point, in July, it was nearly remained active and U.S. dollar in- 2 percent lower than at the beginning struments, such as commercial paper, of the year. Net purchases of foreign remained relatively attractive to for- currencies for the year amounted to eign investors. $8.7 billion equivalent, which were In other private capital flows, there used primarily to settle all Federal was a considerable drop in U.S. direct Reserve obligations arising from investment abroad, mainly for the swap drawings and to reconstitute petroleum industry, and U.S. pur- nearly all the funds raised through chases of foreign securities also Treasury sales of notes denominated declined. While foreign private pur- in foreign currencies in German and chases of U.S. government securities Swiss markets during the last three fell off as the sale of mark-denomi- years and through sales of SDRs and nated Treasury issues was completed drawings on the International Moneearly in the year, foreign purchases of tary Fund in 1978. U.S. corporate stocks increased sub- As 1980 began, prospects for the stantially. dollar's value were mixed. The rapid Foreign official assets in the United rise in oil prices in 1979, the political States rose about $16 billion in 1980, tensions arising from developments in with large net foreign sales of dollars Iran, Afghanistan, and elsewhere, for intervention purposes more than and the unstable conditions in gold offset by increased placements in the and silver markets all contributed United States by OPEC and other to market uncertainties. In this encountries. U.S. official reserve assets vironment, the dollar's value showed increased about $9 billion in 1980, some tendency to strengthen, and reflecting mainly the foreign currency U.S. authorities moved to acquire a purchases detailed below, as well as net amount of about $1 billion increased holdings of special drawing equivalent in German marks for rights (SDRs). repayment of Federal Reserve swap obligations. Starting in February, a widening gap between U.S. and foreign interest rates, reinforced by the Federal The dollar's international value went Reserve's special credit restraints in through several wide swings during mid-March, led to a spectacular rise 1980, influenced mainly by shifts in in the dollar's value against all major U.S. interest rates. U.S. authorities currencies. U.S. authorities actively made gross purchases and sales of purchased foreign currencies, parnearly $19 billion equivalent of ticularly German marks, and were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 International Developments Selected Exchange Rate Indexes The second quarter was marked by 1978=100 a sharp and deep decline in the dollar's value, associated with a fall in U.S. interest rates relative to those U.K. pound abroad. These developments took 120 place against a background of severe contraction in U.S. economic activity. On a weighted-average basis, the dollar had given up all its late-winter gains by the end of May; against some individual currencies, such as Weighted-average dollar the pound sterling and the Japanese 80 yen, the dollar's downward movement was even more pronounced. 1979 1980 U.S. authorities intervened to support the dollar in the amount of near- Weighted-average dollar is the index of weightedaverage exchange value of the U.S. dollar against the ly $3 billion, net, between early April currencies of other G-10 countries plus Switzerland, and early July, when the dollar's using 1972-76 total trade weights. Other currencies are value showed signs of stabilizing. bilateral rates against the U.S. dollar. Almost all the foreign currency sold able to retire completely outstanding was German marks, but moderate Federal Reserve swap commitments amounts of Swiss francs and French and to accumulate additional bal- francs were also used. ances against the U.S. Treasury's The wide margin by which U.S. indebt obligations. In all, an additional terest rates had fallen below reprenet amount of more than $4 billion sentative rates in foreign countries equivalent of foreign currencies was narrowed quickly as U.S. economic purchased before the dollar's value activity revived. At first, the dollar's reached a peak in early April. value in terms of most major curren- U.S. Government Purchases and Sales (-) of Foreign Currencies, 1980 Millions of dollars equivalent Currency Qi Q2 Q3 Q4 Year Federal Reserve f 3,687 343 1,191 1,747 6,967 German marks .. 1-435 -1,398 -544 -167 -2,544 28 150 89 429 Swiss francs -187 -40 0 -271 / 198 20 0 0 218 Japanese yen I -1 0 -5 0 -5 French francs ! ° -100 0 -6 6 1 8 9 0 2 -1 1 6 6 1 0 391 1,409 1,928 7,774 TOTAL ... I 0 -1,685 -649 -167 -2,982 / 4,045 Treasury 1-481 f 1,669 171 643 3,316 5,798 German marks 1-355 -1,209 -268 -97 -1,929 Swiss francs r I 29 0 0 -3 8 5 8 1 0 8 - 1 4 3 6 5 TOTAL .. r 1 - 1 3 ,6 5 9 5 8 -1,2 1 2 7 0 1 -3 7 0 3 3 0 3 - ,3 9 3 7 4 -1 5 , , 9 9 7 3 5 2 1. Details may not add to totals because of separate rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 29 cies again moved up as market par- tively purchased German marks, acticipants envisioned even higher U.S. quiring a net amount of nearly $5 interest rates during the recovery. billion equivalent. With these pur- When U.S. monetary aggregates be- chases, the United States ended the gan to expand at surprisingly high year with balances that more than rates in August and September, how- covered its outstanding foreign curever, concerns about U.S. inflation rency obligations. deepened, limiting further improve- The Federal Reserve's position at ment in the dollar's value in spite of year-end included holdings of foreign the continuing rise in nominal interest currencies valued at $5.1 billion, at rates. During this period, the Federal then-current exchange rates. These Reserve purchased enough marks and were primarily marks, Swiss francs, French francs to repay by late Oc- and yen. Of the total, the System tober its swap obligations to the Ger- owned $2.1 billion equivalent; funds man and French central banks, and held for the account of the U.S. the U.S. Treasury restored some of Treasury amounted to $3.0 billion the mark balances it had drawn on equivalent. No System swap drawings during the spring. were outstanding. (At the end of In the final quarter of the year, 1979, the System owned foreign curanother surge in the dollar's value rencies valued at $0.3 billion and held dominated foreign-exchange mar- $2.2 billion equivalent for the kets. U.S. interest rates once again Treasury; System swap obligations rose to very high levels—higher in then came to $3.2 billion.) The some cases than during the spring— System had a net gain of $96 million and contractionary developments in on its foreign exchange operations in some industrial countries led authori- 1980, of which $25 million was net ties there to lower, or at least not realized gain and the balance raise, their interest rates. The Federal reflected various book-value ad- Reserve and Treasury once more ac- justments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 Monetary Policy Reports to Congress Given below are reports submitted to contribution the monetary and fiscal the Congress by the Federal Reserve authorities can make is to impart a on February 19, 1980, and on July 22, sense of long-range stability in policy 1980, pursuant to the Full Employ- and in the economic environment. In ment and Balanced Growth Act of present circumstances, that requires 1978. an approach that provides assurance that the momentum of inflation will Report on February 19, 1980 be arrested. Inflation not only represents an imminent threat to the sus- Federal Reserve Policy tainability of the current business exand the Outlook for 1980 pansion but also lies at the heart of The Objectives of many of the longer-range problems of Monetary Policy in 1980 the economy, such as the inadequacy Frequently in the past the decisions of business capital formation, and the about stabilization policy seemed related declines in the productivity —perhaps sometimes misleadingly— and real earnings of American workto come down to a choice of how ers, and the vulnerability of the dollar strongly to encourage recovery or to in foreign exchange markets. retard expansion. Decisionmakers Monetary policy clearly has a maface a much more complicated set of jor role to play in the restoration of circumstances today. For some time price stability. Regardless of the now, most forecasters have suggested source of the initial impetus, inflation that the economy is on the verge of can be sustained over the long run recession, but the recession has not only if the resulting higher level of appeared. Over the same period infla- dollar expenditures is accommodated tion has continued apace. The out- through monetary expansion. The look for the economy remains Federal Reserve is determined not to obscured by major uncertainties, provide that sustenance but will ranging from the possible economic adhere instead to a course, in 1980 effects of current international ten- and beyond, aimed at wringing the insions and the prospects for world oil flation out of the economy over time. prices and supplies to the attitudes of If recessionary tendencies should investors around the world toward develop during 1980—as many exthe dollar and the threat that inflation pect—the steady anti-inflationary may bring increasing distortions of policy stance represented by continutraditional spending and savings pat- ing restraint on growth in the supply terns. It is not within the powers of of money and credit would be consistmonetary and fiscal policy to resolve ent with an easing of conditions in all of these uncertainties and to en- financial markets, as demands for sure a fully satisfactory economic money and credit weaken. That performance. would provide support for economic Nonetheless, the appropriate direc- activity and would help assure the tion for policy is clear. The greatest avoidance of a cumulating, deepening Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 downswing. If, on the other hand, in- inflationary rates of growth. The flationary pressures mount, a policy deceleration is especially marked in of restrained growth in money and the case of the narrower aggregates. credit would lead to greater tautness The midpoint of the range for M-l A, in financial markets, thereby damp- for instance, is 43A percent; in 1979, ing the expansion of aggregate de- M-l A increased 5l/i percent. The difmand. In any event, prospects for ference between these two figures acdealing with the inflation problem tually understates the degree of without serious economic disruption deceleration in economic terms, will be materially enhanced if other however, since the adjustment of the elements of government also exhibit a public to the introduction of autofirm anti-inflationary commitment matic transfer service (ATS) and New and if workers and management rec- York State negotiable order of ognize that a moderation of their withdrawal (NOW) accounts probwage demands and pricing policies is ably reduced the growth of M-l A last in their own long-range interests as year by roughly 1 VA percentage points well as those of the nation as a whole. as funds were transferred out of existing demand deposits to such ac- The Growth of Money and counts. In setting the range for 1980, Credit in 1980 the FOMC assumed, in the context of At its meeting earlier this month, the present law, that the public's adjust- Federal Open Market Committee ment process is about completed and (FOMC) established ranges of growth that any shifting from demand for the monetary aggregates that it deposits to ATS and NOW accounts believed, in light of the prospects for will have little further impact on fiscal policy and for private demands, M-1A this year. Of course, if NOW would impose appropriate restraint accounts were authorized on a naon inflationary forces in 1980. Mea- tionwide basis, some downward adsured from the fourth quarter of 1979 justment of the present M-l A range to the fourth quarter of 1980, the might be needed in order to take acranges are: for M-1A, 3Yi to 6 per- count of the accelerated shift out of cent; for M-1B, 4 to 6!/z percent; for conventional demand deposits that M-2, 6 to 9 percent; and for M-3, 61/2 might result. to 9*/2 percent. These ranges are The range for M-1B—which inbased on the newly adopted defini- cludes checkable interest-bearing tions of the monetary aggregates; a deposits in addition to currency and description of this redefinition ap- demand deposits—also implies a peared in the FEDERAL RESERVE substantial slowing; the midpoint of BULLETIN, volume 66 (February 1980) the range, at 5*4 percent, is well pages 97-114. The FOMC also pro- below the actual 7.3 percent expanjected that bank credit would expand sion in 1979. Of course, because ATS between 6 and 9 percent during the and NOW accounts are included in current year. M-1B, the expansion in 1979 was The FOMC's ranges indicate the enlarged by one-time transfers from Federal Reserve's intention to seek an regular savings deposits and probably appreciable slowing of monetary ex- other assets to the newly offered pansion from the rates observed in transaction accounts—the reverse of 1979, and thus to move toward non- the experience with M-l A. For sim- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 Monetary Policy Reports ilar reasons, enactment of nationwide tions plus money market mutual NOW account legislation would be funds. Given the moderation of expected to raise the growth of this demands for credit—especially at money stock measure this year, and commercial banks—anticipated for the present range would have to be the current year, M-3 appears likely reconsidered in that light. to grow less than the 9.5 percent in- M-2 likely would not be affected crease recorded in 1979. importantly by NOW account legisla- It should be emphasized that, tion, since it encompasses the major although we view these new monetary categories of assets that are close definitions as better measures of substitutes for NOW accounts. Be- financial behavior today than the old sides M-1B, M-2 includes savings and definitions, the institutional framesmall-denomination time deposits at work is changing rapidly, and this imcommercial banks and thrift institu- plies an inevitable uncertainty about tions, plus certain other highly liquid the behavior of any monetary aginstruments—namely, money market gregate. Furthermore, the Committee mutual fund shares, overnight repur- recognizes that other aspects of fichase agreements (RPs), and over- nancing and economic developments night Eurodollar deposits at Carib- will require careful monitoring in the bean branches of U.S. banks. The process of policy determination and recently introduced 2!/2-year cer- implementation. The ranges specified tificate, which has no specified for the monetary aggregates appear minimum denomination and carries a adequate to the Committee to provide ceiling rate close to that on Treasury the necessary degree of flexibility. notes, should serve to bolster growth of small time deposits. Six-month The Outlook for the Economy money market certificates likely also in 1980 will remain popular. Nonetheless, ab- It is never an easy matter to project sent a steep decline in market interest the course of the economy, but the rates, the total of interest-bearing current circumstances pose excepdeposits subject to federal rate ceil- tional difficulties for forecasters. ings probably will continue in the Aside from the uncertainties assomonths ahead to grow slowly by ciated with international political tenhistorical standards. However, sions, we find ourselves in an growth of M-2 should be buoyed in economic environment characterized 1980 as in 1979 by sizable flows into by historically high rates of interest the money market funds. On balance, and inflation, so that past experience the prospect is that M-2 this year will may provide only a limited guide to grow at a rate somewhat below the in- prospective behavior. In order, crease of 8.8 percent in 1979. though, to give the Congress an in- The final monetary measure, M-3, dication of the Federal Reserve's includes, in addition to M-2, large- views about the outlook for the denomination time deposits of economy, the Board of Governors $100,000 or more and term (more has assembled, in the accompanying than one-day) RPs at banks and thrift table, ranges that encompass the institutions. It is thus a very broad ag- judgements of its individual numbers gregate, encompassing most of the about the most likely outcomes for liabilities of the depositary institu- several key variables. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 The Board members' projections, rising oil import bill continues to act it must be emphasized, rest on certain as a drag on aggregate demand. With important assumptions. It is, for ex- these depressants on employment and ample, assumed that, although the income growth, consumer spending is cost of imported oil may rise mod- expected to slacken in the months erately further over the course of this ahead. year, there will not be a repetition of It is likely that the tighter consumer the 1979 price runup and fuel supplies and mortgage credit conditions now will not be disrupted. It is also as- existing and the already high debt sumed that overall federal spending in obligations of households will en- 1980 will generally be in line with the courage some recovery in the abadministration's current forecast and normally low personal saving rate in that there will be no federal tax cut. coming quarters. The weakening of consumer demand would also tend to damp plant and equipment spending Range as softer markets tend to deter businesses from outlays that would Item Actual Projected 1979 1980 add to excess productive capacity. Net exports might rise somewhat, Change from fourth quarter to fourth however, owing to the impact on imquarter, percent port volume of the weakness in Nominal gross national product 9.9 IVi to 11 domestic spending and production. Real gross national product .8 —IVi to Vi In the labor markets, employment Implicit price deflator.. 9.0 9 to 11 may be flat this year and could well A verage level in fourth decline somewhat in the goodsquarter producing sectors. At the same time, Employment (millions) 97.7 97 to 983/4 Unemployment rate the growth of the labor force prob- (percent) 5.9 63/4 to 8 ably will slow, reflecting in part the Annual rate of change reduced growth of the working-age in fourth quarter, population but also the usual cyclical percent Consumer price index. . 13.2 8% to 12 response to slack demand for workers. The unemployment rate, which turned upward last month, is likely to As can be seen, even with these remain in an uptrend over the recommon assumptions, the range of mainder of the year. probable outcomes is relatively wide. Even in such an economic environ- Even so, there is recognition that, ment, progress in reducing inflation while considered less likely, the actual will be delayed. Indeed, in the first outcomes could fall outside of the in- quarter, the rise of the consumer dicated ranges. Such is the nature of price index could accelerate, owing in the uncertainties in the economic large measure to the latest round of outlook at present. oil price increases and to the lagged Most members of the Board believe impact on the index of the rise in that a downturn in activity is likely mortgage rates last fall. Throughout sometime in 1980. Production cut- the coming year, wage demands will backs in the auto sector and a drop in reflect efforts of workers to catch up residential construction activity with past inflation, and pressures on already have occurred; meanwhile, a unit labor costs may be intensified by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports cyclical weakness in productivity. These goals, the Economic Report in- Energy prices probably will continue dicates, should be viewed as forecasts to rise rapidly, as recent increases in rather than as indications of the adprices by the Organization of Petro- ministration's desires. The adleum Exporting Countries (OPEC) ministration expects a mild recession, are passed through to consumers and not lasting much past the middle of as domestic gas and oil markets are 1980. A recovery then begins and cargradually freed from controls. ries through 1981. The consumer Should aggregate demand prove price index rises much less rapidly this relatively strong, as some think possi- year than in 1979 (when it increased ble, inflationary pressures across the 13.3 percent), largely in reflection of economy could prove more persist- an expected slowing in the rise of ent. For example, it must be recog- energy prices and of home purchase nized that any substantial increase in and financing costs. A broad price defense spending beyond what measure less affected by these special already is contemplated in the ad- factors, the implicit GNP deflator, is ministration's budget could sig- projected to rise 9 percent in 1980, the nificantly alter the economic outlook. same as in 1979, and to slow to only The lag between authorization and 8.6 percent in 1981. actual federal outlay may be quite There is no apparant incompatibililong in the case of military hardware, ty between the Federal Reserve's 1980 but expectational impacts on employ- monetary growth ranges and the ment, production, and private spend- economic forecast of the administraing can emerge fairly quickly. tion for 1980. The administration has projected a rise in nominal GNP of about 8 percent; this figure is well within the capacity of the FOMC's The Administration's Short-Term monetary ranges to finance. Economic Goals and With regard to the more distant the Relationship of the future, the pattern of developments Federal Reserve's Monetary that appears likely this year would Objectives to those Goals seem to be consistent with the According to the President's Eco- resumption of moderate expansion in nomic Report, which was submitted economic activity in 1981. However, to the Congress last month, the fol- the chances of sustaining an advance lowing short-term goals were laid out over time would be greatly enhanced, for the economy: in an environment of continued monetary restraint, if there were greater progress in reducing infla- Item 1980 1981 tionary pressures than is suggested by Change from fourth quarter the administration's price forecast. to fourth quarter, percent Such progress would depend on, Real gross national product .. -1.0 2.8 among other things, continued fiscal Consumer prices 10.7 8.7 Real disposable income .5 1.1 prudence, moderate wage and price Productivity -.3 1.3 behavior by labor and business, an A verage level in improved productivity performance, fourth quarter Employment (millions) 97.8 99.7 and maintenance of a strong dollar in Unemployment rate (percent) 7.5 7.3 exchange markets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 A Review of Recent monetary aggregates at its July Economic and meeting. Financial Developments Aggregate demand actually proved stronger than generally expected in Overview of Developments in 1979 the second half of 1979, largely One year ago the Federal Reserve because consumers displayed a surreported to the Congress, as required prising willingness to spend, reducing by the Full Employment and Bal- their rate of saving to an extraoranced Growth Act, its objectives for dinarily low level. Real gross national 1979. The Board indicated that, in product rose moderately, and the light of growing pressures on resource overall unemployment rate remained availability, a moderation in the rate stable. Inflation, as measured by the of economic expansion was essential implicit GNP deflator, did not abate, if inflationary forces were to be con- but neither did it accelerate, as labor tained. The pace of price advance had costs and food prices behaved somealready accelerated over the preced- what more favorably than anticiing year, and it was recognized that if pated. this tendency toward faster inflation Taking 1979 as a whole, monetary were not reversed, the progress that expansion was broadly consistent had been achieved by the November 1, with the FOMC's objectives—with 1978, program to bolster the dollar the major money stock measures fallon foreign exchange markets would ing close to or within the upper halves be jeopardized and the dangers of of the Committee's announced serious economic disruption would be ranges. Meanwhile, real GNP growth heightened. Consequently, at its was somewhat less rapid and inflation February meeting, the Federal Open somewhat more rapid than might Market Committee had set growth have been expected last February. ranges for the major monetary ag- Energy supply and price develgregates that would be consistent with opments provide much of the exreasonable restraint of demands for planation for this adverse mix of outgoods and services in the economy. put and inflation; they also represent The first half of 1979 saw a number a major peril to the satisfactory perof unanticipated, negative develop- formance of the economy in 1980. Inments. Economic activity was deed, more secure energy supplies depressed by inclement weather, by and control of inflation are necessary labor disputes, and by gasoline short- conditions for the longer-range progages. More critically, foreign oil pro- ress of our economy and must remain ducers posted drastic price increases, priority matters for public policy giving added impetus to inflation and until they are achieved. draining income from the U.S. economy. In this environment, the Board Economic Activity in 1979 reported in July that there appeared a Economic activity registered only a significant threat of a mild recession small gain last year, following almost in the months ahead. It also noted four years of brisk expansion. Real that there was little hope of a near- gross national product increased term slowing of inflation. Under about 1 percent over the four quarters these circumstances, the FOMC reaf- of 1979; industrial production rose a firmed the previous ranges for bit early in the year but then edged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports off, finishing the year just marginally of spending on consumer durable above the December 1978 level. Two goods was exacerbated by the effects fundamental factors exerted a per- of gasoline price and supply develvasive damping influence on ag- opments on the demand for autogregate private demand: a near mobiles. Consumer spending on doubling of the average cost of im- other items proved quite robust, and ported oil, which drained income to total personal consumption expendiforeign producers and exacerbated tures rose even though real disposable underlying inflationary pressures, income was virtually flat. Business and a posture of increasing restraint fixed investment, which normally lags by monetary and fiscal policy to con- cyclical turning points, posted a small tain those pressures and to prevent a real gain in 1979; at the same time, worsening of long-range price trends. perhaps because an economic slow- While these factors were tending to down was widely anticipated, firms moderate growth of output and ex- maintained a tight rein on stocks, and penditure throughout the past year, despite the problems of the auto secquarterly movements in activity were tor, inventory accumulation was importantly influenced by a series of reduced over the year. Government unexpected shocks. In the winter outlays were flat in 1979, reflecting at months, unusually severe weather in least in part public sentiment for many parts of the nation depressed restraint on taxes and spending. The activity in several sectors. In the one major area of strength was the inspring, real GNP declined ap- ternational trade sector; in constantpreciably in response to strikes that dollar terms, the net export balance disrupted production and transporta- grew substantially as a result of the tion and to shortages of gasoline. As relatively faster expansion of foreign the strikes ended and gasoline lines economies and the continuing effects disappeared in the summer, activity on exports and imports of past exsnapped back smartly, especially in change rate changes. the retail sector where auto sales were Personal consumption expendiboosted by price incentives offered by tures. Real consumer outlays grew dealers and manufacturers in an ef- Wi percent during 1979, compared fort to cut back inventories. Real with AVi percent during 1978. GNP growth slowed again in the final Underlying the weakness in consumer months of the year, as the special spending was a still sharper deceleraelements of strength in the third tion in real disposable income, which quarter dissipated and the basic rose only XA percent during 1979 after restraining influences in the economy a rise of 414 percent in the preceding dominated. year. Growth of nominal income Among the major sectors of the slowed significantly, and household economy, the greatest weakness dur- buying power was further eroded by ing 1979 was in residential construc- accelerating inflation and by the rise tion and consumer durable goods. in tax burdens related to higher social This pattern is typical of periods security taxes and to the interaction when aggregate activity levels off, of inflation and a progressive income particularly when there is a tightening tax. of financial markets, as there was last All of the advance in real consumer year. In 1979, however, the softness spending occurred in the second half Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 of the year when the saving propen- Residential construction. Expendisities of households fell to historically tures for residential construction, in low levels. The personal saving rate in constant dollars, fell about 8 percent the fourth quarter was about 3 lA per- in 1979; given the magnitude of the cent—1 percentage point less than the rise in interest rates over 1978 and previous post-Korean-War record 1979, this is a modest decline by low. The rise in consumer spending historical standards. The demand for after midyear was to some extent a re- housing was sustained by underlying bound from the weak second quarter, demographic trends—including subwhen gasoline shortages had stantial population migration and disrupted normal spending patterns rapid household formation—and by and cut demand for large fuel- the growing interest in homes as an inefficient cars. In response to falling investment and as an inflation hedge. sales and excessive inventories, The combined effects of rising house domestic automobile producers in- prices and mortgage interest rates stituted major sales promotion cam- caused the monthly carrying costs of paigns in the third quarter and again homeownership to climb steeply, but near the end of the year. As a result, buyers were willing to allocate an insales were boosted noticeably; in- creasing share of their income to deed, the higher selling rates may well housing. At the same time, the potenhave involved some ''borrowing" tially disruptive effects of rising from future periods. market interest rates on mortgage Consumer sentiment, as measured credit availability were considerably by opinion surveys, began to de- ameliorated by such institutional terioriate in 1978 and worsened in developments as the improved ability 1979, reaching levels that in the past of thrift institutions to compete for have been associated with reces- lendable funds, most notably through sionary periods. Previous experience issuance of six-month money market with these surveys suggests that there certificates, and the increasing use of should have been a cyclical downturn mortgage-related securities. in consumer spending. That such a Private housing starts averaged 1.8 decline did not occur appears at least million, at an annual rate, during the partly attributable to the strength of first three quarters of 1979, down inflationary expectations, which en- from the pace of 2.1 million in the latcouraged a buy-in-advance mentality. ter part of 1978. Starts fell to about a In the latter part of the year, how- 1.5-million rate in November and ever, consumers began to exhibit less December, however, when the terms eagerness to purchase durable goods and availability of construction and in anticipation of future price in- mortgage credit tightened dramaticalcreases and to show greater concern ly in response to the October 6 moneabout high interest rates and lessened tary actions by the Federal Reserve. credit availability. Given the already Home sales also fell in the closing reduced liquidity of the household months of the year, and prices gave sector associated with further heavy some sign of leveling off. In contrast borrowing in 1979, a turn toward to the 1973 housing downturn, buildsomewhat more cautious spending ers are not saddled with outsized inpatterns would not be at all surpris- ventories of unsold units, and rental ing. vacancy rates generally are very low. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 Monetary Policy Reports Over the course of 1979, single- ment requirements, the net addition family starts fell almost a third from to the nation's capital stock was the very high level of the preceding small. At the end of 1979, the ratio of year. Starts of multifamily units the stock of business fixed capital to declined only 10 percent. An increase the size of the labor force differed litin starts of multifamily units built for tle from the 1975 level; in contrast, sales as condominiums or coopera- the capital-labor ratio increased at an tives was more than offset by a average annual rate of 2.7 percent decline in unsubsidized rental units. over the decade of the 1960s, when Building under the section 8 rental productivity and real income per subsidy program of the U.S. Depart- capita grew rapidly. ment of Housing and Urban Develop- Businesses generally attempted to ment accounted for one-quarter of all maintain lean inventories last year. multifamily units, about the same Total inventory investment in conproportion as in 1978. stant dollars did accelerate during the Business spending. Spending first half of the year, however, repolicies of businesses were generally flecting primarily an inventory imcautious last year as firms, anticipat- balance for large domestic automoing some slowing of sales, attempted biles. After midyear, however, auto to avoid creating excess capacity or makers combined production cutaccumulating unwanted inventories. backs with price incentives to bring Real business fixed investment rose stock back into line with sales. Outonly VA percent during 1979 com- side of the automobile industry, busipared with 10!/2 percent in the pre- nesses generally succeeded in controlvious year. As has been common in ling inventory positions throughout the advanced stages of economic ex- 1979. This goal became especially impansions, spending increases were portant toward the end of the year concentrated in structures, for which when short-term interest rates rose there is a long lag between the formu- substantially, increasing inventory lation of plans and the completion of carrying costs. By year-end, the real new facilities; earlier in the expan- stock-sales ratio for manufacturing sion, capital spending had been domi- and trade was in the normal range, nated by shorter-lived producers' suggesting an absence of the kind of durable equipment such as trucks and inventory imbalances that frequently fleet autos. Most of the advance in have aggravated recessionary tendennonresidential structures during 1979 cies in the past. was for commercial and industrial Government sector. Government buildings. Investment in equipment outlays for goods and services were was little changed over the year, with about unchanged during 1979 followgains in machinery and aircraft off- ing a moderate rise during the presetting declines in motor vehicles. vious year. Public sentiment for Given the continuing need for new spending restraint continued to affect capital to improve productivity, and decisionmaking by all levels of govthereby to alleviate inflationary pres- ernment; federal fiscal policy was adsures and to support rising living ditionally influenced by the need to standards, the level of business fixed avoid any aggravation of inflationary investment last year left much to be forces in the economy. desired. After allowance for replace- Real federal purchases grew about Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 1 percent during 1979, as higher sales tax revenues. As a result, states defense spending more than offset and localities showed their first operslower growth of outlays in the strate- ating deficit (budget position net of gic petroleum reserve and farm price social insurance funds) in three years. support programs. Total federal ex- International trade and payments. penditures—including transfers— Net exports of goods and services recorded a faster rate of growth in were the only major sector that 1979 than in 1978, owing in part to a turned in as strong a performance in large midyear cost-of-living increase 1979 as in 1978. On a GNP basis, real for social security recipients and to net exports increased about $8 billion higher interest payments on the last year. The U.S. merchandise trade public debt. However, inflation- deficit, although swollen by an $18 induced increases in nominal incomes billion increase in the cost of imand previously legislated increases in ported oil, was $29 billion in 1979, $5 social security taxes resulted in a siz- billion less than in 1978. able rise in federal tax collections, The volume of exports continued and as a result, the federal budget to expand rapidly during the past deficit—on a national income ac- year. Agricultural exports jumped to counts basis—declined considerably record rates in the second half as over the year. The high employment drought in the Soviet Union and budget surplus, an indicator of the Eastern Europe boosted sales. More thrust of discretionary fiscal policy, importantly, the volume of nonagriincreased, signaling greater restraint cultural exports rose about 12 percent on aggregate demand. in 1979; U.S. producers benefited At the state and local level, real from an improved competitive posipurchases of goods and services de- tion brought about by the depreciaclined marginally during 1979 follow- tion of the dollar in 1977 and 1978 ing a sizable increase a year earlier. and from relatively robust economic Construction spending was particu- growth abroad. larly depressed following federal cut- In contrast, U.S. import demand backs in grants for local public works was damped by the sluggish performand public employment programs. ance of domestic income and indus- Moreover, states and localities also trial production. Imports other than attempted to limit spending by hold- oil rose only marginally in volume ing down employment growth; the in- terms in 1979, although foreign auto crease in employment during 1979 producers captured a record share of was about the same as in the previous the U.S. market as consumer preferyear but was considerably less than ences shifted toward fuel-efficient the average annual gains recorded cars. At the same time, the volume of earlier in the decade. Despite this oil imports was virtually unchanged slowdown in the pace of spending, from the 1978 level, with reduced the fiscal position of states and locali- consumption offsetting the impact of ties deteriorated in 1979 as revenue a rebuilding of inventories. World oil growth fell far short of the gains prices, after remaining flat for two posted in the previous year. Tax cuts years, jumped sharply. The average by many governmental units and cost per barrel of imported oil in lower car sales and gasoline consump- December 1979 was 87 percent above tion limited the growth of income and the level at the end of 1978. By the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports fourth quarter, U.S. oil imports were finished consumer goods were up at an annual rate of $75 billion, com- about \2Vi percent over the course of pared with a $43 billion rate a year last year. earlier. Rapid increases in energy prices, The current account, which was in particularly for petroleum products, deficit by about $14 billion in each of dominated inflation developments the two previous years, was roughly during the year. Imported oil priced in balance in 1979. Net receipts from under long-term contracts rose steadiservice transactions, continuing their ly, from an official OPEC contract rapid growth of recent years, offset price of $12.91 per barrel in the merchandise trade deficit. The net December 1978 to prices ranging return on foreign direct investment from $24 to $30 per barrel one year was especially strong, reflecting con- later. Moreover, the stockpiling of tinued economic expansion abroad, petroleum by some countries and prothe favorable effects of the 1977-78 duction cutbacks in Iran resulted in depreciation on the dollar value of spot market prices that were considerforeign profits, and the surge in over- ably above official OPEC levels. At seas earnings of U.S. oil companies. the same time, in the U.S. market the Total earnings on U.S. direct invest- producer price index for crude oil was ments abroad were on the order of up about 50 percent during 1979, $37 billion; perhaps half of these reflecting both price increases for earnings were reinvested abroad and domestic uncontrolled oil and the therefore recorded also as an outflow initiation of the administration's of U.S. private capital. Earnings of decontrol program on June 1. foreign direct investments in the The large increases experienced in United States also rose, but they are petroleum prices had significant on a much smaller scale. direct and indirect effects. Retail gasoline prices rose more than 50 per- Prices, Wages, and Productivity cent, and fuel oil prices advanced In 1979, prices advanced at histori- almost 60 percent despite some softcally high rates, primarily as a result ening in demand that was attributable of pressures from energy and labor both to conservation and to mild costs. The fixed-weight price index weather late in the year. In addition, for gross domestic business product, rising energy costs led to faster price a broad measure of aggregate prices, increases for a number of other conrose about 10 percent during 1979, a sumer goods, including transportapace more than 1 lA percentage points tion services and residential rents. At above the previous year's rate of in- the producer level, prices of goods crease. Other price measures increased such as industrial chemicals and plaseven more: the fixed-weight price tics also reflected the steep runup in index for personal consumption ex- energy costs. penditures (PCE) rose 10% percent In contrast to energy prices, food while the consumer price index (CPI) prices increased less sharply in 1979 increased 13!4 percent. The differ- than in 1978. Over the four quarters, ences between these two indicators consumer food prices rose 10!4 perreflected mainly alternative con- cent, following an WA percent inceptual treatments of homeownership crease in 1978. Although beef recosts. At the producer level, prices of mained in relatively short supply dur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 ing 1979, the greater availability of The poor performance of productivother meats and poultry contributed ity reflected in part the continuation to some deceleration of food prices of the weak trend of recent years, during the summer. associated with sluggish growth of the Inflationary pressures persisted in capital stock, changes in the composisectors outside energy and food. tion of the labor force, and other Prices of consumer goods excluding long-range factors. In addition, howfood and energy accelerated during ever, there was a cyclical element in 1979: the PCE fixed-weight price the drop in productivity; there is norsubindex for such items rose IVA per- mally a tendency for output per hour cent in 1979 compared with 7 percent to drop when economic expansion the previous year, and the corre- decelerates, as employers initially are sponding CPI subindex rose at an loath to lay off trained workers for even faster rate. Prices of capital what might prove a short period of equipment and nonresidential struc- slack. tures rose at a faster pace in 1979 than Many workers saw their wage gains in 1978. Price movements in com- outstripped by price increases during modity markets were quite volatile 1979. The lack of progress in real throughout the year and reflected wages is not surprising, given the considerable speculative activity drop in productivity and the adverse related in part to international terms-of-trade impact of the surge in political and military tensions. foreign oil prices. Nonetheless, Wage increases in the nonfarm American workers have become acbusiness sector moderated very slight- customed to an upward trend in their ly to 8 percent in 1979, compared purchasing power, and there are likewith 8!/2 percent the year before. ly to be strong catchup demands this Compensation per hour, which in- year. The administration's 1980 wage cludes fringe benefits and employer standards take this fact into account, contributions for social insurance as permitting somewhat bigger wage well as wages, rose almost 9 percent, hikes for those workers who experijust a shade less than in 1978. The ad- enced relatively small gains in 1979 ministration's voluntary pay standard probably restrained the advance in Labor Markets compensation somewhat in the face The demand for labor remained quite of accelerated price inflation; how- strong in 1979, despite the sluggishever, sectors in which cost-of-living ness of output growth. Firms experiprotection is prevalent, such as manu- encing gains in sales added to their facturing, generally experienced the payrolls, while those encountering largest gains even though demand for dips in the demand for their products labor in those sectors was relatively evidently tended to retain their workweak. ers—with the negative consequences Labor productivity—that is, out- for productivity and unit labor costs put per hour worked—declined 2XA noted in the preceding section. Over percent in the nonfarm business sec- the year as a whole, the number of tor. As a result, despite the slowing of workers on the payrolls of nonfarm compensation, the rise in unit labor establishments increased 2.1 million, costs accelerated sharply, from 8 per- less than in 1978, but nonetheless a cent in 1978 to WVi percent in 1979. sizable gain. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports The major area of greatest strength rate for males 25 and over, and the in hiring was the service sector, in blue-collar jobless rate all increased a which employment rose fairly steadily bit after the first quarter. In January throughout the year. Manufacturing 1980, when the unemployment rate payrolls, in contrast, declined slightly rose from 5.9 to 6.2 percent, the inin the second half of 1979. This weak- crease largely reflected layoffs of ness was concentrated among durable adult male, blue-collar workers. goods producers, especially in the There were no significant changes motor vehicles and steel industries. over the past year in the structure of By the end of the year, about 130,000 unemployment. The jobless rates for auto workers were on indefinite nonwhites, for teenagers, and for layoff. black teenagers have not improved The strength of labor demand in relative to those for other major the service sector may help to explain population groups. This January, the the large increase in the number of nonwhite unemployment rate was women in the labor force last year. 113A percent, teenage unemployment Many of the occupational groups in was 16!4 percent, and black teenage the service sector traditionally have unemployment was 34lA percent. The had high proportions of female work- unemployment rate among nonwhites ers. Adult women have accounted for has remained about twice the level for a large percentage of labor force whites, and teenage unemployment growth in the past several years, and continues to be about three times the this pattern continued in 1979, when rate for adults. they accounted for two-thirds of the expansion both in the labor force and Domestic Financial Markets in total employment. Interest rates. Market rates of in- The overall labor force participa- terest rose substantially during 1979, tion rate grew less rapidly in 1979 so surpassing the previous highs recordthat the smaller increase in employ- ed in 1974. As in that earlier year, ment was still sufficient to hold the sharply accelerated inflation created unemployment rate almost constant strong demands for money and credit throughout the year, at about 5.8 per- and correspondingly intense upward cent. This is a level that, given the pressures on interest rates. These composition of the work force and pressures were most evident in the other characteristics of the labor second half of the year, when the market, most analysts agree is today Federal Reserve had to adopt an inconsistent with relatively tight labor creasingly restrictive posture in order supplies. Certainly, the proportion of to keep the monetary aggregates the population employed remained at within the ranges set earlier and an all-time high during 1979, and reported to the Congress. On October many employers continued to report 6, the System took certain actions difficulty in finding well qualified aimed at providing greater assurance workers. Some statistical indicators that its monetary objectives would be of labor market tautness did, how- achieved. A fundamental change was ever, begin to move in the direction of made in the System's operating progreater ease as the year progressed; cedures, shifting the day-to-day focus for example, the share of the labor of open market operations from the force on layoff, the unemployment federal funds rate to the growth of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 member bank reserves.1 At the same deceleration was particularly marked time, the discount rate was raised 1 in the case of M-l. The FOMC last percentage point to 12 percent, and February established a range of Wi an 8 percent marginal reserve require- to AVi percent for growth of M-l ment was applied to certain managed (currency and demand deposits) in liabilities of commercial banks.2 the year ending with the fourth Over the course of 1979, interest quarter of 1979; this compared with rates on short-dated money market an increase of 714 percent in the instruments such as Treasury bills, preceding year. As the Board indilarge certificates of deposit (CDs), cated to the Congress in its initial and commercial paper generally rose report under the Humphrey-Hawkins 2Vi to 3 percentage points. In long- Act, it was estimated that growth in term debt markets, taxable bond M-l during 1979 might be reduced as yields increased 1 Vi to 2 percentage much as 3 percentage points by the points, and interest rates on conven- shifting of funds from existing detional home mortgage loans increased mand deposits to newly authorized about 2Vi percentage points. Short- ATS accounts across the nation and term rates have fluctuated around NOW accounts in New York State. their year-end levels during the past This meant that the observed growth several weeks, but bond yields have rate of M-l might understate by 3 risen to new highs, apparently at least percentage points its expansion in in part a reflection of concerns about terms of actual economic impact. the consequences of a possible stepup In its midyear report, the Board in defense spending on the federal stated that the FOMC had reaffirmed budget and on inflation. the range of 1 Vi to 4Vi percent, with Monetary aggregates. The major the understanding that this range monetary aggregates grew more slow- would be adjusted upward to the exly in 1979 than they had in 1978.3 The tent that the impact of ATS-NOW account shifts fell short of the original estimate of 3 percentage points. With 1. Appendix B describes the new operating inflows to ATS and NOW accounts procedures [not included in this REPORT]. falling off sharply, the FOMC em- 2. The marginal reserve requirement applies ployed an adjusted M-l range of 3 to to increases, above a base level, in the total managed liabilities of member banks, Edge 6 percent during the remainder of the corporations, and U.S. agencies and branches year based on an expected ATS-NOW of foreign banks. These liabilities include large effect of around 1 Vi percent. time deposits ($100,000 and over with maturi- In any event, M-l increased 5.5 ties of less than a year), Eurodollar borrowings, repurchase agreements against U.S. gov- percent during 1979, and the estiernment and agency securities, and federal mated depressing effect of ATSfunds borrowings from nonmember institu- NOW accounts amounted to about tions. (Federal funds borrowings from member 1 VA percentage points. The aggregate banks, Edge corporations, and agencies and was approaching the upper bound of branches are exempt to avoid double counting for reserve requirements, and a deduction is its range in the late summer, but its permitted against RPs for U.S. government growth moderated in the closing and agency securities held in trading accounts.) months of the year. This slower 3. The discussion in this section is cast in growth has continued into 1980. terms of the former definitions of the monetary aggregates since those were the basis for deci- M-2, which includes, in addition to sions during 1979. M-l, bank time and savings deposits Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports other than large negotiable CDs, in- and savings deposits at commercial creased 8.3 percent between the banks and thrift institutions, a large fourth quarters of 1978 and 1979. volume of funds was placed instead in This is slightly above the FOMC's market debt instruments and in range of 5 to 8 percent, established mutual funds or investment trusts last February and reaffirmed in July. during 1979. Money market mutual Expansion of the interest-bearing funds registered spectacular growth, component was strong, as small- their total assets increasing from $10 denomination time deposits grew at a billion to $45 billion. (A record surge very brisk pace, offsetting a contrac- since year-end has boosted their total tion in passbook savings accounts. assets above the $55 billion mark.) Six-month money market certificates However, the depository institutions, (MMCs) accounted for all of the confronted with heavy credit degrowth in small time and savings ac- mands, were able to obtain the lendcounts; inflows were especially strong able funds they desired through the after March, when the federal regula- issuance of ceiling-free liabilities such tory agencies eliminated (for periods as large CDs, RPs, federal funds, and when the six-month Treasury bill rate Eurodollar borrowings and, in the exceeds 9 percent) the interest dif- case of savings and loan associations, ferential of lA percentage point that through borrowing from Federal had previously given thrift institu- Home Loan Banks. Consequently, tions a competitive advantage in the depository institutions continued to MMC market. These actions were account for a large proportion of taken partly to reduce cost pressures credit provided to nonfinancial secon thrift institutions and partly to tors of the economy, in contrast to help moderate the flow of funds to the pattern observed at other times depository institutions so as to re- when market interest rates have been strain inflationary pressures. high. Commercial bank credit in- M-3, which is M-2 plus deposits at creased 12.2 percent over the year thrift institutions, rose 8.1 percent in ending in the fourth quarter of 1979 1979, within the FOMC's range of 6 —compared with the FOMC's projecto 9 percent. Deposits at savings and tion of IVi to \0Vi percent—despite a loan associations, mutual savings leveling off in the fall. banks, and credit unions expanded The total volume of funds raised by IVA percent, down from about \0Vi domestic nonfinancial sectors of the percent in 1978 but still well above economy in 1979 was about the same rates recorded in previous periods of as in 1978. Reduced borrowing by high market interest rates. The key to governmental units approximately the sustained growth of thrift institu- offset an increase in takings by busition deposits—particularly for sav- ness firms. Aggregate credit expanings and loans and mutual savings sion was greatest in the first three banks—was the MMC; however, quarters of the year, as the tightening there was also a sizable increase in of financial markets that accompalarge-denomination time deposits nied the System's October actions outstanding at savings and loans. contributed to a steep drop in bor- Credit flows. Because market inter- rowing by households and businesses est rates rose further relative to the in the fourth quarter. returns on fixed-interest-ceiling time The credit needs of the U.S. Trea- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 sury declined markedly in 1979 owing usury ceilings may provide some to the reduction in the federal budget relief for borrowers in such areas. deficit. The operating budgets of Borrowing by nonfinancial busistate and local governments mean- ness firms increased substantially in while moved in the opposite direc- 1979, as the growth of outlays for intion, from surplus to deficit, but their ventories and fixed capital outnet borrowing, too, diminished. Al- stripped the advance in internal funds though the tax-exempt market was generated. This "financing gap" was used much more extensively as a particularly large during the first source of funds for residential mort- three quarters of the year; in the gage finance, restrictive Internal fourth quarter the gap narrowed Revenue Service regulations brought somewhat with the slowing of invena virtual cessation of the advance tory accumulation. refunding activity that had swelled Increases in business loans at banks state and local government bond issu- and in net issuance of commercial ance in the previous year. paper accounted for most of the The strong demand for housing, growth in borrowing by nonfinancial both as shelter and as an investment, enterprises. Mortgage loans rose and an evident desire to maintain past somewhat, reflecting the strength of spending levels in the face of declin- commercial construction, but corpoing real disposable income kept bor- rate bond issuance remained around rowing by the household sector at an the moderate 1978 level as companies historically high level during 1979. were reluctant to incur long-term Over the first three quarters, debt ex- debts at historically high interest pansion exceeded income growth, rates. The relatively heavy reliance on and loan repayments as a percent of shorter-term borrowings was reflected disposable income moved to a new in a further deterioration of tradihigh. By the latter part of 1979, signs tional measures of balance-sheet had begun to emerge—in data on strength. Flow of funds account estiloan delinquencies and bankruptcies mates for nonfinancial corporations —that families were encountering indicate that the aggregate ratio of some difficulty in meeting their finan- short-term debt to total debt has cial obligations. reached a record high and that the The heavy debt burdens may have ratio of liquid assets to current liabilicombined with the higher level of in- ties has reached a low level seen beterest rates to damp use of household fore only in 1974. Perhaps partly for credit in the fourth quarter. In addi- this reason, the dropoff in business tion, however, credit availability be- borrowing in the fourth quarter was came a significant factor as institu- concentrated in the short-term area. tions tightened credit standards or curtailed lending in response to Foreign Exchange Markets greater uncertainty about financial and the Dollar prospects and reduced earnings mar- The dollar was quite strong on forgins. Credit supplies were most eign exchange markets in the first five severely constrained in those parts of months of 1979, following the tightenthe country with low usury ceilings; ing of U.S. money market conditions the year-end federal legislation pro- and the announcement by the Treaviding a three-month override of state sury and the Federal Reserve of a dol- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports lar support program on November 1, dollar on exchange markets. By mid- 1978. The dollar rose more than 5 November, the dollar had risen about percent on a trade-weighted average 4 percent on a weighted-average basis basis, gaining 5 Vi percent against the from its early October lows. Foreign mark, IVi percent against the Swiss monetary authorities subsequently franc, and 14 Vi percent against the tightened their policies to deal with yen between the end of December and similar inflationary pressures abroad, the end of May. During this period, and the dollar lost strength. From U.S. and foreign monetary authori- mid-November through the end of ties entered the markets to moderate the year the dollar drifted lower in exchange rate movements, reversing thin markets unsettled by developin the process a large portion of their ments associated with the taking of 1978 intervention purchases of dol- American hostages in Iran. At yearlars. By the end of May the Federal end, the dollar stood close to its early Reserve had repaid all its outstanding October lows on a weighted-average swap debts to other central banks, the basis. The dollar has been relatively Treasury had reconstituted all of the stable in recent weeks, with trading balances it had raised through the rather light in an environment of issuance of notes denominated in heightened international political foreign currencies, and the Federal uncertainties. Reserve and the Treasury both completed repayment of their pre-1971 Report on July 22, 1980 Swiss franc indebtedness. The Outlook for the Economy In early summer, however, the and Monetary Policy Objectives dollar weakened, mainly in response to the failure of U.S. inflation to The Outlook for the Economy moderate and to the absence of a con- The economy moved into recession in certed U.S. program to solve its the first half of this year. A cyclical energy problem. The dollar's weak- downturn had been widely anticiness intensified in early June and con- pated for some time, but the decline tinued into September, despite a in spending, output, and employseries of increases in the Federal ment, once under way, has been Reserve's discount rate, a gradual rise steeper than most analysts had forein the federal funds rate, and renewed seen. The second-quarter decrease in heavy exchange-market intervention real gross national product, at an anin support of the dollar. nual rate of about 9 percent accord- By early October the dollar had ing to the Commerce Department's retraced all of its rebound of earlier in preliminary estimate, was considerthe year, and selling pressures were ably sharper than in the initial mounting rapidly amidst accelerating quarters of other post-war recessions. price rises in gold and other commod- The slump in activity has been most ities and other signs of a worsening in pronounced in the housing and auto expectations of inflation. In these cir- industries—the latter sector being adcumstances, the Federal Reserve's an- versely affected by structural probnouncement on October 6 of a series lems as well as by general cyclical pressures. But the decline has not of anti-inflation measures—described been limited to these sectors. Retail in the preceding section—was accomsales excluding autos have dropped panied by a sharp advance of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 considerably since January, and strong, with the recent relaxation of business outlays for equipment and credit market conditions encouraging new construction also have fallen. a resumption of normal spending pat- The very sharp curtailment of terns, or whether the cyclical adjustspending on houses and consumer ment will be prolonged and the subsegoods and services in the current quent upturn possibly sluggish. The downturn probably is attributable in experience of the past year or so has large part to the cumulative effect of demonstrated the hazards of foreinflation on consumers' financial casting, and the uncertainties at the well-being. Real disposable personal present time clearly are substantial. income was virtually flat in 1979 and Much will depend, for example, on has declined appreciably this year. the perceptions of businessmen about Earlier, consumers had reduced their the longer-range prospects for derate of saving in the face of shortfalls mand and the attractiveness of inin real income in an effort to main- vestment, the response of consumers tain consumption standards and in to the 1981-model-year automobiles, anticipation of inflation. This was and the strength of the rebound in accomplished by further rapid growth housing that may develop in the wake in installment and mortgage credit in of the recent easing in mortgage the late stages of the recent expan- market conditions. sion, but with the result that debt There are signs that the contraction service burdens— which already were in some sectors may be nearing an at high levels historically—continued end, but these are far from conto climb. Sharply higher interest rates clusive. Retail sales in June turned up and generally more stringent credit slightly after four months of sharp terms in late 1979 and early 1980 decline; in the first ten days of July acted as additional deterrents to auto sales were at the strongest pace spending, encouraging households in in three months. Housing starts and their efforts to reduce debt and to sales of new homes strengthened in rebuild savings. the most recent months for which The falloff in final sales has caused data are available. businessmen to spend more cautious- In reflection of the prevailing unly. This tendency has been reinforced certainties, there is a considerable by financial factors as well. The li- range of views among the members of quidity position of businesses had the Federal Open Market Committee deteriorated appreciably during the (FOMC) regarding the movement of expansion, particularly in the latter major economic variables over the restages when there was a surge in mainder of the year. Most of the short-term borrowing; many firms members believe that the recession now are making strong efforts to probably will persist into the fourth restructure balance sheets. quarter, with a cumulative net drop in The unexpected rapidity of the cur- real gross national product less than rent downturn thus far has led ana- that in the downslide of 1973-75. Allysts to reassess their view of the pros- though the decline should slow in the pects for economic activity in the months ahead, employment may be period ahead. Significant disagree- cut back further, and the unemployment has arisen with regard to ment rate could rise beyond 8 Vi perwhether recovery will be prompt and cent by year-end. The increasing slack Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports in labor markets and in industrial the impact on economic performance capacity utilization should at the will, of course, depend on its timing same time help to moderate inflation- and composition. There is a distinct ary pressures. —and very troubling—possibility The accompanying table presents that a poorly designed tax reduction, ranges for key economic variables or one not coupled with adequate that generally encompass the judg- restraint on the expenditure side, ments of the individual FOMC might give rise to added inflationary members about the probable per- and financial pressures that would in formance of the economy this year time dissipate the beneficial shortand in 1981. term effects on the fiscal stimulus. Any indication that the Congress and the administration were moving away from a commitment to rigorous fiscal Actual Projected Item discipline would run the risk of rein- 1979 1980 1981 vigorating the inflationary expecta- Change from fourth tions that have played such a major quarter to fourth quarter, role in the economy's difficulties. The percent Committee thus feels it important Nominal GNP 9.9 5to7!/2 8!/2toll'/2 RealGNP 1.0 -5 to —21/2 Vi to 3 that the question of a tax cut be ap- Implicit GNP proached cautiously; if a tax cut deflator ultimately is enacted, it should be A verage level in fourth quarter, 8.9 9 to 10 73/4 to 9!/2 carefully structured to enhance the percent productive potential of our economy Unemployment rate and to yield the greatest relief from cost and price pressures over the The outlook f5o.9r 189'/821to 9i'/s4 esp8etcoi9a'l/4ly longer run. uncertain at the current time. Economic and financial develop- Monetary Policy Objectives ments over the next six months The task for monetary policy—and should lay the groundwork for the for stabilization policy generally—in recovery anticipated in 1981. But, in the current circumstances obviously is addition, any actions taken in the a difficult one. Recession naturally fiscal arena would have an impact on summons forth calls for stimulus to the path of recovery. The projections aggregate demand. The prevailing presented in the table, which do not high level of unemployment and the assume a tax cut in the next year, in- exceptional weakness apparent in dicate a turnaround in economic ac- particular industries and sectors of tivity—although there is a con- our economy certainly must be given siderable range of views concerning careful consideration in the formulathe potential strength of the recovery. tion of public policy. But caution On balance, the forecast is for a must be exercised in the application moderate rebound in real GNP, ac- of any broad countercyclical stimucompanied by some further slacken- lus, especially in the present environing in the pace of inflation. ment of persistent inflationary Unemployment, however, is likely to pressures. Indeed, there is no clearer remain high throughout the year. lesson from the experience of the past Should there be a tax cut in 1981, decade and a half than that excessive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 stimulus is detrimental to the objec- sustained recovery. Over the long tive of achieving and sustaining non- term, a reduction in the underlying inflationary, balanced growth. rate of inflation is essential for a A primary and continuing goal of strong U.S. economy, for encouragmonetary policy must be to curb the ing the saving we will need to finance accelerating inflationary cycle. It now adequate capital investment, and for appears that some progress is begin- maintaining the position of the dollar ning to be made in that direction. in international markets. Price increases have slowed con- But it is clear also that if inflation is siderably from the pace of early in the to be restrained without undue disyear, in part reflecting some relief in ruption of economic activity we canthe food and energy sectors, but also not rely solely on monetary policies. as a result of the drop in demand For example, fiscal discipline is essenpressures. In addition, recent at- tial to ensure that excessive pressure is titudinal surveys point to a reduction not placed on the financial and real in inflationary expectations. The con- resources of the economy. The structinuation of this trend in expectations ture of our tax system should be exwill result in a greatly improved amined with an eye to the incentives it economic and financial environment, provides for productivity-expanding one more conducive to long-term research and capital formation. And growth. We already have witnessed the full range of governmental one benefit of an easing of infla- policies should be reviewed to ensure tionary fears: a substantial decline in that they do not add needlessly to long-term interest rates from their costs and do not stunt innovation and highs earlier this year and a revitaliza- competition. tion of the bond markets. The Federal Reserve's pursuit of a policy of Money and Credit Growth monetary restraint—evidenced this in 1980 and 1981 year by a moderation of money In February the Federal Reserve growth—has been an important fac- reported to the Congress ranges of tor in this turn in expectations; a sus- growth for the monetary aggregates tained commitment to the attainment in 1980 that it believed to be consistof non-inflationary rates of money ent with the continuing objective of and credit growth is essential if this reducing inflationary pressures over progress is to be extended. time while providing for sustainable Despite the improvement that has growth in the nation's production of occurred, however, inflationary goods and services. These ranges anforces are far from subdued. The past ticipated a substantial deceleration in years have left a legacy of adverse monetary growth in 1980 from the cost trends that will not be reversed pace of the preceding year. Measured quickly. Moreover, more extreme in- from the fourth quarter of 1979 to the flationary expectations easily could fourth quarter of 1980, the following be reignited. In establishing its plans ranges were adopted: for M-1A, V/i for growth in the monetary ag- to 6 percent; for M-1B, 4 to 6Vi pergregates, the Federal Reserve will cent; for M-2, 6 to 9 percent; and for continue to place high priority on M-3, 6V2 to 9Vi percent. The assoreducing inflation, believing that this ciated range for bank credit expanis essential to fostering a sound and sion was 6 to 9 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports During the first half of 1980, circumstances affecting the public's growth of the monetary aggregates demand for transactions balances, slowed considerably from the 1979 and given the relative strength of the pace. The deceleration was par- broader aggregates and the usual lags ticularly marked for the narrower ag- between changes in credit conditions gregates, M-1A and M-1B, which and growth in the narrower aggrew at rates below the lower limits of gregates, the FOMC believed it aptheir longer-run ranges—at annual propriate to foster a more gradual rates of about Vi and VA percent return of M-l growth to the ranges respectively from the fourth quarter established earlier. of 1979 to the second quarter of 1980. In connection with reserve- (M-1A is currency and demand de- targeting procedures, System open posits held by the public, while M-1B market operations supplied a large includes checkable interest-bearing volume of nonborrowed reserves over deposits as well.) At the same time, the course of the second quarter. the broader aggregates, M-2 and M-3, Given the weak demand for money grew at annual rates of 6Vi and 63A and bank credit, most of the added percent respectively, which are nonborrowed reserves were used by somewhat above the lower limits of banks to repay borrowings from the their ranges. In fact, by June, M-2 Federal Reserve discount window. —which includes money market fund Borrowings fell from a high of $2.8 shares and all deposits except large billion on average in March to certificates of deposit (CDs) at banks minimal levels recently, and the easand thrift institutions—was around ing of bank reserve positions was the midpoint of its longer-run range, reflected in a sharp decline in the and M-3 slightly below, while the nar- federal funds rate. From their peaks rower aggregates were moving back of late March or early April, shorttoward their ranges, following an term interest rates have declined 7 to unusually sharp drop in early spring. 9 percentage points and long-term The contraction in the narrower ag- rates by roughly 2 to 3 percentage gregates during the second quarter points. was much greater than would have Expansion in the broader aggrebeen expected on the basis of the gates over the first half of the year historical relationships among reflected the very rapid growth for money, income, and interest rates. much of the time in money market This unusual weakness may have mutual fund shares, 6-month money reflected exceptional efforts by the market certificates, and 2Vi-year public to pare cash balances, such as small saver certificates, instruments have characterized some other peri- that pay market rates of interest. Late ods following a sharp upward adjust- in the period, as short-term market ment in market interest rates to new interest rates declined sharply, the record levels. There may also have contraction in savings deposits at been an impact from the surge in debt banks and other depository institurepayments, especially at banks, after tions halted, and the outstanding the imposition of the credit control amount of those deposits began to program in mid-March, with some of rise. For part of the period, growth in the funds apparently coming out of M-3 was sustained also by continued cash balances. In light of these special issuance of large time deposits by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 commercial banks and thrift institu- tinues to economize on cash balances tions, which are included in M-3 but to an unusual degree in the second not in M-2; however, large time de- half of the year, growth in the narposits began to contract in late spring rower aggregates would likely fall as credit demands weakened substan- toward the lower end of the estabtially. lished ranges. Bank credit growth greatly ex- With respect to the broader aggreceeded the FOMC's range in the first gates, growth in the second half is quarter of the year. The second likely to place them nearer the midquarter, however, saw a sharp con- points of their respective ranges and, traction in this measure, and credit in the case of M-2, quite possibly in growth was well below the FOMC- the upper half of its range. Recent specified range as of mid-year. trends suggest that a continued Demands for bank loans by house- substantial expansion in the interestholds and businesses dropped abrupt- bearing-nontransactions component ly in the second quarter, while the of M-2 is likely. In the current cyclical banks—concerned about the possible environment, consumers have begun erosion of profit margins by high-cost to reevaluate their financial positions funds obtained earlier and seeking to and have reduced their borrowing conform to the guidelines of the and adjusted upward their rate of March 14 special credit restraint pro- saving. Thus, if the recent lower level gram—pursued relatively tight lend- of interest rates persists, the outlook ing policies. Businesses, meanwhile, is for an augmented flow of funds to have met a substantial portion of depository institutions along with their credit needs through issuance of continued, though slower, growth in commercial paper (which serves as a money market mutual funds. close substitute for bank credit for The Committee also noted that the many large firms), by borrowing in recent sharp contraction in bank bond markets, and by reducing credit makes it quite likely that this holdings of liquid assets. Over the measure will fall below the 6 to 9 perhalf year, the total of credit advanced cent growth range specified in Februby banks and in the private short- ary. A resumption of bank credit exterm money markets rose at an an- pansion during the second half is annual rate of around IVi percent. ticipated, but the strength of that At its meeting in July, the Federal move will depend to a considerable Open Market Committee reassessed extent on patterns of corporate the ranges it had adopted for finance. The desire for balance sheet monetary growth in 1980 and for- restructuring may well continue to mulated preliminary goals for 1981. mute business loan demands, al- The Committee elected to retain the though weaker corporate cash flows previously established ranges for the and a narrowing of the spread of the aggregates over the remainder of prime rate over commercial paper 1980. This decision by the Committee rates likely will prompt some borrowtook into consideration the recent ing at banks. Mortgage loan demands behavior of the money stock meas- also should begin to recover as the ures as well as emerging economic year progresses, and the runoff in conditions. In this regard it was consumer loans is expected to abate. recognized that, if the public con- One factor that contributed to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports recent weakness in bank lending was transactions balances, thereby dethe Board's special credit restraint pressing M-1A growth next year. On program. As announced earlier, the the other hand, M-IB probably will be program is being phased out this boosted somewhat next year by shifts month because there is now no evi- from savings deposits and other dent need for extraordinary measures interest-bearing assets into NOW acto hold bank lending within reason- counts. The range for M-1B thus may able bounds. In removing the special have to accommodate a period of abcontrols, the Board has emphasized normal growth as the public adjusts its intention to continue to maintain to the availability of a new instruaggregate growth in money and credit ment. The experience of the past year at rates consistent with a reduction in and a half with automatic transfer inflationary pressures. service (ATS) accounts has indicated With regard to monetary policy the difficulty of estimating in advance over the longer run, the FOMC the public's demand for such balreiterates its intent to seek reduced ances. Although growth in M-2 and rates of monetary expansion over M-3 will not be affected by NOW accoming years, consistent with a return count movements, these broader agto price stability. While there is broad gregates include other relatively new agreement in the Committee that it is financial instruments, the demand for appropriate to plan for some further which is still subject to uncertainty. progress in 1981 toward reduction of The behavior of these instruments in the targeted ranges, most members coming months will aid the FOMC in believe it would be premature at this determining appropriate growth time to set forth precise ranges for ranges for the broader aggregates in each monetary aggregate for next the 1981 period. year, given the uncertainty of the economic outlook and institutional The Administration's Short-Term changes affecting the relationships Economic Goals and the among the aggregates. The extent and Relationship of Federal Reserve timing of adjustments in the targets Objectives to those Goals will depend upon an appraisal of the The administration, in association outlook at the end of the year. The with its mid-year budget review, has appropriate money growth in 1981 updated its forecast of the behavior relative to 1980 of course will depend of major economic variables for 1980 to some extent on the outcome in this and 1981. The revised figures are year—that is, on exactly where in the shown in the accompanying table. present ranges the various aggregates These estimates, which the adfall at year-end. ministration has indicated should be In addition, the various measures viewed as forecasts rather than as of money will be affected in 1981 by goals, show a considerably greater shifts in the demand for different decline in real activity in 1980 than types of financial assets. The in- had been anticipated in the January troduction of negotiable order of Economic Report of the President. withdrawal (NOW) accounts on a na- The outlook for growth in nominal tionwide basis in January will ac- GNP through year-end has been celerate the shift from regular de- lowered by a small amount, owing to mand deposits into interest-earning a somewhat higher anticipated rate of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 inflation for the four quarters of deficits would increase that risk. This 1980. The administration's projec- possibility highlights the urgency of tions for this year fall within the concerted effort by the public and ranges expected by the members of private sectors to reduce the rate of the FOMC. advance of costs and prices and the need to focus any discussions of fiscal action on approaches that would Item 1980 1981 serve to alleviate cost pressures and Change from fourth quarter bolster productivity. to fourth quarter, percent Nominal GNP 63/4 12!/2 Real GNP —3 V/i A Review of Recent Economic Implicit price deflator 10 and Financial Developments A verage level in fourth 93/4 quarter, percent Economic Activity Unemployment rate 8'/2 During the First Half of 1980 81/2 Economic activity turned down early The administration has projected a this year following almost five years resumption of output growth next of expansion. Between January and year that places real GNP near the June, industrial production fell IVi upper end of the range encompassed percent, unemployment declined by the forecasts of the members of about 1 lA million, and the unemploythe FOMC. At the same time, the ad- ment rate jumped \Vi percentage ministration's estimates place the rate points. Real gross national product is of inflation somewhat above the estimated to have fallen at an annual range of the FOMC members' expec- rate of 9.1 percent in the second tations. (Like the FOMC members' quarter, with the decline in activity projections, the administration's widespread among major sectors of forecast does not include a tax cut the economy. Retail sales have deprovision for 1981.) creased substantially since January, As indicated in the preceding sec- housing starts have dropped to neartion, the Federal Reserve intends to record postwar lows, and business set monetary growth ranges for 1981 outlays for equipment and new conthat will help to restrain inflationary struction have declined. Although pressures in the recovery period. As businesses were cautious in building experience this year illustrates, con- inventories during the expansion, the siderable uncertainty attaches to any severity of the recent decline in final analysis of the relationships over sales has led to some involuntary relatively short periods among stock accumulation; as in past cycles, money, interest rates, and nominal the resulting efforts to curb inventory GNP. However, a substantial expan- growth have played a significant role sion in demands for goods and ser- in the weakening of orders and provices, accompanied by a lack of prog- duction. ress on the inflation front—or worse, Recent reductions in aggregate dean actual increase in inflation or in- mand, coupled with a slower rise of flationary expectations—would raise energy prices, meanwhile have the possibility of a considerable firm- brought some moderation in the overing of conditions in financial mar- all pace of inflation. The producer kets. Large and prolonged federal and consumer price indexes have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports risen at much less rapid rates in the since late 1974. Furniture and appast few months than they did earlier pliance sales also are down sharply in the year. Moreover, there are in- this year, in part because of the fall in dications from consumer surveys that housing sales. But weakness in coninflationary expectations have been sumer outlays has not been confined lowered. Nevertheless, inflation still to the durable goods sector. Purpossesses a strong momentum, with chases of nondurables in real terms unit labor costs continuing on a steep also have been falling since late last upward trend. year, with sizable declines recorded Personal consumption expendi- for clothing and general merchandise. tures. Personal consumption expen- Since January, real disposable inditures fell sharply in real terms dur- come has decreased substantially as ing the first half. A number of employment and hours worked have adverse trends had characterized fallen and prices have continued uphousehold finances for some time ward at a rapid pace; nonetheless, the prior to the beginning of 1980. Real retrenchment by consumers has lifted disposable income had stagnated the saving rate somewhat above the after 1978, household liquidity posi- extraordinarily low level of the fourth tions had weakened as liabilities in- quarter of last year. It still remains creased faster than financial assets low by historical standards, however, after late 1976, and a near-record and uncertainty about job and inproportion of disposable income had come prospects may well prompt been committed to the servicing of households to enlarge precautionary debt. Moreover, consumer con- savings, thereby contributing further fidence, as measured by opinion to the weakness in personal consumpsurveys, had deteriorated to levels last tion expenditures. seen in the 1973-75 recession. In the Residential construction. Homelight of these trends, a downward ad- building activity has experienced a justment of consumer outlays might severe decline. Housing starts, which have been expected last year; the fact averaged nearly VA million units at that it did not occur appears at- an annual rate during the first nine tributable in part to growing expecta- months of 1979, began to fall sharply tions of inflation that fostered a buy- last autumn. By December, starts in-advance psychology. were at a Wi-million-unit pace, and Between January and May, retail by May they had declined to a rate of sales fell 6V2 percent in nominal terms almost 900,000. June saw a pickup in and more than 9Vi percent in real starts to a 114 million annual rate. terms—the sharpest four-month drop In the single-family sector, starts in the postwar period. Preliminary dropped 45 percent between the third estimates for June, however, indicate quarter of 1979 and the second that sales moved up somewhat. As in quarter of this year. Although demopast recessions, large decreases in graphic factors remained quite sales this year have occurred for the favorable during this period, the derelatively discretionary items of con- mand for such dwellings was cursumer expenditure. Automobile sales tailed by the increased cost of homein June averaged only 7.6 million ownership associated with higher units at an annual rate, close to the house prices and the rapid rise in May pace, which was the slowest mortgage interest rates. The monthly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 cost of interest and principal on an have provided support to multiunit average-priced new home financed activity. with a conventional mortgage rose to Business spending. Business spend- $700 in May—a third higher than six ing on plant and equipment has months earlier and 50 percent above slowed in recent months as firms have the same month of 1979. Households sought to avoid expanding capacity at probably were increasingly reluctant the onset of a recession. Spending on to undertake such heavy financial nonresidential structures, which acobligations, especially as income and counted for much of the gain in inemployment conditions weakened vestment during 1979, peaked in this year. January and declined substantially in Home sales have dropped almost the following months. Business pur- 40 percent from the pace of last sum- chases of trucks and automobiles also mer. Although production adjust- have been falling since early this year, ments have reduced the number of as have outlays for other capital unsold new single-family dwellings on equipment. the market, these unsold units bulk Weakness in capital spending in the larger relative to the recent slower first half of the year—as well as in rate of sales. At the May sales pace, forward-looking indicators of investwhich was up sharply from April, ment activity such as surveys, conthere was almost a nine-month supply truction contracts, and equipment of unsold new single-family units on orders—probably reflected businessthe market. The pickup in sales in men's anticipations that sales may re- May is perhaps a sign of some in- main sluggish for a while. In addicreased interest on the part of tion, corporate cash flows are homebuyers, prompted by the recent diminishing, and with liquidity posieasing in financial markets; however, tions already strained in many inthe still large overhang of unsold stances, there may be a reluctance to homes is likely to discourage a quick undertake additional projects requirresumption of building in many lo- ing external financing. Although incalities. terest rates have fallen dramatically Multifamily housing starts began from the high levels reached earlier declining sharply late last year and in this year, growing excess plant the second quarter were off about 35 capacity suggests the likelihood of percent from the already-reduced further decreases in real outlays, pace of the third quarter of 1979. The while firms take advantage of lower decline in this sector has been less long-term rates to restructure their severe than in the 1973-75 period, as balance sheets. low vacancy rates in many areas and Despite sizable cutbacks in producan acceleration in rent increases tion, some involuntary inventory acbeginning in late 1979 have given cumulation appears to have occurred builders an incentive to sustain a this spring as a consequence of the significant level of apartment con- steep fall in sales. The stock-sales struction in the face of high construc- ratio for all manufacturing and trade tion costs and tight financial condi- in real terms rose only moderately tions. In addition, demands for con- during the first quarter, but climbed dominiums—a lower-cost alternative appreciably in April and May to near to single-family homeownership— the level of late 1974. Since the start Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports of the year, substantial increases in pronounced for construction activity the ratio have been registered in most because federal funding was cut back major industries with especially large and municipal bond issuance was rises for primary metals manufac- constrained in the first quarter by turers, furniture and appliance high interest rates. Despite the retailers, and the motor vehicle in- downward adjustments of outlays, dustry. Auto sales incentive programs the aggregate operation deficit of the and production adjustment in the state and local government sector apfirst quarter of 1980 largely elim- parently widened considerably in the inated excessive stocks that had spring. resulted from last summer's gasoline International trade and payments. shortages. However, beginning in Real exports of goods and services mid-April, automobile sales plum- continued to grow rapidly in the first meted, and despite further cur- quarter of 1980, but the rise appears tailments of production, some to have slowed somewhat in the secoverhang of stocks at dealers reap- ond quarter. The deceleration largely peared. reflected the slowing of economic ex- Government, Spending at all levels pansion abroad and the fading of the of government has been restrained in impact of the 1917-IS real depreciarecent months. Total federal expend- tion of the dollar. All of the growth in itures, which grew rapidly in the early the first half was concentrated in nonmonths of the year, moderated in the agricultural exports; agricultural second quarter largely as a result of shipments were reduced, partly bethe March budget cuts. Growth in cause of the embargo on additional receipts fell off much more, however, grain sales to the Soviet Union imas weakness in personal income and posed by the President in January. profits offset the impact of additional The volume of imports, meanwhile, revenue from the windfall profits tax began to fall off as U.S. economic acon oil producers. As a result, the tivity slackened and as higher prices federal deficit on a national income and greater fuel efficiency acted to accounts basis probably deepened by restrain oil imports. The volume of about $30 billion, at an annual rate, non-oil imports rose slightly on between the fourth quarter of 1979 balance in the first half of 1980, but and the second quarter of 1980. all of the increase was in the first However, the high-employment quarter. The quantity of oil imports budget, a better indicator of the fell, apparently reaching its lowest thrust of discretionary fiscal policy, rate in four years in the second quarshowed a movement toward restraint ter. Despite a declining volume of oil during this period. imports in the first quarter, higher State and local government spend- prices by the Organization of Petroling fell in real terms during the first eum Exporting Countries (OPEC) rehalf of 1980, as governmental units sulted in a continuation of the rapid curtailed outlays in response to the growth in the dollar value of oil imslower growth of revenues caused by ports. The oil import bill nearly tax cuts enacted in 1979, the weaken- doubled between the fourth quarter ing economy, and the March reduc- of 1978 and the first quarter of 1980; tions of federal grants-in-aid. The in the second quarter the value of oil reduced pace of spending was most imports changed little as lower Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 volume offset a further rise in import and subsequently suppliers of buildprices. ing materials also reduced their pay- The U.S. merchandise trade deficit rolls. During the spring, however, increased about $6 Vi billion at an an- weakness in labor demand began to nual rate in the first quarter of this spread throughout the economy; emyear from the rate in the last quarter ployment at trade establishments of 1979. The current account moved dropped 190,000 over the second from a deficit of about $7 billion at quarter, and in June payrolls in the an annual rate in the fourth quarter, service-producing sector registered and near balance for the year 1979, to the first monthly decline since 1975. a deficit of about $10 billion in the In addition to trimming payrolls, first quarter of 1980. Higher foreign employers have curtailed work schedearnings of U.S. oil companies offset ules in light of the weakening of sales. part of the rise in the merchandise Since January, the average workweek trade deficit. Partial data indicate at manufacturing establishments has that the trade and current-account been shortened almost 114 hours. deficits narrowed in the second More generally, the number of workquarter. ers on part-time schedules for economic reasons rose sharply in the Labor Markets and second quarter, with former full-time Capacity Utilization jobholders accounting for most of the Labor demand was relatively well- increase. maintained early in the year, but it The rise in joblessness has been fell off steeply in the spring as firms widespread among demographic and responded to the sharp declines in occupational groups, with especially sales by cutting their work forces and large increases reported among adult shortening workweeks. Between Jan- males. Since December, the jobless uary and June, the number of work- rate among men has climbed almost ers on the payrolls of nonfarm estab- 2Vi percentage points, compared with lishments fell almost 950,000; total an increase of VA percentage point for employment, as measured by the adult women, and June marked the household survey, fell more than 1 lA first time in two decades that the rate million. With layoffs rising, the for men was higher than that for nation's jobless rate jumped from 6lA women. Unemployment among bluepercent in January to IVA percent in collar workers rose sharply to an 11 Vi May and June. percent rate in June, the highest since Much of the cutback in employ- September 1975. In contrast, unemment occurred in the construction ployment rates among white-collar sector and in durable goods manufac- workers have increased only marginturing, especially motor vehicle and ally since the end of 1979. related industries. By June, the The adjustments in output by number of auto workers on indefinite firms, especially in the second quarlayoff was nearly 250,000 (about 30 ter, were reflected in a sharp decline percent of total hourly workers in the in the index of industrial production. industry), and substantial layoffs had Between January and June, industrial occurred in the steel and tire indus- production fell nearly IVi percent. tries as well. Construction employ- Production declines in auto-related ment began to drop early in the year, industries and in industries supplying Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports construction materials began early in the year. At the producer level, finthe year, but by late spring cutbacks ished food prices fell at about a AVi were occurring in most other indus- percent annual rate between Decemtries as well. Among manufacturing ber and June. Steep drops in wholefirms, capacity utilization in June sale prices through May—particularly dropped to 76 percent, almost 11 per- for livestock—alleviated cost prescentage points below its 1979 peak. sures at the retail level, contributing to relatively stable retail food prices Prices, Wages and Productivity since the end of last year. However, After exploding upward in the early recent developments in the markets months of the year, rates of price in- for livestock and fresh produce indicrease moderated significantly in the cate that food prices also are likely to second quarter. The improvement re- rise more rapidly in the second half of sulted primarily from a stabilizing of the year. energy prices and from declines in the Inflationary pressures have perprices of nonferrous metals, after a sisted in sectors outside food and flurry of speculative activity earlier in energy since the beginning of the the year. Increases in the prices of year. In the consumer price index, inconstruction materials and compo- creases in the homeownership components also slowed noticeably in the nent have been particularly large, as second quarter with the decline in the measures of mortgage rates and activity in the housing sector. home purchase prices both advanced In the energy area, retail prices rapidly in the first half of this year; surged in January and February, in the recent easing of mortgage rates large part the result of the hike in will likely hold down increases in the OPEC prices that occurred in late consumer price index during the next 1979, but the pace of increase then few months. In the producer price slowed noticeably in the spring, as in- index, prices of capital equipment acventories reached near-record levels celerated in the first half of 1980 from and demand continued to drop. The the already rapid pace of 1979. increase in energy prices also moder- Labor cost pressures remained inated at the producer level. Nonethe- tense in the first half of 1980, as comless, indirect effects of earlier pensation increases were substantial increases in the prices of fuels and while productivity declined further. petroleum feedstocks were still evi- Output per hour in the private nondent through the end of June in items farm business sector dropped at such as plastics and rubber products, about a 1 Vi percent annual rate in the industrial chemicals, and household first quarter, after falling 2 percent supplies. Moreover, a number of fac- over the preceding year. At the same tors—including the latest increases in time, hourly compensation acceler- OPEC prices, the curtailment of gas- ated to a 10 VA percent annual rate, so oline production, and the progressive that the unit labor costs of nonfarm decontrol of crude oil prices—suggest businesses rose at about an 113A perthat further relief in the energy area is cent rate in the first quarter. Preliminot to be expected. nary data for the second quarter sug- Food prices generally have exerted gest that unit labor costs continued to a moderating influence on aggregate rise rapidly, as productivity conprice measures since the beginning of tracted further. Although cyclical Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 reductions in overtime and the chang- tiveness of the measures announced ing employment mix may restrain the in October 1979 and thus to provide growth in total compensation some- greater assurance that the monetary what in coming months, wage de- goals reported to the Congress in mands are likely to remain strong, February would be met. These acespecially in light of past increases in tions, some of which were taken consumer prices. Thus, upward pres- under the authority of the Credit sures on unit labor costs will probably Control Act as part of a broad remain substantial over the near term. government effort aimed at reducing inflationary pressures, included the Financial Developments following: (1) a special credit restraint During the First Half of 1980 program directed toward limiting the Interest rates. Market rates of in- growth in loans to U.S. customers by terest moved sharply higher in the commercial banks and finance comearly months of 1980, exceeding pre- panies to ranges consistent with the vious record levels and peaking monetary and credit objectives of the around the end of the first quarter. Federal Reserve; (2) a special deposit These increases were largely reversed requirement for all types of lenders in the second quarter amid a substan- on increases in certain categories of tial downslide in economic activity consumer credit; (3) an increase in the and contracting demands for money marginal reserve requirement on and credit. The upward pressure on managed liabilities of large member yields at the turn of the year resulted banks and U.S. branches and agenfrom a combination of factors, in- cies of large foreign banks; (4) a cluding a deterioration in inflationary special deposit requirement on inexpectations as actual price increases creases in managed liabilities of large accelerated in January and February, nonmember banks; (5) a special dethe failure of incoming data to con- posit requirement on increases in firm the long-anticipated downturn in total assets of money market mutual activity, and international political funds; and (6) a surcharge of 3 perdevelopments that raised the likeli- centage points on frequent borrowing hood of an increase in federal deficit by large member banks from Federal spending. In February, moreover, Reserve Banks. growth in money and credit surged, These measures hastened the movecreating demands for bank reserves ment toward reduced credit availabilwell in excess of the provision of non- ity already in train at many lenders, borrowed reserves consistent with the and apparently increased the resolve Federal Reserve's target ranges for of consumers to curtail their use of growth in the monetary aggregates. credit. In subsequent weeks, incom- In the Treasury bill market, in partic- ing data revealed a substantial slackular, the resulting rise in short-term ening in money and credit growth to interest rates was reinforced by large well within the Federal Reserve's obsales of securities by foreign institu- jectives. In light of these developtions to finance intervention in ments, the Board amended the special foreign exchange markets. credit program: on May 6 the 3-per- On March 14, the Board of Gover- centage-point surcharge on discount nors took actions of a temporary borrowing by large banks was eliminature designed to reinforce the effec- nated, and on May 22 special deposit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 Monetary Policy Reports requirements were reduced by half intervention activities by U.S. and and the special credit restraint guide- foreign monetary authorities. lines were modified. On July 3 the The peaking and subsequent steep final phaseout of the program was decline in U.S. interest rates in early announced. April triggered heavy selling pressure The rise in most interest rates came on the dollar in international marto a halt in late March and early kets, and the dollar's foreign ex- April, and yields began to move down change value fell in the April to June as demands for money and credit period. Foreign and U.S. monetary dropped abruptly in response to de- authorities intervened to moderate veloping slack in the economy. Most this decline by making net purchases private short-term rates fell 7 to 9 per- of dollars. Even so, by the end of centage points, to their lowest levels June earlier gains were entirely since the spring of 1978. In long-term erased, and the weighted-average exsecurities markets, bond yields re- change value of the dollar at midyear traced most or all of the increases re- was little changed from its value at corded earlier in the year, as market the beginning of the year. participants appeared to have low- Domestic credit flows. Net funds ered their expectations of inflation. raised in credit markets by domestic The restraining posture of monetary nonfinancial sectors of the U.S. econand fiscal policy, as well as moderat- omy totaled a sizable $391 billion at ing rates of price increase in the an annual rate in the first quarter of cyclical downturn, has contributed to 1980, but contracted sharply to an this improved outlook for price estimated $193 billion in the second changes. period. This exceptionally large Foreign exchange markets and the decline in borrowing reflected in large dollar. Movements in U.S. interest part the recent sudden weakening in rates greatly influenced fluctuations production and sales activity; in addiin the foreign exchange value of the tion, monetary restraint, suppledollar over the first half of 1980. The mented by the special policy actions dollar was in strong demand early in of mid-March, contributed to tauter the year when U.S. interest rates rose credit terms and reduced availability sharply. The growing perception by of funds at many lenders. market participants of accelerating In the private sector, the volume of inflation and worsening payments funds raised in the first quarter was deficits abroad gave added impetus to greatly enlarged by a surge in borrowthe dollar's rise over this period, as ing on the part of nonfinancial busidid the announcement of credit con- ness firms. Some of this increased trol measures on March 14. Authori- borrowing reflected needs to finance ties in a number of foreign countries growth in inventories and fixed capialso moved to tighten monetary con- tal outlays, as the gap between such ditions, but the resulting increase in expenditures and internally generated foreign interest rates lagged well be- funds of nonfinancial corporations hind that of U.S. rates. The strength- widened. But fears that unchecked inening in the foreign exchange value of flation would lead to the imposition the dollar in February and March was of credit controls and a consequent moderated somewhat by substantial reduction in credit availability appar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 ently led to a burst of anticipatory remained very large, total short- and borrowing by firms as well. As a re- intermediate-term business credit sult, corporations added substantially demands in the second quarter modto their holdings of liquid assets in the erated appreciably from the firstfirst quarter and appear to have quarter pace. Late in the second quardrawn down these holdings in subse- ter, the prime rate began to move quent months. down, narrowing the gap with market As interest rates moved up rapidly rates somewhat; survey data, furtherearly in the year, businesses concen- more, suggest that banks in May were trated their credit demands in short- making a large share of short-term and intermediate-term markets, with business loans at below-prime interest borrowing at banks and in the com- rates. mercial paper markets especially In the household sector, consumers heavy. Corporate bond financing re- greatly reduced their use of installmained relatively low as businesses, ment credit during the first half. The especially industrial firms, were reluc- large growth of consumer installment tant to issue long-term debt at histori- and mortgage debt in 1979—both in cally high yields. This pattern of cor- absolute terms and in relation to disporate financing shifted dramatically, posable income—had produced a however, when interest rates dropped marked deterioration in household lirapidly in the spring. Public offerings quidity. The combination of resulting of longer-term corporate bonds accel- heavy debt burdens, high interest erated to unprecedented levels, with rates, and, in some states, restrictive the proceeds from many of these usury ceilings acted to slow growth of issues being used to pay down bank installment credit in late 1979 and the debt. first quarter of 1980. The volume of After March, commercial banks— outstanding installment credit conconcerned both about pressures on tracted in the second quarter as contheir earnings margins as interest sumers curtailed expenditures and rates dropped and about meeting the repaid debt against a backdrop of loan growth guidelines of the volun- rapidly declining real incomes and ristary special credit restraint program ing unemployment. Credit-tightening —tended to discourage business bor- measures by lenders after the anrowers. In particular, adjustments in nouncement of the credit-control the bank prime lending rate lagged package on March 14 and uncertainty substantially behind downward on the part of consumers about the movements in other market rates, effects of those controls contributed greatly increasing the relative cost of further to the reduction in the use of this source of financing. As a result credit. of the relatively high cost of bank Household borrowing in mortgage credit, coupled with a desire of busi- markets also slowed considerably in nesses to adjust their balance sheets the first half. Reduced deposit flows following the heavy reliance on short- and pressures on earnings margins term debt in previous months, busi- from rising costs of funds constrained ness loans at banks contracted mark- the lending activity of thrift instituedly in the second quarter. Although tions and pushed mortgage rates to commercial paper issuance by firms record levels in March. Many would- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 Monetary Policy Reports be homebuyers were deterred by the with overwithholding in 1979, the high cost of mortgage credit. More Treasury was able to even out its borrecently, lower market interest rates rowing pattern somewhat by permithave helped to reduce cost pressures ting its cash balance to drop over the for thrift institutions and have con- first quarter and then rebuilding it in tributed to a pickup in deposit flows. the second. Sharp drops in mortgage rates since In contrast to the federal sector, early April and reports of some net borrowing by state and local goveasing in nonrate terms suggest that ernments dropped off in the first lending institutions have become quarter but accelerated appreciably in more active in seeking mortgage loans the second. Many municipal governsince early June. But mortgage rates ments postponed or canceled schedremain high by historical standards, uled bond issues early in the year while demands for housing and hous- because of high interest rates; for ing credit continue to be damped by a some government units, these actions weak economy and by the liquidity were necessitated by the rise of interconcerns of households; consequent- est rates above statutory limitations. ly, mortgage commitment activity But the volume of tax-exempt financapparently has remained relatively ing picked up considerably in the secsluggish. ond quarter when interest rates fell The Treasury borrowed heavily in and many previously postponed bond credit markets in the first half to issues were brought to market. The fifinance the combined deficits of the nancing needs of state and local units federal government and off-budget generally increased over the first half agencies. Normal seasonal patterns in in response to slower growth of revfederal cash flows associated with the enues and a consequent widening of timing of tax receipts led to a concen- their operating deficits. In addition, tration of the Treasury's borrowing the volume of tax-exempt securities in the first three months of the year. issued continued to be boosted by of- Although the first-quarter deficit was ferings of mortgage revenue bonds, further deepened this year by un- designed to finance single-family usually large tax refunds associated housing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

65 Record of Policy Actions of the Board of Governors Regulation A and Regulation Q (Extensions of Credit (Interest on Deposits) by Federal Reserve Banks) March 5, 1980—Amendments August 6, 1980—Revision The Board amended Regulations A, The Board revised Regulation A, ef- D, K, and Q, effective September 4, fective September 1, 1980, to carry 1980, to implement certain provisions out provisions of the Monetary Con- of the International Banking Act of trol Act of 1980. 1978. Votes for this action: Messrs. Volcker, Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes and Mr. Rice. Votes against this acagainst this action: None. tion: None.1 The Monetary Control Act of 1980 The Board established reserve regranted access to the Federal Reserve quirements and deposit interest rate discount window to any depository limitations for federally licensed and institution offering transaction ac- federally chartered agencies and counts or nonpersonal time deposits branches of foreign banks and statesubject to reserve requirements. licensed agencies and branches that Under the revised regulation, as have consolidated worldwide banking under the current procedures, Federal assets of more than $1 billion. The Reserve credit will be made available amendments included the following chiefly for purposes of meeting an in- changes: (1) reserve requirements stitution's immediate cash or reserve (Regulation D) and interest rate ceilneeds; such advances, referred to as ings (Regulation Q) will be estabadjustment credit, would be expected lished for agencies and branches idento be repaid promptly. In addition, tical to those for similar deposits at the revised regulation sets forth the member banks; (2) credit balances at conditions under which the Federal agencies will be subject to the same Reserve will provide extended credit reserve requirements as deposits of to institutions that need funds over similar maturity at Edge corporations longer periods. (Regulation K) and member banks; (3) agencies and branches will have Regulation A access to all System services; and (4) (Extensions of Credit agencies and branches will have acby Federal Reserve Banks), cess to the discount window (Regula- Regulation D tion A) on the same basis and under (Reserves of Member Banks), Regulation K 1. On this and subsequent pages, footnote 1 (Internationa! Banking indicates that there was one vacancy on the Operations). Board at the time the action was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Board Policy Actions the same conditions as is afforded Regulation D domestic money center member (Reserve Requirements of banks. Depository Institutions) August 6, 1980—Revision Regulation C The Board revised Regulation D, ef- (Home Mortgage Disclosure) fective November 13, 1980, to carry November 26,1980—Amendments out provisions of the Monetary Control Act of 1980. The Board amended Regulation C, effective December 5, 1980, to re- Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, quire institutions that must make Messrs. Rice, and Gramley. Votes disclosures under the Home Mortagainst this action: None. gage Disclosure Act to report their mortgage data on a calendar-year The Board revised Regulation D to rather than a fiscal-year basis. implement reserve requirement provi- Votes for this action: Messrs. Volcker, sions of the Monetary Control Act Schultz, Wallich, Partee, Mrs. Teeters, that imposed reserve requirements on Messrs. Rice, and Gramley. Votes all depository institutions maintainagainst this action: None. ing transaction accounts or nonpersonal time deposits. The revised re- The change implemented some of serve requirement provisions also the recent amendments to the Home apply to Edge Act and Agreement Mortgage Disclosure Act; changes corporations and to U.S. branches implementing other amendments to and agencies of foreign banks. the act will be adopted in 1981. In ad- In connection with the provisions dition to the change in the reporting of the Monetary Control Act, the title year, the amendment also established of Regulation D was changed from March 31, 1981, as the date by which Reserves of Member Banks to Rereports for 1980 and for any portion serve Requirements of Depository Inof 1979 not included in a previous stitutions. report must be filed. August 13, 1980—Amendment Regulation D The Board amended Regulation D, (Reserves of Member Banks) effective November 13, 1980, to implement the passthrough provisions March 5, 1980—Amendments of the Monetary Control Act of 1980. These actions are discussed under Votes for this action: Messrs. Volcker, Regulation A. Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes against this March 14,1980—Amendment and action: None. Absent and not voting: Adoption of a New Regulation Mr. Schultz. May 22, 1980—Amendments Under the Monetary Control Act, July 2, 1980—Amendments and nonmember depository institutions Termination of Regulation are required to hold reserves on trans- These actions are discussed under action accounts and nonpersonal time Credit Restraint. deposits. These reserves may be held Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 with a Federal Home Loan Bank, the machines for the deposit of cash and Central Liquidity Facility of the Na- checks. The Board also adopted tional Credit Union Administration, several technical amendments and a or with any depository institution clarifying amendment to the section maintaining its required reserves with dealing with initial disclosures to a Federal Reserve Bank. The amend- specify that the required disclosures ment establishes rules for nonmember must be in a form that can be retained depository institutions to follow if by the consumer. they pass required reserve balances through another institution to the April 9, 1980—Amendments Federal Reserve and rules for in- The Board amended four provisions termediary institutions to follow in of Regulation E pertaining to rehandling the reserve balances of quirements for terminal receipts and others. periodic statements. Three were effective May 10, 1980; the fourth Regulation E delayed the effective date of certain (Electronic Fund Transfers) requirements until August 10, 1980. January 23, 1980—Amendments Votes for this action: Messrs. Schultz, Wallich, Partee, and Mrs. Teeters. The Board amended Regulation E by Votes against this action: None. Abadding several major sections to im- sent and not voting: Messrs. Volcker plement the Electronic Fund Transfer and Rice.1 Act and by revising some of the existing provisions, effective May 10, One of the amendments related to 1980. receipts given at cash-dispensing machines. Machines that can dispense Votes for this action: Messrs. Volcker, cash but cannot provide receipts are Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes exempt from the requirement to proagainst this action: None. vide receipts at the time the transfer is initiated. Institutions that had or- The new sections of the regulation dered or installed these machines specify the following: (1) documenta- before February 6, 1980, are allowed tion requirements for electronic fund to continue using them provided they transfers (EFTs), (2) requirements for mail receipts to customers on the next notifying consumers about preauth- business day. orized credits, (3) procedures for The other three amendments perresolving errors, and (4) responsi- tained to the requirements for bilities for compliance when certain periodic statements. Some institutypes of EFT services are provided by tions offering electronic fund transfer an institution other than the institu- (EFT) services allow customers to use tion holding the account. automated teller machines to make The Board amended the definition deposits to their accounts. One of an electronic fund transfer, as con- amendment allows financial institutained in a section adopted in 1979, to tions to omit from the periodic stateexclude payments made by check, ment information identifying the lodraft, or other paper instrument at cation of the terminal used for such electronic terminals and to include deposits. Another revision relates to customer use of automated teller the disclosure on the periodic state- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Board Policy Actions ment of charges for electronic trans- mation could be obtained through the fers. The amendment allows institu- authorization network associated tions to combine EFT charges with with the point-of-sale system. The other account charges on the periodic Board believed that each of the alterstatement. The fourth amendment natives represented an unwarranted gives institutions until August 10, burden, and therefore it decided to 1980, to comply with the requirement remove the requirement that receipts that periodic statements indicate the for point-of-sale transactions indicate location of the terminal at which a the type of account being used. transfer was initiated and the name of any third party to whom or from September 24, 1980— whom funds were transferred. Amendments May 5, 1980—Amendment The Board adopted four amendments to Regulation E, effective October 6, The Board amended Regulation E, 1980, pertaining to intra-institutional effective May 10, 1980, to eliminate a transfers and documentation requirerequirement that the receipts given at ments. point-of-sale terminals identify the type of account being charged, if only Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, one account can be accessed at the and Mr. Rice. Votes against this acpoint of sale by the EFT card. tion: None. Absent and not voting: Mr. Gramley. Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this ac- One amendment exempts from the tion: None.1 regulation transfers between accounts of family members at the same in- Regulation E requires that transac- stitution. A second change provides tions made through an electronic ter- an exemption for certain automated minal be recorded on a receipt speci- teller machines that do not comply fying which type of account is used— with the terminal receipt requirefor example, whether a savings or ments in the regulation. A few checking account is involved. In machines permit customers to access transactions involving point-of-sale more than one account with the same terminals, compliance with that re- card, but cannot uniquely identify the quirement is difficult because the account used on the terminal receipt; debit card used in these transactions institutions that ordered or purchased may not indicate the type of account such machines before February 6, it accesses. 1980, the date the regulation became The Board believed that none of the effective, were exempt from that rethree alternative resolutions for com- quirement. pliance was practical. One alternative The other two amendments are would require the sales clerk to ask technical. One permits financial inthe customer the account to be used stitutions to omit from the periodic and record the information manually. statement reference to the state in A second alternative would involve which an electronic transfer was inthe issuance of new debit cards in- itiated if the transaction was made dicating the type of account they ac- within 50 miles of the institution's Digitizedc feosrs F. RAAsS EaR t hird alternative, the infor- main office. The fourth amendment http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 eliminates a requirement that periodic state banking provisions of the Interstatements include the code used on national Banking Act of 1978. terminal receipts to identify any third Votes for this action: Messrs. Volcker, party to whom or from whom funds Schultz, Wallich, Partee, Mrs. Teeters, were transferred. The code is un- Messrs. Rice, and Gramley. Votes necessary because the name of the against this action: None. third party is given on the periodic statements. The new section (Subpart B) of Regulation K sets forth rules govern- Regulation F (Securities of ing the activities of branches, agen- Member State Banks) cies, commercial lending companies, and subsidiary banks of foreign September 17, 1980— banking organizations that operate or Amendments seek to operate in more than one The Board amended Regulation F, ef- state. The rules specify how such an fective November 1, 1980, to con- organization may select its "home form with changes in comparable state" of operation and the cirregulations of the Securities and Ex- cumstances under which it may change Commission and to simplify change its home state and establish the regulatory format. offices in other states. Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, November 12,1980—Amendments Messrs. Rice, and Gramley. Votes The Board amended Regulation K, against this action: None. effective November 13, 1980, to change the consent procedures by The amendments prompted by the which banking organizations may SEC changes pertained mainly to the make additional investments in their form and content of financial statesubsidiaries. It also amended the ments and to certain disclosures on regulation, effective January 3, 1981, loans required of officers, majority to implement provisions in the Intershareholders, and others. In addition, national Banking Act and the Bank the Board simplified the regulation by Holding Company Act concerning replacing the instructions for preparing financial statements with a refer- the nonbanking activities of foreign ence to the instructions for preparing banking organizations. the reports of condition and of in- Votes for these actions: Messrs. come. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes against these actions: Regulation K (International None. Banking Operations) March 5, 1980—Amendments The revised consent procedures permit member banks, Edge and These actions are discussed under Agreement corporations, and bank Regulation A. holding companies, under certain conditions, to make additional in- September 17, 1980—Amendment vestments in the organizations in The Board amended Regulation K, which they already have an interest effective October 2, 1980, by adding a without first seeking approval from Digitizedn feowr F RsAecStEioRn to implement the inter- the Board. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Board Policy Actions The International Banking Act ex- tions and to clarify existing provitended the nonbanking prohibitions sions. of the Bank Holding Company Act to Votes for this action: Messrs. Wallich, foreign banks operating in the United Coldwell, Partee, Mrs. Teeters, and States through a branch, agency, or Mr. Rice. Votes against this action: commercial lending company. The None. Absent and not voting: Messrs. Volcker and Schultz. revisions to Regulation K implement the provisions of the Bank Holding In June 1979, when the Board Company Act that grant foreign adopted the new Regulation L to imbanks certain exemptions from the plement the Depository Institution nonbanking prohibitions. To qualify Management Interlocks Act, it also for those exemptions, a foreign bankproposed for comment additional ing organization must be principally provisions to complete the regulation. engaged in the banking business out- Based partly on the comments reside the United States. The revisions ceived, the Board amended the established criteria for determining regulation (1) by providing additional whether a foreign banking organiza- time to terminate prohibited intion meets this test. Organizations terlocking relationships for instituthat fail to qualify in two consecutive tions that would be faced with a years will no longer be entitled to an disruptive loss of officers or directors exemption; those failing to qualify and (2) by changing the definition of may petition the Board for specific "adjacent communities" for purdetermination of eligibility. poses of the regulation. In addition, Foreign banking organizations that the Board adopted several clarifying qualify for an exemption may engage or technical amendments pertaining in certain nonbanking activities that to the following: the types of inotherwise would be prohibited. In terlocking relationships that can be general, such activities are limited to grandfathered; the definition of those that are in the same line of "person" as it applies to corporabusiness as the foreign organization tions or other businesses; and the cirengages in outside the United States. cumstances that would change the The Board agreed that resolution of grandfather privileges of an instituquestions regarding whether activities tion. are in the same line of business will be made by reference to the four-digit Regulation Q "establishment" category of the (Interest on Deposits) Standard Industrial Classification February 26—Amendment (SIC). Banking or financial activities (those included in division H of the The Board amended Regulation Q, SIC) usually may be pursued only effective February 27, 1980, to with specific Board approval. establish temporarily for member banks a maximum interest rate ceiling of H3/4 percent on 2!/2-year certifi- Regulation L cates of deposit. (Management Official Interlocks) Votes for this action: Messrs. Volcker, February 27, 1980—Amendments Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against The Board amended Regulation L, this action: None. Absent and not Digitizede ffofre FctRivAeS EMR ay 9, 1980, to add new sec- voting: Mr. Schultz. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 71 As of January 1, 1980, depository depository institutions, particularly institutions were permitted to offer a thrift institutions. 21/i-year certificate of deposit with an interest rate ceiling that would vary Regulation T according to changes in the yield on Treasury securities of comparable (Credit by Brokers and Dealers) maturities that are auctioned each February 27, 1980—Amendments month. No maximum was imposed on that ceiling. A rise in interest rates, The Board amended Regulation T, however, threatened to be disruptive effective June 2, 1980, to relieve certo certain financial institutions, par- tain administrative burdens of broticularly those whose assets comprise kers and dealers and to recognize imprimarily long-term fixed-rate loans, provements in information-processbecause such institutions are less able ing technology. to pay the higher rates over the life of Votes for this action: Messrs. Wallich, the deposits than are other institu- Coldwell, Partee, Mrs. Teeters, and tions. Consequently, the Board and Mr. Rice. Votes against this action: the other federal regulators of finan- None. Absent and not voting: Messrs. Volcker and Schultz. cial institutions established maximum interest rate ceilings on this category The amendments to Regulation T of deposit. provided for the following: (1) changing from five business days to seven March 5, 1980—Amendments business days the period within which deposits must be made to a margin These actions are discussed under account; (2) increasing from $100 to Regulation A. $500 the minimum amount of shortfall in a margin account or special March 14, 1980—Amendment cash account that would require regulatory action by the broker; (3) The Board amended Regulation Q, allowing a securities exchange, effective immediately, to impose inassociation, or other self-regulatory terest rate ceilings on certain obligaorganization to approve requests tions issued by the parent holding from brokers or dealers for extencompany of a member bank. sions of time for payment; and (4) Votes for this action: Messrs. Volcker, permitting the date of the postmark Schultz, Wallich, Partee, Mrs. Teeters, on a request for an extension of time and Mr. Rice. Votes against this ac- to serve as evidence of timely filing. tion: None.1 In connection with the last amendment, the Board also rescinded an in- The amendment, which applied to terpretation that required the use of obligations issued in denominations the date of receipt of the request of less than $100,000 and with ma- (rather than the postmark) as eviturities of four years or less, imposed dence of timely filing. interest rate limitations on such obligations similar to those on June 11, 1980—Amendments member bank time deposits of comparable maturities. The action was The Board amended Regulation T to taken to reduce potential pressures establish for marketmakers in options Digitizedf foorr FcRoAnStiEnRu ed disintermediation from a financing rule, similar to the http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 Board Policy Actions one provided for securities specialists, August 6, 1980—Amendment whereby options specialists may ob- The Board amended Regulation T, tain, under certain circumstances, effective November 3, 1980, to allow financing on terms more favorable brokers and dealers to extend credit than those available to ordinary on mutual fund shares that have been customers. In a related action, the fully paid for. Board rescinded an existing special provision that exempted options Votes for this action: Messrs. Volcker, specialists from the Board's uniform Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes margin requirements, since the against this action: None. amendment provides that exemption directly. Both actions were effective The Board's securities credit August 11, 1980. regulations already permitted banks Votes for these actions: Messrs. and other lenders to extend credit on Schultz, Partee, Mrs. Teeters, Messrs. mutual fund shares, and this amend- Rice, and Gramley. Votes against these ment provided similar authority to actions: None. Absent and not voting: brokers and dealers. Messrs. Volcker and Wallich. The Board's securities credit December 12, 1980— regulations permit stock specialists to Interpretation finance with broker-dealers their The Board determined that Regulapositions in the stocks in which they tion T does not permit the use of specialize on terms more advan- bank depository receipts for gold as tageous than those available to the the required margin deposit. public. This concession is provided to help stock specialists maintain fair Votes for this action: Messrs. Volcker, Partee, Mrs. Teeters, Messrs. Rice, and orderly markets in their specialty and Gramley. Votes against this acstocks. In the mid-1970s, the tion: None. Absent and not voting: Securities and Exchange Commission Messrs. Schultz and Wallich. adopted rules stating that marketmakers in options performed the The Board had been asked to detersame functions in the market as stock mine whether bank depository specialists and should be included in receipts for gold could be used in a the same regulations. Accordingly, margin account. It was argued that the Board amended Regulation T to since the South African Krugerrand is extend the specialist credit provisions considered currency and therefore is to exchange-registered options spe- eligible for use as credit in a margin cialists. account, bank depository receipts for In early 1977, the Board temporar- gold, being similar in nature to the ily exempted options specialists from Krugerrand, also should be eligible a new rule that established uniform for use as a cash credit in a margin acmargin requirements for the writing count under Regulation T. The releof options. With the adoption of a vant provision of Regulation T (perseparate rule for options specialists, mitting the use of foreign currency in the special exemption was no longer an account if the currency is regarded necessary and the Board therefore as a commodity) had been adopted rescinded it. when U.S. citizens were prohibited Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 73 from owning gold. The Board ruled, only by the lender; mortgage intherefore, that bank depository surance, on the other hand, is more receipts for gold were not acceptable like term insurance and is available substitutes for cash in margin ac- from many sources. It was noted that counts. obtaining credit life insurance was almost simultaneous with consum- Regulation Y mating the loan; with mortgage life (Bank Holding Companies and insurance, however, the two transac- Change in Bank Control) tions are more likely to be separate. Governor Rice dissented from this July 2, 1980—Decisions action because he preferred to delay a on Impermissible decision on whether the activity was Nonbanking Activities closely related to banking until public The Board decided not to add the comment could be sought. underwriting of home mortgage life In the second action, the Board insurance to the list of nonbanking considered an application by a holdactivities permissible for bank hold- ing company to retain a data processing companies. ing subsidiary whose activities included providing contract key entry Votes for this action: Messrs. Volcker, Partee, and Gramley. Vote against this services. The terms of that service call action: Mr. Rice. Abstention: Mr. for the subsidiary to receive financial Schultz. Absent and not voting: Mr. information from a customer and to Wallich and Mrs. Teeters. convert the data into a medium usable by the customer's processing The Board also decided that the equipment—either key-punched provision of key entry services on a cards or magnetic cards, tapes, or contract basis was not a permissible discs. After the data have been conactivity for bank holding companies. verted to a usable format, the infor- Votes for this action: Messrs. Volcker, mation is returned to the customer Schultz, Partee, Rice, and Gramley. for processing on its own system. Votes against this action: None. Ab- The Board determined that key ensent and not voting: Mr. Wallich and Mrs. Teeters. try services were not closely related to banking. The service was not in a In its determination that under- traditional area of banking expertise writing mortgage life insurance was nor was it an integral part of other not permissible for bank holding data processing services that the subcompanies, the Board noted that sidiary provided. Thus, the Board many insurance companies provide decided that providing such services mortgage life coverage and that there should not be an activity permissible was no reason to conclude that the ac- for bank holding companies. tivity was closely related to banking. Although holding companies are per- August 6, 1980—Interpretation mitted to underwrite credit life and credit accident and health insurance, The Board issued an interpretation of the Board distinguished between Regulation Y, effective August 11, those types of insurance and mort- 1980, concerning nonbanking activigage life insurance. Credit life in- ties permissible for bank holding surance generally has been provided companies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 Board Policy Actions Votes for this action: Messrs. Volcker, however, it permitted simplified pro- Schultz, Wallich, Partee, Mrs. Teeters, cedures to become effective more Messrs. Rice, and Gramley. Votes promptly. In April 1980, the Board against this action: None. had proposed for comment a revised regulation, and in May it adopted The interpretation allows a bank three simplifying amendments: (1) to holding company to form a subsidiexempt all agricultural credit from ary to perform services for other subthe disclosure requirements of the sidiaries within the organization if the regulation; (2) to eliminate the holding company itself can perform disclosure requirements in periodic those services directly. statements provided by lenders in connection with closed-end credit October 23, 1980—Amendment transactions; and (3) to continue a The Board amended Regulation Y, provision, which otherwise would effective December 31, 1980, to add have expired May 31, 1980, that the performance of real estate ap- governs a consumer's right to rescind praisals to the list of activities per- a transaction made under an openmissible for bank holding companies. end credit plan secured by the consumer's residence. Votes for this action: Messrs. Schultz, Wallich, Partee, Mrs. Teeters, and Mr. July 23—Amendment Gramley. Votes against this action: None. Absent and not voting: Messrs. The Board amended Regulation Z to Volcker and Rice. increase temporarily the tolerance for error in disclosing annual percentage The amendment allows bank rates for irregular mortgage transacholding companies to perform aptions. praisals of real estate, including single-family residences, upon proper Votes for this action: Messrs. Schultz, application to the Board. Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes against this action: None. Absent and not voting: Regulation Z Mr. Volcker. (Truth in Lending) A congressional conference report May 14, 1980—Amendments issued in conjunction with passage of The Board approved three amend- the Truth in Lending Simplification ments to Regulation Z, effective May and Reform Act of 1980 recommend- 21, 1980, in conjunction with provi- ed that the Board permit, on a temsions of the Truth in Lending Sim- porary basis, a more generous tolerplification and Reform Act of 1980. ance for error in disclosing the annual percentage rate for mortgage transac- Votes for this action: Messrs. Schultz, tions that involve irregular payments Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. or advances. The transactions would Absent and not voting: Mr. Volcker.1 include those with multiple advances, such as loans for construction financ- The Simplification Act required ing, and those with irregular repaythat the Board adopt a revised ment schedules, such as mortgages in Regulation Z by April 1, 1981; which the monthly payments include Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 75 insurance premiums that can vary comply voluntarily with the Board's over the term of the loan. overall objectives of reducing credit In adopting the recommendation availability and dampening inflacontained in the conference report, tionary pressures. the Board increased the tolerance Votes for this action: Messrs. Volcker, from 1/8 of 1 percentage point to 1/2 Schultz, Partee, Mrs. Teeters, and Mr. of 1 percentage point above or below Rice. Vote against this action: Mr. the actual rate. The greater tolerance Wallich.1 would be permitted between August 1, 1980, and March 31, 1981; during The Board adopted, in conjunction that period, lenders were expected to with several actions taken by the adgain experience in using the calcula- ministration, the following antition tools necessary for computing inflation measures, pursuant in part the annual percentage rates for com- to the Credit Control Act of 1969 and plicated mortgages. After March 31, to Executive Order 12201: 1981, the tolerance would revert to 1. Amendment of Regulation D to 1/8 of 1 percentage point. increase from 8 to 10 percent the marginal reserve requirement that had been imposed in October 1979 on Credit Restraint certain managed liabilities of member March 14, 1980—Amendment and banks and Edge corporations. Adoption of a New Regulation 2. Adoption of Subpart A to re- As part of a general government pro- quire creditors who provide certain gram to help curb inflationary pres- types of consumer credit to maintain sures, the Board took a series of ac- a special non-interest-earning deposit tions, effective March 14, 1980, to with the Federal Reserve equal to 15 control inflation generated by exten- percent of the growth in covered assions of credit in excessive amounts.2 sets above the base level outstanding To impose special deposit require- on March 14, 1980. ments on certain creditors, the Board 3. Adoption of Subpart B to reamended Regulation D and adopted a quire money market mutual funds new regulation, Part 229 (Credit and other similar creditors to main- Restraint): Subpart A (Consumer tain a special non-interest-earning Credit), Subpart B (Short-Term Fi- deposit equal to 15 percent of the nancial Intermediaries), and Subpart growth in covered assets above the C (Nonmember Commercial Banks). amount outstanding on March 14. 4. Adoption of Subpart C to re- Votes for these actions: Messrs. quire nonmember banks to maintain Volcker, Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes a special non-interest-earning deposit against these actions: None.1 equal to the 10 percent marginal reserve requirement established for The Board also approved establish- member banks on their managed liament of a special credit restraint pro- bilities, as described in 1 above. gram that encouraged all creditors to The Board also established a voluntary special credit restraint program that urged financial intermediaries, 2. This subject is discussed in greater detail in other sections of the REPORT. other creditors, and borrowers to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 Board Policy Actions take into account the Federal Re- of a particular sponsor to roll over serve's anti-inflationary efforts when maturing investments, under certain making credit decisions. Lenders conditions, without incurring the 15 were asked to continue to meet the percent special deposit requirement. essential credit needs of their 3. Exempted the tax-exempt assets established customers, but to avoid of money market funds that invest at lending for speculative or nonproduc- least 80 percent of their assets in tive purposes and to limit overall short-term tax-exempt obligations. growth in credit to a range of 6 to 9 4. Permitted certain money market percent. funds in existence on March 14, 1980, Governor Wallich dissented from to use $100 million as the minimum the action on the voluntary program base from which to calculate inbecause he preferred that the Federal creases in outstanding credit. Reserve continue to rely on market 5. Established reporting proceprices rather than to rely on moral dures for all affected organizations, suasion for the execution of monetary and delayed for one week (until April policy. He feared that some creditors 8, 1980) the filing of the base report might try to circumvent the voluntary of assets of money market funds. program, possibly by shifting business abroad; he also was concerned April 2, 1980—Amendments about the increased administrative The Board amended the credit burden that would be placed on the restraint regulation, Subpart A, ef- Federal Reserve. fective immediately, to establish a uniform rule for creditors who March 27, 1980—Amendments change the terms on existing open- The Board approved, effective March end credit plans. 28, 1980, several amendments to Sub- Votes for this action: Messrs. Volcker, part B of the credit restraint regula- Schultz, Wallich, Partee, and Mrs. tion that modified the program's ap- Teeters. Votes against this action: plicability to certain investment None. Absent and not voting: Mr. Rice.1 funds. The Board also added Subpart D (Reports under Special Credit Restraint Program) to implement the The Board also amended Subpart A, reporting provisions of the program. effective immediately, to provide an alternative method of calculating a Votes for these actions: Messrs. creditor's base amount of covered Schultz, Partee, Mrs. Teeters, and Mr. credit. Rice. Votes against these actions: None. Absent and not voting: Messrs. Votes for this action: Messrs. Schultz, Volcker and Wallich.1 Wallich, Partee, and Mrs. Teeters. Votes against this action: None. Ab- The amendments to the credit sent and not voting: Messrs. Volcker restraint program had the following and Rice.1 effects: 1. Excluded bona fide personal One amendment established a natrust, pension, retirement, and other tionwide rule for creditors who imtax-exempt accounts invested by bank pose or increase any finance or other fiduciaries in money market funds. charge on open-end credit accounts, 2. Allowed a unit investment trust change the method of computing the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 77 balance upon which charges are as- Control Act of 1980; permanent prosessed, or increase the minimum re- visions will be issued later. quired payment. The new rule requires creditors to provide a written May 22, 1980—Amendments notice 30 days in advance of any such The Board approved amendments to change in terms. Consumers may the special credit restraint program either accept the new terms and conthat reduced by one-half the limitatinue to use the account, or reject the tions on credit growth. new terms, discontinue use of the credit card, and pay off any existing Votes for this action: Messrs. Volcker, balance under the old terms. Wallich, Partee, and Rice. Votes The second action was taken to against this action: None. Absent and not voting: Mr. Schultz and Mrs. prevent undue hardship to some cred- Teeters.1 itors, particularly retailers, who could be unfairly restricted because their In view of the reduction in credit outstanding level of credit may have growth that had occurred and the been at the normal seasonal low in possibility of weakening economic mid-March. The change allowed conditions, the Board took the creditors to choose an alternate base following actions: period that would accommodate es- 1. Reduced to 5 percent the martablished seasonal variations. ginal reserve requirement on managed liabilities and increased by IVi April 16, 1980—Adoption of a percent the base amount upon which Temporary Seasonal Credit reserves are calculated, effective with Program the statement week May 29-June 5, The Board adopted a temporary 1980, for both member and nonseasonal credit program to assist member banks. small banks faced with liquidity 2. Reduced to IVi percent the spepressures. cial deposit requirement for covered consumer credit, effective beginning Votes for this action: Messrs. Volcker, Schultz, Wallich, Mrs. Teeters, and with the average amount of credit Mr. Rice. Votes against this action: outstanding in June. None. Absent and not voting: Mr. 3. Reduced to IVi percent the spe- Partee.1 cial deposit requirement on money market mutual funds, effective with The program extended to small the computation period beginning nonmember banks, under simplified June 16, 1980. guidelines, the seasonal borrowing privileges previously available only to July 2, 1980—Amendments and member banks. It allowed institutions Termination of Regulation with less than $100 million in deposits to obtain credit from the Federal The Board amended Regulation D Reserve to help them meet the credit and rescinded the credit restraint needs of farmers, small businesses, regulation, Subparts A, B, C, and D, and other priority users. to terminate during July the remain- The program and guidelines were ing requirements imposed as part of considered a temporary action to im- the credit restraint program. The plement provisions of the Monetary Board further amended Regulation D Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 Board Policy Actions to eliminate a 2 percent supple- against this action: None. Absent and mentary reserve requirement imposed not voting: Mr. Wallich and Mrs. Teeters.1 in November 1978 on large time deposits of member banks. The new policy, which applies to Votes for these actions: Messrs. one-bank holding companies with to- Volcker, Schultz, Partee, Rice, and tal assets of $150 million or less and Gramley. Votes against these actions: with no significant nonbanking ac- None. Absent and not voting: Mr. Wallich and Mrs. Teeters. tivities, was designed to facilitate the change of ownership of small banks The Board completed the phase- and to help maintain local ownership. out of the credit restraint program by While stressing the need to maintain taking the following actions: the safety and soundness of the bank- 1. Eliminating the 2 percent sup- ing system, the Board said it would plemental reserve requirement and permit a higher level of debt than the remaining 5 percent marginal re- would be permissible for larger or serve requirement for managed liabili- multibank holding companies. Preties, effective with the reserve main- viously, the Board required the retiretenance period beginning July 24. ment of acquisition debt within 12 years. The revised policy establishes 2. Eliminating the IVi percent deno time limit for debt retirement; inposit requirement on consumer credit. stead, it requires that the ratio of debt No further deposits are necessary to equity capital of the holding comafter the deposit maintenance period pany be reduced to 30 percent within expires on July 23. 12 years. That ratio approximates the 3. Eliminating the IVi percent dedebt level maintained by many multiposit requirement on money market bank holding companies. The capital mutual funds, effective with covered of the subsidiary bank must be mainassets outstanding on July 28. tained at a level of no less than 8 per- 4. Eliminating the voluntary specent of assets. cial credit restraint program. No further reports are required after institutions file the June 30 report. May 7, 1980— Divestitures under the Bank Holding Company Act The Board adopted a statement of policy regarding its treatment of cer- Policy Statements and tain divestitures required by the Bank Other Actions Holding Company Act. March 26, 1980— Votes for this action: Messrs. Schultz, Formation of Small Wallich, Partee, and Mrs. Teeters. One-Bank Holding Companies Votes against this action: None. Absent and not voting: Messrs. Volcker The Board adopted a statement of and Rice.1 policy for assessing the formation of one-bank holding companies when The 1970 amendments to the Bank sizable acquisition debt is involved. Holding Company Act allowed cer- Votes for this action: Messrs. Volcker, tain one-bank holding companies that Schultz, Partee, and Rice. Votes also engaged in impermissible non- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 79 bank activities up to ten years to com- November 26, 1980— plete one of the following actions: (1) Procedures for Handling to qualify for an exemption that Applications by Banks and would permit retention of the activ- Bank Holding Companies ity; (2) to divest the activity; or (3) to The Board adopted a policy statedivest the bank and cease being a ment describing the procedures to be bank holding company. The act refollowed regarding notice of applicaquired affected companies to comtions by banks or bank holding complete such actions by December 31, panies, the timeliness of comments, 1980; it contained no provision for and guidelines for public meetings. extending the deadline. A provision The policy is effective with all apin the Monetary Control Act of 1980, plications for which notice is pubhowever, would allow bank holding lished after January 31, 1981. companies having impermissible real estate holdings an additional two Votes for this action: Messrs. Volcker, years within which to divest. Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes The Board noted that a number of against this action: None. banking organizations still had not filed their plans for complying with The new policy establishes imthe divestiture requirements. The proved procedures for notifying the policy statement issued by the Board public of applications to acquire subrequired that each affected company sidiaries or branches, to merge, or to file by July 1, 1980, an application to become members of the Federal Reretain a nonbanking activity if it serve. The statement includes model planned to do so. Failure to file such formats for required newspaper an application would be considered a notices; the notices must specify the declaration of the company's intendeadline for receipt of comments on tion to divest the activity. Those an application or for a request for an organizations planning to divest must extension of the comment period. begin filing reports with the Board on The policy also prescribes guidelines August 1, 1980, regarding their prog- to be used for informal hearings on ress in completing the divestiture. protested applications, particularly With regard to the real estate provi- those protested under the Community sions of the Monetary Control Act, Reinvestment Act. the policy statement indicated that In conjunction with the new policy, the Board would review on a case-bythe Board also approved technical case basis requests for extensions of amendments to its Rules of Protime within which to comply. In cedure. reviewing those requests, the Board would take into account whether the December 12, 1980— company had made a good-faith ef- Fee Schedules and Pricing fort in the past to divest and whether Principles for System Services immediate divestiture would impose a substantial financial loss. Holding The Board adopted pricing princompanies that wished to take ad- ciples, implementation dates, and a vantage of the extension of time were partial schedule of fees to be charged required to submit a request by July 1, depository institutions that use the 1980. Federal Reserve's services. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 Board Policy Actions Votes for this action: Messrs. Volcker, gories shall match costs over the long Partee, Mrs. Teeters, Messrs. Rice, run and shall reflect adjustments for and Gramley. Votes against this acthe costs that would be incurred by tion: None. Absent and not voting: Messrs. Schultz and Wallich. private businesses if they provided the services. The pricing principles, however, shall give due regard to To implement provisions of the competitive factors and the provision Monetary Control Act of 1980, the of an adequate level of services na- Board adopted schedules of prices for tionwide. certain of its services and published 4. The structure of fees and service the principles and price determinants arrangements shall be designed to imunderlying the prices. prove the efficiency of services and to Fees, or a timetable for the adop- facilitate longer-run improvements in tion of fees, were established for the the payments system. following services: 5. Interest shall be charged on 1. Payment system services, such items credited prior to collection at as check clearing and collection, wire the current rate applicable on federal transfer of funds, and use of Federal funds. Reserve automated clearinghouse facilities. 1980—Discount Rates 2. Book entry, safekeeping, and other services associated with the pur- The Board approved seven changes in chase or sale of government securi- the basic discount rate during 1980. ties. All were increases or decreases of 1 3. Noncash collections. percentage point. These changes in- 4. Transportation of currency and cluded an increase from 12 percent to coin, and coin wrapping. 13 percent in mid-February, three Charges are to be phased in over a reductions from 13 percent to 10 per- 12-month period: Charges for wire cent between late May and late July, transfer and net settlement transac- and three increases from 10 percent to tions will begin January 29, 1981; 13 percent between late September charges for a number of other ser- and early December. The Board also vices will be imposed in the summer voted on four occasions to turn down and fall of 1981; and on January 1, requests for increases submitted by 1982, charges will be implemented for individual Federal Reserve Banks. No coin and currency services. requests to lower the rate were disap- In its determination of appropriate proved during 1980. prices, the Board was guided by a In mid-March a surcharge of 3 number of principles, including the percentage points above the basic disfollowing: count rate was established on fre- 1. All System services covered by quent borrowings by institutions with the fee schedule shall be priced ex- deposits of $500 million or more. plictly. This surcharge was lifted in early 2. All such services shall be May, but later in the year a new suravailable to nonmember depository charge was imposed; it was set at 2 institutions at the same fee charged percentage points in mid-November member banks. and subsequently was increased to 3 3. Revenues for major service cate- percentage points in early December. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 81 The specific reasons for the Reserve Banks. The surcharge pro- Board's decisions are reviewed below. vided added incentive for affected in- In reaching those decisions the Board stitutions to adjust their loans and intook into account general economic vestments more promptly to changing and financial developments that are market conditions. Such adjustments covered in more detail elsewhere in would improve the ability of the this REPORT. A listing of the Board's Federal Reserve to attain its longerdiscount rate actions during 1980, in- run objectives for bank credit and the cluding the votes on the actions and money supply. the reasons for dissents, follows this review. Late March through April: No Change January to Mid-March: In late March and in mid-April re- Increase in Basic Discount Rate; quests by two Federal Reserve Banks Imposition of Surcharge to raise the basic discount rate by 2 percentage points and 3 percentage During the early weeks of the year the points were denied by the Board. The Board became very concerned that other ten Banks had proposed that economic developments, including a the current rate be maintained. Over large increase in the price of imported previous weeks short-term market oil, were adding to inflationary rates had risen to levels well above the pressures and might lead to further discount rate. However, because of destabilizing pricing decisions. the sensitivity of financial markets to Moreover, by mid-February monemonetary policy developments, the tary expansion appeared to be ac- Board concluded that a large increase celerating, after an extended period in the discount rate was likely to conof relatively moderate growth. In the vey a misleading message of further Board's judgment these developtightening in monetary policy and put ments underscored the need to further upward pressure on bank highlight the System's continuing lending rates and market interest policy to resist inflation, and on rates. February 15 the Board approved an increase in the basic discount rate Early May to Late July: from 12 percent—the level in effect Removal of Surcharge; since October 8, 1979—to 13 percent. Reductions in Subsequently, on March 14 the Basic Discount Rate Board approved a surcharge of 3 percentage points on frequent bor- On May 6 the Board approved rerowings by institutions with deposits quests by several Federal Reserve of $500 million or more. The sur- Banks to eliminate the surcharge of 3 charge was introduced as part of a percentage points on frequent borrowbroader program to curb inflation. It ings by large depository institutions. was designed to discourage the fre- At the time it was established the surquent use of the discount window by charge brought the cost of Federal institutions with access to the money Reserve credit for affected borrowers market and was intended to supple- into approximate alignment with the ment the administrative discipline constellation of short-term market already in place at the Federal rates. Those rates had declined sub- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 Board Policy Actions stantially during April and by early collateralized to the satisfaction of May were well below the surcharge the Reserve Bank be made at the basic rate. In the circumstances the Board discount rate, which remained at 10 concluded ihat the need for a sur- percent. charge no longer existed. From late May to late July, the Late September through Board approved three reductions of 1 December: Increases in percentage point in the basic discount Basic Discount Rate; rate—from 13 percent to 10 percent. Reimposition of Surcharge All of these actions were technical in nature: they were designed to bring On September 25 the Board approved the discount rate into closer align- an increase of 1 percentage point in ment with short-term market rates, the basic discount rate to a level of 11 which fell substantially over the percent. This action was taken period, and were not intended to against the background of an unexsignal a change in the general course pectedly sharp recovery in economic of monetary policy. activity and the persistence of intense inflationary pressures. These developments were associated in turn with Early August through rapid expansion in money and bank Mid-September: No Change in credit and with sizable increases in Basic Discount Rate market interest rates. By late Between early August and mid-Sep- September short-term interest rates tember, one Federal Reserve Bank re- had risen to levels well above the baquested a change in the basic discount sic discount rate, and bank borrowrate—an increase of Vi percentage ings had also advanced appreciably point. The request was disapproved on average. In announcing this action on September 15. The Board's deci- the Board referred to the continuing sion reflected its view that the dis- policy of the Federal Reserve to count rate was then at an appropriate discourage excessive growth in the level in relation to short-term market monetary aggregates. rates. The Board approved a further in- On August 22 the Board approved crease of 1 percentage point in the a reduction of Vi percentage point in basic discount rate on November 14 the rate on loans made under section and also approved a surcharge of 2 10(b) of the Federal Reserve Act. percentage points on frequent bor- Such loans were secured by "ineligi- rowings by depository institutions ble paper," and the purpose of this ac- with $500 million or more in deposits. tion was to conform the System's Interest rates and bank borrowings lending rules with the Monetary Con- had risen considerably further since trol Act of 1980. The latter had late September. The monetary agremoved the previous requirement gregates and bank credit had conthat loans collateralized by ineligible tinued to expand at rapid rates, with paper be made at a rate at least Vi particular strength exhibited by percentage point above the basic dis- business loans. In this situation the count rate. This action eliminated the Board decided that increases in penalty rate in question by providing System lending rates were desirable to that adjustment and seasonal credit bring them into better alignment with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 83 market rates and to highlight the quired to establish rates on discounts Federal Reserve's continuing anti- for and advances to member banks at inflationary policy. least every 14 days and to submit such On December 4 the Board ap- rates to the Board for review and proved an additional increase of 1 determination. The Board votes listed percentage point in the basic discount below are those that involved aprate to a level of 13 percent and also proval or disapproval of actions to approved a higher surcharge, of 3 change the rate. Reference is made to percentage points, on frequent bor- the rate on discounts for and adrowings by large depository institu- vances to depository institutions for tions. In the Board's judgment, there short-term adjustment credit. This was a strong case on technical rate has been referred to as the basic grounds for raising the System's lend- discount rate in the foregoing report. ing rates, given the unusually wide A corresponding change in subspread that had developed in recent sidiary rates was approved each time weeks between those rates and market the basic rate was changed. As of interest rates. Moreover, borrowings December 31, 1980, the structure of by depository institutions had re- rates was as follows: a basic rate of 13 mained relatively high. The Board percent for short-term adjustment also believed that the increases in credit, subject to a surcharge of 3 question would be consistent with the percentage points for such borrowing policy of restraining excessive growth by institutions with deposits of $500 in money and credit and would have a million or more that borrowed in sucfavorable impact on inflationary ex- cessive statement weeks or in more pectations. than four weeks in a calendar quar- Subsequent requests by three Fed- ter; 13 percent for extended seasonal eral Reserve Banks to raise the basic credit; 14 percent for extended credit discount rate by 1 or 2 percentage in situations in which exceptional cirpoints were turned down by the cumstances or practices are adversely Board on December 22. In reaching affecting an individual institution; this decision, the Board took account and 16 percent for emergency credit of sizable increases in short-term in- to borrowers other than depository terest rates since early December, but institutions. it also noted that expansion in the monetary aggregates appeared to February 15, 1980 have moderated substantially in re- Effective February 15, 1980, the cent weeks. Moreover, while inflation Board approved actions taken by the and inflationary expectations redirectors of the Federal Reserve mained very strong, there were signs Banks of New York, Cleveland, Richthat economic activity might weaken mond, Atlanta, Chicago, St. Louis, in the months ahead. Minneapolis, Dallas, and San Francisco to increase the discount rate Votes on Reserve Bank Actions from 12 percent to 13 percent. to Change the Discount Rate Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, Under the provisions of the Federal and Mr. Rice. Votes against this ac- Reserve Act, the boards of directors tion: None. Absent and not voting: of the Federal Reserve Banks are re- Mr. Coldwell. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 Board Policy Actions The Board subsequently approved taken by the directors of the Federal similar actions taken by the directors Reserve Bank of Cleveland on April of the Federal Reserve Banks of 10 to increase the discount rate to 15 Boston, Philadelphia, and Kansas percent. City, effective February 19, 1980. Votes for this action: Messrs. Volcker, Mr. Wallich, while voting in favor Schultz, Partee, Mrs. Teeters, and Mr. of this action, indicated that he would Rice. Votes against this action: None. have preferred a larger increase in Absent and not voting: Mr. Wallich.1 light of the strength of inflationary forces and inflationary sentiment in May 6, 1980 the economy. Effective May 7, 1980, the Board approved actions taken by the directors March 14, 1980 of the Federal Reserve Banks of Effective March 17, 1980, the Board Boston, Philadephia, Richmond, approved actions taken by the direc- Atlanta, Chicago, St. Louis, Minnetors of all of the Federal Reserve apolis, Dallas, and San Francisco to Banks to establish a surcharge of 3 eliminate the 3 percentage point surpercentage points for borrowing for charge, approved on March 14, 1980, ordinary adjustment credit by institu- applicable to frequent borrowings by tions with deposits of $500 million or depository institutions with deposits more, when such borrowing occurred of $500 million or more. in two successive statement weeks or Votes for this action: Messrs. Volcker, when it occurred in more than four Schultz, Mrs. Teeters, and Mr. Rice. weeks in a calendar quarter. Vote against this action: Mr. Wallich. Absent and not voting: Mr. Partee.1 Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this ac- The Board subsequently approved tion: None.1 similar actions taken by the directors of the Federal Reserve Banks of New March 31, 1980 York, Cleveland, and Kansas City, effective May 9, 1980. The Board disapproved actions taken Mr. Wallich voted against this acon March 27 by the directors of the tion because he believed the sizable Federal Reserve Bank of Cleveland to decline in market interest rates during increase the discount rate to 16 perrecent weeks had generated an undecent and by the directors of the sirable inference of easing in mone- Federal Reserve Bank of St. Louis to tary policy. Removal of the discount increase the discount rate to 15 perrate surcharge would reinforce that cent. view in his judgment and have an Votes for this action: Messrs. Schultz, adverse effect on inflationary expec- Wallich, Partee, Mrs. Teeters, and Mr. tations. Rice. Votes against this action: None. Absent and not voting: Mr. Volcker.1 May 28, 1980 April 14, 1980 Effective May 29, 1980, the Board approved actions taken by the direc- The Board disapproved an action tors of the Federal Reserve Banks of 1. This note appears on p. 65. Boston, Philadelphia, Cleveland, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 85 Richmond, Atlanta, Chicago, St. York, Cleveland, Richmond, Atlan- Louis, Minneapolis, Kansas City, ta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco to reduce Kansas City, Dallas, and San Franthe discount rate from 13 percent to cisco to reduce the discount rate to 10 12 percent. percent. Votes for this action: Messrs. Volcker, Votes for this action: Messrs. Volcker, Schultz, Mrs. Teeters, and Mr. Rice. Wallich, Mrs. Teeters, Messrs. Rice, Vote against this action: Mr. Wallich. and Gramley. Votes against this ac- Absent and not voting: Mr. Partee.1 tion: None. Absent and not voting: Messrs. Schultz and Partee. The Board subsequently approved a similar action taken by the directors The Board subsequently approved of the Federal Reserve Bank of New similar actions taken by the directors York, effective May 30, 1980. of the Federal Reserve Banks of Mr. Wallich was opposed to a re- Boston and Philadelphia, effective duction at this time because he was July 29, 1980. concerned that such action would be interpreted as a move toward a more August 22, 1980 stimulative monetary policy and Effective September 2, 1980, the would therefore have an adverse im- Board approved actions taken by the pact on inflationary expectations. directors of the Federal Reserve Banks of Boston, New York, Phila- June 12, 1980 delphia, and Atlanta to reduce the Effective June 13, 1980, the Board discount rate under section 10(b) of approved actions taken by the direc- the Federal Reserve Act from lOVi tors of the Federal Reserve Banks of percent to 10 percent. New York, Philadelphia, Cleveland, Votes for this action: Messrs. Volcker, Richmond, Chicago, St. Louis, Min- Schultz, Partee, and Gramley. Votes neapolis, Kansas City, Dallas, and against this action: None. Absent and San Francisco to reduce the discount not voting: Mr. Wallich, Mrs. Teeters, rate to 11 percent. and Mr. Rice. Votes for this action: Messrs. Volcker, The Board subsequently approved Schultz, Partee, Mrs. Teeters, Messrs. similar actions taken by the directors Rice, and Gramley. Votes against this action: None. Absent and not voting: of the Federal Reserve Banks of Mr. Wallich. Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, The Board subsequently approved Dallas, and San Francisco, effective similar actions taken by the directors September 2, 1980. of the Federal Reserve Banks of Boston and Atlanta, effective June September 15, 1980 16, 1980. The Board disapproved an action taken by the directors of the Federal July 25, 1980 Reserve Bank of St. Louis on Sep- Effective July 28, 1980, the Board ap- tember 11, 1980, to increase the disproved actions taken by the directors count rate from 10 percent to IOV2 of the Federal Reserve Banks of New percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 Board Policy Actions Votes for this action: Messrs. Volcker, mond, Atlanta, St. Louis, Minne- Schultz, Partee, Mrs. Teeters, Messrs. apolis, Kansas City, and San Fran- Rice, and Gramley. Votes against this cisco to increase the discount rate to action: None. Absent and not voting: Mr. Wallich. 13 percent and to raise the surcharge to 3 percentage points for large September 25, 1980 depository institutions that have a record of frequent borrowing. Effective September 26, 1980, the Board approved actions taken by the Votes for these actions: Messrs. Volcker, Schultz, Wallich, Partee, directors of all of the Federal Reserve Rice, and Gramley. Vote against these Banks to increase the discount rate to actions: Mrs. Teeters. 11 percent. Votes for this action: Messrs. Volcker, The Board subsequently approved Schultz, Wallich, Partee, Mrs. Teeters, similar actions taken by the directors Messrs. Rice, and Gramley. Votes of the Federal Reserve Banks of against this action: None. Boston, Philadelphia, Chicago, and Dallas, effective December 8, 1980. November 14, 1980 Mrs. Teeters believed that no Effective November 17, 1980, the change should be made in discount Board approved actions taken by the rates. In her view interest rates were directors of all of the Federal Reserve already too high and were having a Banks to increase the discount rate to highly restraining impact on eco- 12 percent and to adopt a surcharge nomic activity. She saw a major risk of 2 percentage points on frequent that further sizable increases in inuse of the discount window by large terest rates, which were likely to be borrowers. stimulated by a rise in discount rates, might be followed by a relatively Votes for these actions: Messrs. sharp downturn in overall economic Volcker, Schultz, Wallich, Partee, Rice, and Gramley. Vote against these activity. actions: Mrs. Teeters. December 22, 1980 Mrs. Teeters voted against the increases because she felt they would The Board disapproved actions taken put further upward pressure on mar- on December 11 by the directors of ket interest rates, which she believed the Federal Reserve Banks of Richwere already too high, and could have mond and St. Louis to increase the seriously adverse consequences for discount rate to 14 percent and by the the economy. directors of the Federal Reserve Bank of Cleveland to increase the discount rate to 15 percent. December 4, 1980 Votes for this action: Messrs. Volcker, Effective December 5, 1980, the Wallich, Partee, Rice, and Gramley. Board approved actions taken by the Votes against this action: None. Abdirectors of the Federal Reserve sent and not voting: Mr. Schultz and Banks of New York, Cleveland, Rich- Mrs. Teeters. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

87 Record of Policy Actions of the Federal Open Market Committee The record of policy actions of the mean that all members of the Com- Federal Open Market Committee is mittee were equally agreed as to the presented in the ANNUAL REPORT of reasons for the particular decision or the Board of Governors pursuant to as to the precise operations in the the requirements of section 10 of the open market that were called for to Federal Reserve Act. That section implement the general policy. provides that the Board shall keep a During 1980 the policy record for complete record of the actions taken each meeting was released a few days by the Board and by the Federal Open after the next regularly scheduled Market Committee on all questions meeting and was subsequently pubof policy relating to open market lished in the Federal Reserve Bulletin. operations, that it shall record therein Policy directives of the Federal the votes taken in connection with the Open Market Committee are issued determination of open market poli- to the Federal Reserve Bank of New cies and the reasons underlying each York as the Bank selected by the such action, and that it shall include Committee to execute transactions in its ANNUAL REPORT to the Con- for the System Open Market Acgress a full account of such actions. count. In the area of domestic open In the pages that follow, there are market activities, the Federal Reserve entries with respect to the policy ac- Bank of New York operates under tions taken at the meetings of the two separate directives from the Open Federal Open Market Committee Market Committee, an Authorization held during the calendar year 1980, for Domestic Open Market Operaincluding the votes on the policy deci- tions and a domestic policy directive. sions made at those meetings as well In the foreign currency area, it as a re'sume of the basis for the deci- operates under an Authorization for sions. The summary descriptions of Foreign Currency Operations and a economic and financial conditions foreign currency directive. These four are based on the information that was instruments are shown below in the available to the Committee at the form in which they were in effect at time of the meetings, rather than on the beginning of 1980. Changes in the data as they may have been revised instruments during the year are later. reported in the records for the in- It will be noted from the record of dividual meetings. policy actions that in some cases the decisions were by unanimous vote Authorization for Domestic and that in other cases dissents were Open Market Operations recorded. The fact that a decision in In Effect January 1, 1980 favor of a general policy was by a large majority, or even that it was by 1. The Federal Open Market Commitunanimous vote, does not necessarily tee authorizes and directs the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions Reserve Bank of New York, to the extent are secured throughout their life by a necessary to carry out the most recent warehouse receipt or similar document domestic policy directive adopted at a conveying title to the underlying goods; meeting of the Committee: provided that the aggregate amount of (a) To buy or sell U.S. Government bankers aceptances held at any one time securities, including securities of the shall not exceed $100 million; Federal Financing Bank, and securities (c) To buy U.S. Government securithat are direct obligations of, or fully ties, obligations that are direct obligations guaranteed as to principal and interest by, of, or fully guaranteed as to principal and any agency of the United States in the interest by, any agency of the United open market, from or to securities dealers States, and prime bankers acceptances of and foreign and international accounts the types authorized for purchase under maintained at the Federal Reserve Bank l(b) above, from dealers for the account of New York, on a cash, regular, or de- of the Federal Reserve Bank of New York ferred delivery basis, for the System Open under agreements for repurchase of such Market Account at market prices and, for securities, obligations, or acceptances in such Account, to exchange maturing U.S. 15 calendar days or less, at rates that, Government and Federal agency securities unless otherwise expressly authorized by with the Treasury or the individual agen- the Committee, shall be determined by cies or to allow them to mature without competitive bidding, after applying replacement; provided that the aggregate reasonable limitations on the volume of amount of U.S. Government and Federal agreements with individual dealers; proagency securities held in such Account (in- vided that in the event Government cluding forward commitments) at the securities or agency issues covered by any close of business on the day of a meeting such agreement are not repurchased by of the Committee at which action is taken the dealer pursuant to the agreement or a with respect to a domestic policy directive renewal thereof, they shall be sold in the shall not be increased or decreased by market or transferred to the System Open more than $4.0 billion • during the period Market Account; and provided further commencing with the opening of business that in the event bankers acceptances on the day following such meeting and covered by any such agreement are not ending with the close of business on the repurchased by the seller, they shall conday of the next such meeting; tinue to be held by the Federal Reserve (b) When appropriate, to buy or sell Bank or shall be sold in the open market. in the open market, from or to acceptance 2. The Federal Open Market Commitdealers and foreign accounts maintained tee authorizes and directs the Federal at the Federal Reserve Bank of New York, Reserve Bank of New York (or, under on a cash, regular, or deferred delivery special circumstances, such as when the basis, for the account of the Federal New York Reserve Bank is closed, any Reserve Bank of New York at market dis- other Federal Reserve Bank) (a) to lend to count rates, prime bankers acceptances the Treasury such amounts of securities with maturities of up to 9 months at the held in the System Open Market Account time of acceptance that (1) arise out of as may be necessary from time to time for current shipment of goods between coun- the temporary accommodation of the tries or within the United States, or (2) Treasury, under such conditions as the arise out of the storage within the United Committee may specify; and (b) to pur- States of goods under contract of sale or chase directly from the Treasury for expected to move into the channels of renewable periods not to exceed 30 days, trade within a reasonable time and that when authorized by the Board of Governors of the Federal Reserve System 1. Pursuant to an action taken by the Com- pursuant to an affirmative vote of not less mittee on December 19, 1979, the limit on than five members, for its own account changes between the Committee meetings in (with discretion, in cases where it seems System Account holdings of U.S. government desirable, to issue participations to one or and federal agency securities was set at $4.0 more Federal Reserve Banks) such billion for the period through the close of amounts of special short-term certificates business on January 9, 1980, at which time it of indebtedness as may be necessary from reverted to $3.0 billion. time to time for the temporary accom- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 modation of the Treasury, provided that and services is declining in the current the rate charged on such certificates shall quarter, after the third-quarter rebound, be a rate of XA of 1 percent below the dis-and that prices on the average are continucount rate of the Federal Reserve Bank of ing to rise rapidly. Retail sales, which had New York at the time of such purchases expanded sharply during the third quarter and provided that the total amount of in both constant and current dollars, such certificates held at any one time by dropped in October. Industrial producthe Federal Reserve Banks shall not ex- tion remained near its midyear level. Nonceed $2 billion. farm payroll employment rose con- 3. In order to ensure the effective con- siderably, after three months of little duct of open market operations, the growth, but the unemployment rate in- Federal Open Market Committee autho- creased from 5.8 to 6.0 percent. Producer rizes and directs the Federal Reserve prices of finished goods continued to rise Banks to lend U.S. Government securities rapidly in October, in part because of furheld in the System Open Market Account ther sharp increases in energy costs. The to Government securities dealers and to rise in the index of average hourly earnbanks participating in Government ings during the first 10 months of the year securities clearing arrangements con- was close to the rapid pace during 1978. ducted through a Federal Reserve Bank, On October 6 the Federal Reserve anunder such instructions as the Committee nounced a series of complementary acmay specify from time to time. tions directed toward assuring control 4. In order to ensure the effective con- over the expansion of money and bank duct of open market operations, while credit and toward curbing speculative exassisting in the provision of short-term in- cesses in commodity and financial vestments for foreign and international markets, including foreign exchange accounts maintained at the Federal markets. The actions included an increase Reserve Bank of New York, the Federal in Federal Reserve Bank discount rates Open Market Committee authorizes and from 11 percent to 12 percent; establishdirects the Federal Reserve Bank of New ment of a marginal reserve requirement on York (a) for System Open Market Ac- increases in the total of managed liabilities count, to sell U.S. Government securities of member banks, Edge corporations, and to such foreign and international accounts U.S. agencies and branches of foreign on the bases set forth in paragraph 1 (a) banks; and a shift in the conduct of open under agreements providing for the resale market operations to an approach placing by such accounts of those securities within greater emphasis in day-to-day operations 15 calendar days on terms comparable to on the supply of bank reserves and less those available on such transactions in the emphasis on confining short-term fluctuamarket; and (b) for New York Bank ac- tions in the federal funds rate. count, when appropriate, to undertake Following the announcement on Ocwith dealers, subject to the conditions im- tober 6, the downward pressure on the posed on purchases and sales of securities dollar in the exchange markets that had in paragraph 1 (c), repurchase agreements developed in September was reversed, and in U.S. Government and agency securi- by the end of October the trade-weighted ties, and to arrange corresponding sale value of the dollar against major foreign and repurchase agreements between its currencies had risena bout VA percent. In own account and foreign and interna- mid-November, however, the value of the tional accounts maintained at the Bank. dollar declined, reflecting in part Transactions undertaken with such ac- developments concerning Iran. The U.S. counts under the provisions of this foreign trade deficit increased in Sepparagraph may provide for a service fee tember as the cost of oil imports rose, but when appropriate. the deficit was somewhat lower for the third quarter as a whole than for the second quarter. Domestic Policy Directive Growth of M-l, which had accelerated In Effect January 1, 1980 in September and was exceptionally rapid in the third quarter as a whole, slowed The information reviewed at this meet- sharply in October to an annual rate of ing suggests that real output of goods 2Vi percent. Expansion of interest- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions bearing deposits included in M-2 re- appropriate adjustments that may be remained strong, as a rise in net flows into quired by legislation or judicial time deposits at commercial banks in developments affecting interest-bearing response to increased yields offset a con- transactions accounts. These ranges will traction in savings deposits. Inflows of be reconsidered at any time as conditions deposits at nonbank thrift institutions warrant. slowed somewhat. Flows into money In the short run, the Committee seeks market mutual funds accelerated. Growth to restrain expansion of reserve aggregates of commercial bank credit moderated in to a pace consistent with deceleration in October; nevertheless, banks increased growth of M-l, M-2, and M-3 in the their reliance on the negotiable, large- fourth quarter of 1979 to rates that would denomination CD's and other managed hold growth of these monetary aggregates liabilities that became subject to the over the whole period from the fourth marginal reserve requirement in the state- quarter of 1978 to the fourth quarter of ment week beginning October 11. Both 1979 within the Committee's longer-run short- and long-term market interest rates ranges, provided that in the period before have risen sharply on balance since the the next regular meeting the weekly early October announcement of the Sys- average federal funds rate remains within tem's policy actions, although most a range of 11/2 to 15 Yi percent. recently rates have declined; mortgage in- It it appears during the period before terest rates have increased substantially the next meeting that the constraint on the further. federal funds rate is inconsistent with the Taking account of past and prospective objective for the expansion of reserves, developments in employment, unemploy- the Manager for Domestic Operations is ment, production, investment, real in- promptly to notify the Chairman, who come, productivity, international trade will then decide whether the situation calls and payments, and prices, the Federal for supplementary instructions from the Open Market Committee seeks to foster Committee. monetary and financial conditions that will resist inflationary pressures while encouraging moderate economic expansion and contributing to a sustainable pattern Authorization, for Foreign of international transactions. At its Currency Operations meeting on July 11, 1979, the Committee agreed that these objectives would be fur- In Effect January 1, 1980 thered by growth of M-l, M-2, and M-3 from the fourth quarter of 1978 to the 1. The Federal Open Market Commitfourth quarter of 1979 within ranges of tee authorizes and directs the Federal 1 Vi toAVi percent, 5 to 8 percent, and 6 to Reserve Bank of New York, for System 9 percent respectively, the same ranges Open Market Account, to the extent that had been established in February. necessary to carry out the Committee's The range for M-l had been established foreign currency directive and express originally on the basis of an assumption authorizations by the Committee purthat expansion of ATS and NOW ac- suant thereto, and in conformity with counts would dampen growth by about 3 such procedural instructions as the Compercentage points over the year. It now mittee may issue from time to time: appears that expansion of such accounts A. To purchase and sell the following will dampen growth by about 1 Vi percent- foreign currencies in the form of cable age points over the year; thus after transfers through spot or forward transacallowance for the deviation from the tions on the open market at home and earlier estimate, the equivalent range for abroad, including transactions with the M-l is now 3 to 6 percent. The associated U.S. Treasury, with the U.S. Exchange range for bank credit is IVi to lOVi per- Stabilization Fund established by Section cent. The Committee anticipates that for 10 of the Gold Reserve Act of 1934, with the period from the fourth quarter of 1979 foreign monetary authorities, with the to the fourth quarter of 1980, growth may Bank for International Settlements, and be within the same ranges, depending with other international financial instituupon emerging economic conditions and tions: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 Austrian Italian lire Amount of arrangement schillings Japanese yen Foreign bank (millions of Belgian francs Mexican pesos dollars equivalent) Canadian dollars Netherlands Austrian National Bank 250 Danish kroner guilders National Bank of Belgium 1,000 Pounds sterling Norwegian kroner Bank of Canada 2,000 French francs Swedish kronor National Bank of Denmark 250 German marks Swiss francs Bank of England 3,000 Bank of France 2,000 German Federal Bank 6,000 Bank of Italy 3,000 B. To hold balances of, and to have Bank of Japan 5,000 outstanding forward contracts to receive Bank of Mexico 700 Netherlands Bank 500 or to deliver, the foreign currencies listed Bank of Norway 250 in paragraph A above. Bank of Sweden 300 C. To draw foreign currencies and to Swiss National Bank 4,000 Bank for International Settlements: permit foreign banks to draw dollars Dollars against Swiss francs 600 under the reciprocal currency ar- Dollars against authorized European rangements listed in paragraph 2 below, currencies other than Swiss francs 1.250 provided that drawings by either party to any such arrangement shall be fully liq- Any changes in the terms of existing swap uidated within 12 months after any arrangements, and the proposed terms of amount outstanding at that time was first any new arrangements that may be authdrawn, unless the Committee, because of orized, shall be referred for review and apexceptional circumstances, specifically proval to the Committee. authorizes a delay. 3. Currencies to be used for liquidation D. To maintain an overall open posi- of System swap commitments may be purtion in all foreign currencies not exceeding chased from the foreign central bank $1.0 billion, unless a larger position is ex- drawn on, at the same exchange rate as pressly authorized by the Committee. that employed in the drawing to be liq- [Note. An overall open position not ex- uidated. Apart from any such purchases ceeding $8.0 billion had been expressly at the rate of the drawing, all transactions authorized by the Committee on Decem- in foreign currencies undertaken under ber 19, 1978, and was in effect as of paragraph 1(A) above shall, unless other- January 1, 1980.] For this purpose, the wise expressly authorized by the Commitoverall open position in all foreign curren- tee, be at prevailing market rates. cies is defined as the sum (disregarding 4. It shall be the normal practice to arsigns) of net positions in individual cur- range with foreign central banks for the rencies. The net position in a single coordination of foreign currency transacforeign currency is defined as holdings of tions. In making operating arrangements balances in that currency, plus outstand- with foreign central banks of System ing contracts for future receipt, minus holdings of foreign currencies, the Federal outstanding contracts for future delivery Reserve Bank of New York shall not comof that currency, i.e., as the sum of these mit itself to maintain any specific balance, elements with due regard to sign. unless authorized by the Federal Open 2. The Federal Open Market Commit- Market Committee. Any agreements or tee directs the Federal Reserve Bank of understandings concerning the adminis- New York to maintain reciprocal currency tration of the accounts maintained by the arrangements ("swap" arrangements) for Federal Reserve Bank of New York with the System Open Market Account for the foreign banks designated by the Board periods up to a maximum of 12 months of Governors under Section 214.5 of with the following foreign banks, which Regulation N shall be referred for review are among those designated by the Board and approval to the Committee. of Governors of the Federal Reserve 5. Foreign currency holdings shall be System under Section 214.5 of Regulation invested insofar as practicable, consider- N, Relations with Foreign Banks and ing needs for minimum working balances. Bankers, and with the approval of the When appropriate in connection with ar- Committee to renew such arrangements rangements to provide investment facilion maturity: ties for foreign currency holdings, U.S. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions government securities may be purchased for System Account in accordance with from foreign central banks under agree- paragraph 3G(1) of the Board of Goverments for repurchase of such securities nors' Statement of Procedure with within 30 calendar days. Respect to Foreign Relationships of 6. All operations undertaken pursuant Federal Reserve Banks dated January 1, to the preceding paragraphs shall be 1944. reported daily to the Foreign Currency Subcommittee. The Foreign Currency Subcommittee consists of the Chairman Foreign Currency Directive and Vice Chairman of the Committee, the Vice Chairman of the Board of Gover- In Effect January 1, 1980 nors, and such other members of the Board as the Chairman may designate (or 1. System operations in foreign currenin the absence of members of the Board cies shall generally be directed at counterserving on the Subcommittee, other Board ing disorderly market conditions, pro- Members designated by the Chairman as vided that market exchange rates for the alternates, and in the absence of the Vice U.S. dollar reflect actions and behavior Chairman of the Committee, his alter- consistent with the IMF Article IV, Secnate). Meetings of the Subcommittee shall tion 1. be called at the request of any member, or 2. To achieve this end the System shall: at the request of the Manager, for the pur- A. Undertake spot and forward purposes of reviewing recent or contemplated chases and sales of foreign exchange. operations and of consulting with the B. Maintain reciprocal currency Manager on other matters relating to his ("swap") arrangements with selected responsibilities. At the request of any foreign central banks and with the Bank member of the Subcommittee, questions for International Settlements. arising from such reviews and consulta- C. Cooperate in other respects with tions shall be referred for determination central banks of other countries and with to the Federal Open Market Committee. international monetary institutions. 7. The Chairman is authorized: 3. Transactions may also be under- A. With the approval of the Com- taken: mittee, to enter into any needed agree- A. To adjust System balances in ment or understanding with the Secretary light of probable future needs for currenof the Treasury about the division of cies. responsibility for foreign currency opera- B. To provide means for meeting tions between the System and the Trea- System and Treasury commitments in parsury; ticular currencies, and to facilitate opera- B. To keep the Secretary of the tions of the Exchange Stabilization Fund. Treasury fully advised concerning System C. For such other purposes as may foreign currency operations, and to con- be expressly authorized by the Commitsult with the Secretary on policy matters tee. relating to foreign currency operations; 4. System foreign currency operations C. From time to time, to transmit shall be conducted: appropriate reports and information to A. In close and continuous consultathe National Advisory Council on Inter- tion and cooperation with the United national Monetary and Financial Policies. States Treasury; 8. Staff officers of the Committee are B. In cooperation, as appropriate, authorized to transmit pertinent informa- with foreign monetary authorities; and tion on System foreign currency opera- C. In a manner consistent with the tions to appropriate officials of the obligations of the United States in the In- Treasury Department. ternational Monetary Fund regarding ex- 9. All Federal Reserve Banks shall par- change arrangements under the IMF Artiticipate in the foreign currency operations cle IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 Meeting Held on plant and equipment would be 14.7 January 8-9, 1980 percent greater in 1979 than in 1978. The survey also indicated that in- Domestic Policy Directive vestment outlays would increase at The information reviewed at this an annual rate of 12.8 percent over meeting suggested that, contrary to the first half of 1980. the estimates presented at the time Producer prices of finished goods of the November 20 meeting, real and consumer prices continued to output of goods and services ex- rise rapidly in November, reflecting panded somewhat further in the in part the continuing diffusion of fourth quarter of 1979 after its earlier increases in energy costs. Adrebound in the third quarter. Aver- vances in prices of food contributed age prices, as measured by the fixed- importantly to the November rise in weight price index for gross domes- producer prices, while further sharp tic business product, appeared to increases in the costs of homeownerhave risen at a pace close to the an- ship were a major factor in sustainnual rate of about 10 percent experi- ing the upward pressure on conenced during the first three quarters sumer prices. of the year. The index of average hourly earn- Total retail sales strengthened in ings of private nonfarm production November and recovered the sizable workers rose at an annual rate of 9lli decline in October, although sales of percent in November and at a rate of new automobiles remained at a re- about 8 percent over the first 11 duced level. In December, auto sales months of 1979, close to the rate of improved considerably. increase in 1978. Labor cost pres- The index of industrial production sures in the nonfarm business sector fell 0.5 percent in November, and on intensified during 1979, as large inbalance the level of production was creases in total hourly compensation little changed from that in December were associated with a decline in 1978. Nonfarm payroll employment productivity. rose considerably in October and In foreign exchange markets the November, following three months trade-weighted value of the dollar of slower expansion, and the rate of against major foreign currencies had unemployment edged down in No- depreciated about 3 percent since vember from 6.0 to 5.8 percent. mid-November, reflecting in large Private housing starts declined part developments relating to Iran somewhat in October and fell sharp- and Afghanistan and a firming of ly further in November to an annual monetary conditions in a number of rate of 1.5 million units. Building foreign countries. The U.S. trade permits for new units declined sub- deficit in October and November avstantially in both October and No- eraged slightly below the rate for the vember, and combined sales of new third quarter. In November a decline and existing single-family homes ap- in the value of oil imports contribpeared to be lower in both months. uted to the improvement, as a sharp The latest survey of business drop in the physical volume of oil plans taken by the Department of more than offset a further rise in its Commerce in late October and No- price. vember suggested that spending for At its meeting on November 20, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions 1979, the Committee had reaffirmed declined to a daily average of about the broad objectives for monetary $1.1 billion. Despite the decline in growth adopted at its meeting on Oc- borrowings, the federal funds rate tober 6 and had decided that over the edged up to an average of about 14 remainder of 1979 the Manager for percent in late December and early Domestic Operations should contin- January, at least in part because of ue to restrain expansion of bank re- exceptionally large demands for exserves in pursuit of the Committee's cess reserves around the year-end objective of decelerating growth of holidays. M-l, M-2, and M-3 over the fourth Expansion in the major monetary quarter to rates that would hold ex- aggregates remained at a reduced pansion of these monetary aggre- pace in November and December, gates from the fourth quarter of 1978 after having slowed markedly in Octo the fourth quarter of 1979 within tober. Over the two-month period, the Committee's ranges for that peri- M-l, M-2, and M-3 grew at annual od; it was understood at the meeting rates of about VU percent, 6 perthat persistence of recent relation- cent, and 53A percent respectively.1 ships might result in growth of M-2 Over the three months from Septemat about the upper limit of its range. ber to December, M-l grew at a rate Specifically, the Committee instruct- of about 3 percent and M-2 and M-3 ed the Manager to restrain the ex- at rates of about 7 percent and 6V4 pansion of bank reserves to a pace percent respectively. thought to be consistent with growth The reduced growth in the moneat average annual rates of about 5 tary aggregates over the fourth quarpercent for M-l and 8V2 percent for ter was associated with a slowing of M-2 in November and December, expansion in interest-bearing deposprovided that in the period before its as the quarter progressed. At the next regular meeting the weekly commercial banks, net flows into average federal funds rate remained money market certificates and largegenerally within a range of IIV2 to denomination time deposits account- 15V2 percent. ed for all of the growth in interest- Over the first four weeks after the bearing deposits during the quarter. November meeting, both total and Among nonbank thrift institutions, nonborrowed reserves grew at about mutual savings banks and credit the rates projected at the time of the unions experienced particularly meeting. Member bank borrowings weak net inflows. averaged about $13A billion, com- Growth in total loans and investpared with an average of slightly less ments at commercial banks slowed than $2 billion in the preceding three sharply in the fourth quarter. Slower weeks, and the federal funds rate expansion was especially procontinued to average around 13V2 percent. Toward the end of the four- 1. M-l comprises private demand deposits week period, however, the demand and currency in circulation. M-2 comprises for reserves appeared to be easing M-l and commercial bank time and savings relative to the path consistent with deposits other than large-denomination cerdesired monetary growth. In the tificates of deposit. M-3 is M-2 plus deposits at nonbank thrift institutions (savings and three weeks remaining before this loan associations, mutual savings banks, and meeting, member bank borrowings credit unions). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 nounced in business loans. Growth unexpectedly strong and the widely in real estate loans remained close to anticipated recession had not develthe pace in the first three quarters of oped, although automobile producthe year. tion and housing starts had declined. Since the November meeting of In the judgment of a number of memthe Committee, interest rates had bers, a downturn now seemed to be fluctuated over a relatively wide getting under way, but there was range, although they had been some- also recognition that it could be dewhat less volatile than in the pre- layed for another quarter or two. vious intermeeting period. On bal- Consumption expenditures in parance, most interest rates had ticular were stronger in late 1979 declined. Most banks had reduced than had been anticipated, and the their loan rate to prime business bor- saving rate fell to an exceptionally rowers from 153/4 to 15V4 percent, low level. To the extent that the reand a few banks had cut the rate to duced saving rate was attributable to 15 percent. Mortgage rates had buying in anticipation of rapid inedged higher in the primary market, creases in prices, strength in conand available information suggested sumer buying could persist for a continued weakness in mortgage time. On the other hand, to the excommitments and lending activity at tent that the reduced rate reflected nonbank thrift institutions. pressure on consumer budgets aris- Staff projections suggested that ing from past inflation and from the growth of nominal gross national onset of the heating season with product would slow considerably in sharply higher prices for energy, the the current quarter and then pick up strength in consumer buying could gradually over the remainder of give way rather promptly to sub- 1980. The projections suggested, stantial weakness. however, that a contraction in real The outlook for domestic econom- GNP would develop in the current ic activity continued to be clouded quarter and would continue later in by political developments abroad. the year, although at a diminishing The problem of the U.S. hostages pace in the second half, and that the held in Iran was unresolved, and in rate of unemployment would in- recent days international tensions crease substantially. The rise in av- had been heightened by the Soviet erage prices was projected to accel- Union's invasion of Afghanistan. Inerate slightly during the early part of creased defense spending could have 1980, mainly because of increases in an impact on economic activity, alenergy costs, but to subside later. though current information sug- In the Committee's consideration gested that increases would be of of the economic outlook, several limited proportions. members stressed the elements of Inflation remained a major conuncertainty in the current situation. cern. In part because of earlier in- The observation was made that the creases in oil prices and in mortgage relationships of the past appeared to interest rates, the consumer price inprovide less guidance than usual in dexes to be published in the next few appraising the current situation and months probably would continue to outlook. In the latter part of 1979, show exceptionally large advances. for example, overall activity had been At its meeting on July 11, 1979, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions the Committee had reaffirmed the mittee would complete its review following ranges for monetary and would establish ranges for 1980 growth from the fourth quarter of within the framework of the Full 1978 to the fourth quarter of 1979 Employment and Balanced Growth that it had established in February: (Humphrey-Hawkins) Act of 1978. M-l, IV2 to 472 percent; M-2, 5 to 8 In the discussion of policy for the percent; and M-3, 6 to 9 percent. near term, the members in general Having established the range for M-l considered rates of monetary growth in February on the assumption that for the three months from December expansion of automatic transfer to March within the framework of service (ATS) and negotiable order some reduction in ranges for growth of withdrawal (NOW) accounts over the whole of 1980 from those would dampen growth by about 3 for 1979 in pursuit of the Compercentage points over the year, the mittee's objective of reducing the Committee also agreed that actual rate of inflation. The Committee also growth of M-l might vary in relation took note of a staff analysis into its range to the extent of any de- dicating that the demand for money viation from that estimate. Later in could be relatively weak in the first the year, expansion of such accounts quarter of 1980, if growth of nominal appeared to be reducing measured GNP did in fact slow sharply, and growth of M-l over the year by could strengthen as the year proabout IV2 percentage points, and af- gressed. ter allowance for the deviation from A number of members favored the earlier assumption, the equiva- pursuit of somewhat slower monelent range was 3 to 6 percent. Over tary growth in the early months of the year ending in the fourth quarter the year than they might accept for of 1979, M-l grew about 5lh per- the whole year, and some indicated a cent, M-2 about 8V4 percent, and willingness to tolerate relatively M-3 about 8 percent.2 slow monetary growth if significant At the July meeting the Com- declines in interest rates developed mittee also anticipated that growth in the weeks immediately ahead. of the monetary and credit aggre- These views were consistent with gates over the year ending in the the possibility that the demand for fourth quarter of 1980 might be with- money would be relatively weak in the ranges established for 1979. At early in the year and that pressures this meeting the Committee began a for monetary growth were likely to review of the ranges for 1980. It was increase later in the year if growth of understood that at its meeting sched- nominal GNP picked up. Moreover, uled for early February the Com- concern was expressed that any substantial declines in interest rates might be interpreted as a significant easing of monetary policy and thus 2. These growth rates are based on revised could have adverse consequences data for the monetary aggregates, reflecting new benchmarks for deposits at nonmember for inflationary expectations and for banks that were published on January 10, the foreign exchange value of the 1980. On the basis of unrevised figures, the dollar. Other members of the Comgrowth rates were slightly lower for M-l and mittee, however, expressed skepti- M-2—about 5 percent and 8 percent respectively. cism about the feasibility of fine tun- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 ing policy in an effort to provide for The information reviewed at this rather small, intrayear variations in meeting suggests that real output of goods and services expanded somewhat the rate of monetary growth. further in the final quarter of 1979 and Differences in views concerning that prices on the average continued to the particular rates of monetary rise rapidly. In November retail sales growth to be specified for the period strengthened and nonfarm payroll emfrom December to March were not ployment rose considerably further, but industrial production declined somewhat great. Preferences were expressed and private housing starts fell. The for growth indexed by expansion in unemployment rate edged down from 6.0 M-l at an annual rate of 4 percent, a to 5.8 percent. Producer prices of finrate of 5 percent, and something be- ished goods and consumer prices continued to rise rapidly, in part because of the tween the two. spreading effects of earlier increases in With respect to the acceptable energy costs. Over recent months the range of fluctuation for the federal rise in the index of average hourly earnfunds rate, almost all members pre- ings has remained close to the rapid pace ferred to retain the range of 11 lli to during 1978. The trade-weighted value of the dollar 1572 percent originally adopted at against major foreign currencies has dethe meeting on October 6, 1979, and preciated about 3 percent since mid-Nocontinued at the meeting on Novem- vember, reflecting in large part the ber 20. One member suggested rais- Middle East situation as well as a firming ing the range slightly, to 12 to 16 per- of monetary conditions in a number of foreign countries. The U.S. foreign trade cent. deficit in October and November on the At the conclusion of the dis- average was slightly below the rate for cussion, the Committee agreed that the third quarter. open market operations in the period Growth of the major monetary aggreuntil the next meeting should be di- gates, which had slowed in October, remained at reduced rates in the final rected toward expansion of reserve months of 1979. From the fourth quarter aggregates consistent with growth of 1978 to the fourth quarter of 1979 M-l over the first quarter of 1980 at an grew 5V2 percent, M-2 about 874 perannual rate between 4 and 5 percent cent, and M-3 about 8 percent. Most market interest rates have declined for M-l and on the order of 7 percent somewhat on balance since the Comfor M-2, provided that the weekly mittee's meeting in late November. average federal funds rate remained Taking account of past and prospecwithin a range of IIV2 to 1572 per- tive developments in employment, uncent. If it appeared during the period employment, production, investment, real income, productivity, international before the next regular meeting that trade and payments, and prices, the Fedthe constraint on the federal funds eral Open Market Committee seeks to rate was inconsistent with the objec- foster monetary and financial conditions tive for the expansion of reserves, that will resist inflationary pressures while encouraging moderate economic the Manager for Domestic Operaexpansion and contributing to a sustaintions was promptly to notify the able pattern of international transac- Chairman who would then decide tions. At its meeting on July 11, 1979, the whether the situation called for sup- Committee agreed that these objectives plementary instructions from the would be furthered by growth of M-l, M-2, and M-3 from the fourth quarter of Committee. 1978 to the fourth quarter of 1979 within The following domestic policy di- ranges of IV2 to 472 percent, 5 to 8 perrective was issued to the Federal Re- cent, and 6 to 9 percent respectively. It serve Bank of New York: appeared that expansion of ATS and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions NOW accounts would dampen growth of Department. Real gross national M-l by about IV2 percentage points over product had grown at a rate of about the year, half as much as assumed early 3 percent in the third quarter, butin the year; thus after allowance for the tressed by strength in consumer deviation from the earlier estimate, the equivalent range for M-l was 3 to 6 per- spending. Average prices, as meacent. The associated range for bank sured by the fixed-weight price index credit was VI2 to IOV2 percent. The for gross domestic business product, Committee anticipated that for the periincreased at an annual rate of about od from the fourth quarter of 1979 to 974 percent in the fourth quarter, afthe fourth quarter of 1980, growth may be within the same ranges, depending ter having risen at an average annual upon emerging economic conditions and rate of about 10 percent in the first appropriate adjustments that may be re- three quarters. Over the year ending quired by legislation or judicial developwith the fourth quarter of 1979, real ments affecting interest-bearing transac- GNP and nominal GNP grew about tions accounts. Ranges for 1980 will be reconsidered at the meeting of the Com- 3A percent and 10 percent respecmittee scheduled for early February. tively. In the short run, the Committee seeks Total retail sales strengthened in expansion of reserve aggregates consis- November and December, after a tent with growth over the first quarter of 1980 at an annual rate between 4 and 5 sharp decline in October. From the percent for M-l and on the order of 7 third to the fourth quarter, however, percent for M-2, provided that in the pe- sales changed little in constant-dolriod before the next regular meeting the lar terms as consumer buying of new weekly average federal funds rate remains within a range of IIV2 to 15V2 per- automobiles and some other durable cent. goods weakened. If it appears during the period before The index of industrial production the next meeting that the constraint on rose somewhat in December, offthe federal funds rate is inconsistent with setting the decline in November. In the objective for the expansion of reserves, the Manager for Domestic Oper- the fourth quarter, industrial producations is promptly to notify the Chairman tion was up about 1 percent from a who will then decide whether the situa- year earlier. tion calls for supplementary instructions Nonfarm payroll employment, from the Committee. which had expanded moderately Votes for this action: Messrs. Volck- during the fourth quarter, rose suber, Balles, Black, Coldwell, Kimbrel, stantially further in January. How- Mayo, Partee, Rice, Schultz, Mrs. ever, the rate of unemployment rose Teeters, Messrs. Wallich, and Timlen. Votes against this action: None. from 5.9 to 6.2 percent in January, (Mr. Timlen voted as an alternate its highest level in well over a year. member.) The Department of Commerce survey of business spending plans Meeting Held on taken in late November and Decem- February 4-5, 1980 ber suggested that expenditures for plant and equipment would rise Domestic Policy Directive about 11 percent from 1979 to 1980, Growth in real output of goods and after having expanded about 143/4 services moderated to an annual rate percent in 1979. After allowance for of about IV2 percent in the fourth expected increases in prices, howquarter of 1979, according to prelim- ever, the rise projected for 1980 was inary estimates of the Commerce negligible. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 In December private housing toward expansion of reserve aggrestarts were at an annual rate of 1.5 gates consistent with growth of M-l million units, unchanged from No- during the first quarter of 1980 at an vember but down from an average annual rate between 4 and 5 percent rate of 1.8 million units in both the and expansion of M-2 on the order of second and the third quarters of the 7 percent, provided that in the interyear. Combined sales of new and meeting period the weekly average existing single-family homes fell in federal funds rate remained general- November for the second con- ly within a range of 11V2 to 15V2 persecutive month, and preliminary in- cent. The Committee had also dications suggested a further decline agreed that if the constraint on the in December. federal funds rate appeared to be in- Producer prices of finished goods consistent with the objective for the and consumer prices continued to expansion of reserves, the Manarise rapidly in late 1979, in part be- ger for Domestic Operations was cause of the continuing spread of the promptly to notify the Chairman effects of earlier increases in energy who would then decide whether the costs. In December producer prices situation called for supplementary and consumer prices were about instructions from the Committee. 12V2 percent and 1374 percent re- Expansion in the major monetary spectively above a year earlier. Both aggregates, which had subsided in measures had risen around 9 percent the final months of 1979, remained at during 1978. reduced rates in January. M-l and The rise in the index of average M-2 were estimated to have exhourly earnings of private nonfarm panded in January at annual rates of production workers moderated in about IV2 percent and 5V4 percent January, following sharp increases respectively, compared with rates of in November and December. For the about 3 percent and 63A percent over year 1979 the index was up 8.3 per- the preceding three months. M-3 cent, about the same as in 1978. was estimated to have grown at an In foreign exchange markets, annual rate of about 4V2 percent in pressures on the dollar were rela- January, after having expanded at a tively slight in January. The trade- rate of about 6 percent during the weighted value of the dollar against fourth quarter. major foreign currencies changed With the demand for money modlittle on balance despite increased in- erate, the federal funds rate declined ternational political tensions. The from an average of about 14 percent U.S. trade deficit rose considerably in late December and early January in December from a relatively low to about 13V2 percent in the state- November level, in large part be- ment week ending January 30 and to cause of an increase in oil imports. a somewhat lower average in the re- For the fourth quarter as a whole, maining days preceding this meetthe trade deficit was close to the sec- ing. Growth in total reserves ond- and third-quarter levels. decelerated sharply in January to an At its meeting on January 8-9, annual rate of 4 percent. Non- 1980, the Committee had agreed that borrowed reserves expanded at an open market operations in the period annual rate of about 11 percent, as until this meeting should be directed average member bank borrowings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions declined somewhat further in Janu- to accelerate somewhat during the ary from the reduced level in De- early part of the year from the annucember. al rate of about 974 percent in the Newly available data confirmed a fourth quarter of 1979, mainly beweakening of bank credit extensions cause of increases in energy costs, to nonfinancial businesses in the but to subside later. In view of interfourth quarter. However, in- national conditions and an apparent complete data for January suggested strengthening of inflationary psya rise in bank lending to such bor- chology, however, the projections rowers. In addition, the issuance of were subject to greater uncertainties commercial paper by nonfinancial than usual, especially with regard to corporations rebounded in Decem- consumer and defense spending. ber and January. In the Committee's discussion of Most market interest rates, espe- the economic situation and outlook, cially longer-term rates, rose over the members in general stressed the the intermeeting period despite the unusual uncertainties affecting foredecline in the federal funds rate. Ad- casts of both output and prices. vances in Treasury bill rates ap- Most members thought that a modpeared to reflect large Treasury erate contraction in real GNP was issues to raise new cash. Longer- likely in 1980, bringing a substantial term debt markets were influenced increase in unemployment, and they by an intensification of inflationary expected the rise in prices to remain expectations, which seemed to re- very rapid. The view was also exflect data indicating stronger busi- pressed, however, that real GNP ness activity than anticipated and would decline little if at all during the the prospect of enlarged defense year, that the unemployment rate spending in response to international would increase less than generally tensions. The home mortgage mar- anticipated, and that the rise in ket remained exceptionally tight in prices could well accelerate further. January, but there were a few re- One major uncertainty for the imports of liberalization in lending poli- mediate future was the probable becies in the primary market. havior of consumer spending for Staff projections prepared for this goods and services. Such spending meeting suggested that growth of had been unexpectedly strong in the nominal GNP would slow much less latter part of 1979 despite weak in the current quarter than had ap- growth in disposable personal inpeared likely a month earlier, and come, and the saving rate had fallen growth over the remaining quarters to an exceptional low of about 374 of 1980 was expected to vary rela- percent in the fourth quarter. Intertively little from the first-quarter pretations of the phenomenon and pace. The projections continued to its implications for the future difsuggest that real GNP would con- fered: it might result primarily from tract moderately during the year and inflation's squeeze on household that the rate of unemployment would budgets and thus foreshadow a sudincrease substantially. Price pros- den retrenchment in consumer pects for the current year were simi- spending; or it might represent prilar to those of a month earlier: the marily a consumer adaptation to rise in average prices was projected high current and prospective rates of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 inflation and so could persist. Near- the period from the fourth quarter of term prospects for consumer spend- 1979 to the fourth quarter of 1980 ing were clouded, in addition, by within the framework of the Full more than the usual uncertainty Employment and Balanced Growth about the effects of federal income Act of 1978. The act, which tax refunds, which were expected to amended section 2A of the Federal be unusually large in March and Reserve Act, requires the Board of April this year. Governors to transmit to the Con- A second major element of un- gress by February 20 and July 20 of certainty in projecting output and each year written reports concerning prices was the course of defense the objectives and plans of the Board expenditures in the light of the and the Committee with respect to heightened international tensions the ranges of growth or diminution provoked by the Soviet Union's in- of the monetary and credit aggrevasion of Afghanistan. Opinions dif- gates for the calendar year during fered concerning the speed with which the report is transmitted and, which a buildup of defense spending in the case of the July report, the obcould be accomplished and, con- jectives and plans with respect to sequently, about whether federal ranges for the following calendar spending would contribute more or year as well. The act also requires less to overall demand and output that the written reports set forth a rethan suggested by the administra- view and analysis of recent develoption's budget. In this connection, it ments affecting economic trends in was observed that business outlays the nation and the relationship of the could be expected to expand in an- plans and objectives for the aggreticipation of the defense buildup. On gates to the short-term goals set the receipts side of the federal bud- forth in the most recent Economic get, tax reductions this year general- Report of the President and to any ly were regarded as unlikely—in the short-term goals approved by the absence, at least, of considerably Congress.1 greater weakness in economic activi- In contemplating monetary growth ty than was commonly foreseen at for the year ahead, the Committee this time. considered ranges for the new def- Committee members continued to initions of the monetary aggreexpress great concern about the in- gates: M-1A, M-1B, M-2, and M-3. flationary environment and its role in A description of these newly defined generating distortions and instabili- aggregates was announced on Febty. It was suggested that the recent ruary 7. M-1A comprises currency international developments, includ- plus demand deposits at commercial ing the further substantial increases banks; it is the same as the displaced in oil prices, were counteracting the M-l, except that demand deposits progress that had been made in the held by foreign banks and foreign oflatter part of 1979 in dampening ex- ficial institutions are excluded. M-1B pected rates of increase in prices. comprises M-l A and other check- At this meeting, the Committee completed the review, begun a 1. The Board's third report under the act month earlier, of the ranges for was transmitted to the Congress on February growth of monetary aggregates over 19, 1980. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions able deposits at all depositary insti- economic activity. It was noted, tutions; thus, NOW accounts, ATS, however, that the ranges adopted at credit union share drafts, and de- this meeting could be modified at mand deposits at mutual savings any time in the light of legislative or banks are included. M-2 contains other developments and in any event M-1B and savings and small-denom- would be reconsidered at midyear. ination time deposits at all deposi- In the Committee's discussion of tary institutions, overnight RPs at the ranges for the coming year, the commercial banks, overnight Euro- members agreed that monetary dollars held at Caribbean branches growth should slow further in 1980, of member banks by U.S. residents following some deceleration over other than banks, and money market 1979, in line with the continuing obmutual fund shares. Finally, M-3 is jective of curbing inflation and pro- M-2 plus large-denomination time viding the basis for restoration of deposits at all depositary institutions economic stability and sustainable and term RPs at commercial banks growth in output of goods and servand savings and loan associations. ices. Committee members differed From the fourth quarter of 1978 to somewhat in their views concerning the fourth quarter of 1979, M-1A the particular aggregates for which grew 5.5 percent, the same as M-l; longer-run ranges of growth should after taking into account the amount be specified. Most members thought of demand deposits apparently that in the present circumstances it shifted to ATS and New York State was appropriate to specify ranges for NOW accounts, the estimated rate the four aggregates, M-1A, M-1B, was 6.8 percent. M-1B grew 8.0 per- M-2, and M-3; but some sentiment cent; M-2, 8.8 percent; and M-3, 9.5 was also expressed for omitting percent. M-l A from the list, and some for In contemplating ranges for omitting M-3 as well. With respect to growth of the monetary aggregates M-l A, its growth would be dampened over the year ahead, Committee in the event of enactment of nationmembers stressed the unusually wide NOW account legislation and, great uncertainties concerning pros- as would be expected, a large transpects for economic activity and fer of funds from demand deposits to prices and thus for growth of nomi- NOW accounts. In support of retainnal GNP. The shift to new defini- ing M-l A on the list, however, it was tions of monetary aggregates noted that enactment of the legislaintroduced additional uncertainties tion would tend to distort growth of concerning the relationships be- M-1B also—in the opposite direction tween them and nominal GNP as as a result of transfers of funds from well as the relationships among the savings deposits to NOW acaggregates themselves in response to counts—and no doubt would lead changing financial market condi- the Committee to reconsider whattions. Moreover, enactment of pend- ever ranges it adopted at this meeting legislation to authorize NOW ing. accounts nationally would in the A few members favored specificashort run have a significant impact tion of relatively narrow ranges. In on growth of some of the monetary light of the difficulties of maintaining aggregates in relation to changes in growth within a narrow range and of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 the uncertainties concerning both tent rates of growth in M-1B and the the outlook for the economy and the newly defined M-2 were estimated to behavior of the newly defined aggre- be slightly above 5 percent and gates, however, most members fa- about 672 percent respectively. In vored ranges on the order of the 3 January M-1A had grown at a rate of percentage points adopted for 1979. about 43/4 percent; growth in M-1B At the conclusion of the dis- and M-2, at rates of about 6 percent cussion, the Committee adopted the and 874 percent respectively, had following ranges for growth of the exceeded their three-month rates by monetary aggregates over the period larger margins. Accordingly, monefrom the fourth quarter of 1979 to the tary growth, particularly as meafourth quarter of 1980: M-1A, 372 to sured by M-1B and M-2, would have 6 percent; M-1B, 4 to 6V2 percent; to decelerate from January to March M-2, 6 to 9 percent; and M-3, 6V2 to if the rates realized for the whole 972 percent. The associated range three-month period were to be confor growth of commercial bank cred- sistent with those implied by the it was 6 to 9 percent. It was under- Committee's decision in January. stood that the longer-run ranges The staff analysis also noted that would be reconsidered in July or at the transactions demand for money any other time that conditions might in the first quarter implied by projecwarrant. It was also understood that tions of nominal GNP were stronger short-run factors might cause con- than a month earlier. At the same siderable variation in annual rates of time, the relationship between mongrowth from one month to the next ey growth and GNP was particularly and from one quarter to the next. uncertain because disbursement of the exceptionally large federal in- The Committee adopted the following come tax refunds beginning in late ranges for rates of growth in monetary aggregates for the period from the fourth February could generate a tempoquarter of 1979 to the fourth quarter of rary bulge in money demand. 1980: M-1A, 37 2 to 6 percent; M-1B, 4 to In the Committee's discussion of 6V2 percent; M-2, 6 to 9 percent; and policy for the period immediately M-3, 6V2 to 972 percent. The associated range for bank credit is 6 to 9 percent. ahead, most members favored essentially an extension of the objec- Votes for this action: Messrs. Volcktives for the period from December er, Balles, Black, Coldwell, Kimbrel, to March that had been established Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich, and Tim- in early January. The behavior of the len. Votes against this action: None. monetary aggregates had been more (Mr. Timlen voted as an alternate or less on course since then and, it member.) was suggested, little had occurred to warrant a change in course. On the In contemplating policy for the other hand, some sentiment was exnear term, the Committee took note pressed for a reduction in the objecof a staff analysis indicating that the tives for monetary growth over the policy decision taken at the meeting first three months of the year, on the of early January implied an annual grounds that prospects for economic rate of growth of about 472 percent activity apparently had strengthened in the new M-1A over the period since a month earlier and inflationfrom December to March. Consis- ary expectations had worsened. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions At the conclusion of the dis- The trade-weigh ted value of the dollar cussion, the Committee agreed that against major foreign currencies changed little in January, and exchange market open market operations in the period pressures were relatively slight in spite until the next meeting should be diof increased international political tenrected toward expansion of reserve sions. The U.S. foreign trade deficit rose aggregates consistent with growth in December, in large part because of an over the first quarter of 1980 at an increase in imports of petroleum. annual rate of about Alli percent for Growth of the major monetary aggregates, which had subsided in the final M-1A and about 5 percent for M-1B, months of 1979, remained at reduced provided that in the period until the rates in January. Most market interest next meeting the weekly average rates, especially long-term rates, have federal funds rate remained within a risen since the Committee's meeting in early January. range of IIV2 to 15V2 percent. Con- Taking account of past and prospecsistent with this short-run policy, in tive economic developments, the Federthe Committee's view, the newly de- al Open Market Committee seeks to fined M-2 should grow at an annual foster monetary and financial conditions that will resist inflationary pressures rate of about 6V2 percent over the while encouraging moderate economic first quarter. If the constraint on the expansion and contributing to a sustainfederal funds rate appeared to be in- able pattern of international transacconsistent with the objective for the tions. The Committee agreed that these expansion of reserves, the Mana- objectives would be furthered by growth of M-1A, M-1B, M-2, and M-3 from the ger for Domestic Operations was fourth quarter of 1979 to the fourth quarpromptly to notify the Chairman ter of 1980 within ranges of VI2 to 6, 4 to who would then decide whether the 6V2, 6 to 9, and 6V2 to 9V2 percent resituation called for supplementary spectively. The associated range for instructions from the Committee. bank credit was 6 to 9 percent. In the short run, the Committee seeks The following domestic policy di- expansion of reserve aggregates consisrective was issued to the Federal Re- tent with growth over the first quarter of serve Bank of New York: 1980 at an annual rate of about 4V2 percent for M-1A and 5 percent for M-1B, provided that in the period before the The information reviewed at this next regular meeting the weekly average meeting suggests that real output of federal funds rate remains within a range goods and services expanded somewhat of IIV2 to 15V2 percent. The Committee in the final quarter of 1979 and that prices believes that, consistent with this shorton the average continued to rise rapidly. run policy, M-2 as newly defined should In December retail sales strengthened, grow at an annual rate of about 6V2 perindustrial production edged up, and noncent over the first quarter. farm payroll employment continued to If it appears during the period before rise, while private housing starts rethe next meeting that the constraint on mained at the reduced level of Novemthe federal funds rate is inconsistent with ber. Nonfarm payroll employment rose the objective for the expansion of resubstantially further in January, but the serves, the Manager for Domestic Operunemployment rate rose from 5.9 to 6.2 ations is promptly to notify the Chairman percent. Producer prices of finished who will then decide whether the situagoods and consumer prices continued to tion calls for supplementary instructions rise rapidly toward the end of 1979, in from the Committee. part because of the spreading effects of earlier increases in energy costs. Over the past several months the rise in the in- Votes for this action: Messrs. Volckdex of average hourly earnings has re- er, Balles, Black, Kimbrel, Mayo, mained close to the rapid pace recorded Partee, Rice, Schultz, Mrs. Teeters, earlier in 1979. and Mr. Timlen. Votes against this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 action: Messrs. Coldwell and Wal- In the statement week ending lich. (Mr. Timlen voted as an alter- March 5, the federal funds rate rose nate member.) to an average of slightly more than 16V8 percent and member bank bor- Messrs. Coldwell and Wallich disrowings expanded further to a daily sented from this action because they average of about %2lli billion. On favored a more restrictive policy for March 6 federal funds generally tradthe period immediately ahead. Beed around 17 percent, despite sizable lieving that inflationary expectations reserve-supplying operations by the had worsened in recent weeks while System, and the Manager advised prospects for economic activity had that in his opinion additional leeway strengthened, they thought that above the existing upper limit of money and credit were too readily I6V2 percent was needed for operaavailable and current levels of intertional flexibility in meeting reserve est rates were not exerting sufficient objectives. In late afternoon, Chairrestraint. man Volcker recommended that the upper limit of the intermeeting range Subsequent to the meeting, on for the federal funds rate be raised to February 22, available data sug- 17V2 percent, pending a discussion gested that M-1A and M-1B were of the situation in a telephone congrowing at rapid rates in February, ference of the Committee to be held and in consequence the demand for in the afternoon of the following day, bank reserves had strengthened conand the Committee voted to approve siderably. The federal funds rate had the Chairman's recommendation. risen to about 15 percent, and member bank borrowings had also in- Votes for this action: Messrs. Volckcreased. To provide the Manager for er, GufTey, Morris, Partee, Rice, Roos, Schultz, Mrs. Teeters, Messrs. Domestic Operations with additional Wallich, Winn, and Timlen. Votes scope for operations in these circumagainst this action: None. (Mr. Timstances, Chairman Volcker recom- len voted as alternate member.) mended that the upper limit of the range of IIV2 to 15V2 percent speci- In the telephone conference held fied for the federal funds rate be in the afternoon of March 7, the raised to I6V2 percent on a tempo- Committee voted to raise the upper rary basis until the situation could be limit of the intermeeting range for reassessed. the federal funds rate to 18 percent, to provide greater operational flexi- On February 22, the Committee modi- bility in meeting reserve objectives. fied the domestic policy directive adopted at its meeting on February 4-5, On March 7, the Committee further 1980, to raise the upper limit of the range modified the domestic policy directive for the federal funds rate to I6V2 per- adopted at its meeting of February 4-5, cent. 1980, to raise the upper limit of the range for the federal funds rate to 18 percent. Votes for this action: Messrs. Volcker, Balles, Black, Kimbrel, Mayo, Votes for this action: Messrs. Volck- Partee, Rice, Schultz, Mrs. Teeters, er, Guffey, Morris, Partee, Rice, Messrs. Wallich and Timlen. Votes Roos, Schultz, Mrs. Teeters, Messrs. against this action: None. Absent: Wallich, Winn, and Timlen. Votes Mr. Coldwell. (Mr. Timlen voted as against this action: None. (Mr. Timalternate member.) len voted as alternate member.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions crease about 11 percent from 1979 to 1980. Adjusted for price increases 1. Domestic Policy Directive that were expected by businesses, The information reviewed at this the survey implied little change in meeting suggested that real output of real outlays. goods and services was continuing In January housing starts declined to grow in the first quarter of 1980 further to an annual rate of about 1.4 after having expanded at an annual million units. Since the third quarter rate of about 2 percent in the fourth of 1979, housing starts had fallen by quarter of 1979. The rise in average more than 20 percent and residential prices, as measured by the fixed- building permits by nearly 25 perweight price index for gross domes- cent. Sales of new single-family tic business product, appeared to homes rose somewhat in January but have accelerated in the current quar- remained well below their thirdter from an average rate of about 10 quarter level, while sales of existing percent during 1979. single-family homes continued to de- Retail sales rose briskly in Janu- cline. ary, but advance data suggested a Producer prices of finished goods moderate decline in February. After rose at a greatly accelerated pace in adjustment for higher prices, the lev- January and February, and conel in February was close to the aver- sumer prices also increased at a age for the fourth quarter. Unit sales sharply higher rate in January. The of new automobiles in the first two advances reflected a continuing months of the year were consid- surge in prices of energy-related erably above the reduced pace in the items and, with the exception of fourth quarter. foods, widespread increases in prices The index of industrial production of other items as well. During 1979 rose somewhat in both January and producer prices had risen 12V2 per- February after changing little during cent and consumer prices about 13 XU the fourth quarter, and returned to percent. The index of average hourly its peak level of March 1979. The earnings of private nonfarm producrate of capacity utilization in manu- tion workers rose at an annual rate of facturing was unchanged in Febru- about 7 percent over the Januaryary at a level about 3 percentage February period, compared with a rise points below its recent peak in of about 8V2 percent during 1979. March 1979. In foreign exchange markets the Nonfarm payroll employment, dollar had been in strong demand which had expanded substantially in since mid-February, largely in re- January, rose appreciably further in sponse to sharp increases in U.S. in- February, and the rate of unemploy- terest rates and, most recently, to ment fell 0.2 percentage point to 6.0 the President's announcement of a percent. Employment in manufac- series of measures designed to curb turing continued to change little. inflationary pressures in the U.S. The latest Department of Com- economy. By the first part of March merce survey of business spending the trade-weighted value of the dolplans, taken in late January and Feb- lar against major foreign currencies ruary, suggested that expenditures had risen to around its high of late for plant and equipment would in- October 1979. By mid-March, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 dollar had advanced further, to late February and the first part of about 6 percent above its level at the March, growth of M-1A and M-1B time of the February meeting. Over subsided. the course of recent weeks foreign Reflecting the acceleration of monmonetary authorities had intervened etary growth in February, the dein heavy volume to support their mand for bank reserves expanded currencies. substantially in relation to the supply In January the U.S. foreign trade of nonborrowed reserves and money deficit increased sharply, despite market conditions tightened considsome reduction in the volume and erably. Effective February 15, Federvalue of oil imports. Other imports al Reserve discount rates were rose substantially, while exports ex- raised from 12 percent to 13 percent. panded at a reduced pace; agricul- The federal funds rate rose from tural exports were down somewhat about 1372 percent in the statement from a high December level. week ending February 13, the first At its meeting on February 4-5, full week after the Committee's the Committee had decided that meeting in early February, to almost open market operations in the period 15 percent in the week ending Februuntil this meeting should be directed ary 20. On February 22 the Comtoward expansion of reserve aggre- mittee voted to raise the upper limit gates consistent with growth from of the intermeeting range for the December 1979 to March 1980 at an funds rate to 1672 percent, and on annual rate of about 472 percent for March 7 it voted to raise the limit to M-1A and about 5 percent for M-1B, 18 percent. The federal funds rate provided that in the intermeeting pe- averaged about 1672 percent in the riod the weekly average federal week ending March 12, the last comfunds rate remained within a range plete statement week before this of 1172 to 1572 percent. In the Com- meeting, and exceeded 17 percent on mittee's view this short-run policy some days in early March. Member should be consistent with growth in bank borrowings rose to an unusu- M-2, as newly defined, at an annual ally high level of almost $372 billion rate of about 672 percent over the in the week ending March 12; in the first quarter. preceding three weeks borrowings Growth in M-1A and M-1B accel- had averaged about $274 billion. erated in February to annual rates of Expansion of total credit outabout 12 percent and 1172 percent standing at U.S. commercial banks respectively from rates of about 372 strengthened in January and accelerpercent and 474 percent in January. ated further in February. Growth Growth in M-2 also quickened in was especially pronounced in busi- February, to an annual rate of about ness loans, and available reports in- 103/4 percent from 63/4 percent in dicated a surge in demands for loan January, reflecting in part the contin- commitments in the latter part of ued rapid expansion in money mar- February and early March. The isket mutual funds; and growth in M-3 suance of commercial paper by nonwas buoyed by increased issuance of financial corporations strengthened large-denomination time deposits at markedly in December and contincommercial banks associated with ued very large in January and Februrapid expansion of bank credit. In ary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions Interest rates rose sharply during 10 percent in the marginal reserve the intermeeting period as inflation- requirement on managed liabilities ary expectations continued to wors- of large member banks and a reducen. Upward pressures on rates, es- tion in the base upon which the repecially on short-term rates, also serve requirement is calculated. reflected the constraint on the provi- 4. A special deposit requirement sion of bank reserves in relation to of 10 percent on increases in manthe demand for reserves and the in- aged liabilities of large nonmember creases in Federal Reserve Bank dis- banks. count rates on February 15. Such 5. A special deposit requirement pressures were reinforced in short- of 15 percent on increases in total asterm markets by the sizable bank is- sets of money market mutual funds. suance of certificates of deposit and 6. A surcharge of 3 percentage by large sales of Treasury bills by points on frequent borrowings from foreign official institutions to finance the Federal Reserve Banks by memintervention in foreign exchange ber banks with deposits of $500 milmarkets. Over the period, com- lion or more. mercial banks raised their loan rate In part because of the new proto prime business borrowers from gram announced on March 14, pro- 15V4 percent to I8V2 percent. In jections of activity and prices at this home mortgage markets, rates on time were subject to more uncernew commitments advanced sharply tainty than usual. Staff projections further and lenders also tightened prepared for this meeting suggested other lending terms. that real GNP probably would turn On March 14 the President an- down in the second quarter and that nounced a broad program involving the contraction in activity was likely fiscal, energy, credit, and other mea- to persist for a number of quarters sures that were designed to help and to be accompanied by a significurb inflationary forces in a manner cant increase in the unemployment that would also restore the basis for rate. The rise in average prices was stable economic growth. Consistent projected to moderate from the acwith that program and with the con- celerated pace in the first quarter but tinuing objective of the Federal Re- to remain rapid. serve System to restrain growth in In the Committee's discussion of money and credit during 1980, the the economic situation, many of the Board of Governors announced the members continued to stress the unfollowing actions on March 14 to re- usual uncertainties affecting ecoinforce the measures announced on nomic forecasts, although the likeli- October 6, 1979: hood of some decline in activity over 1. A voluntary special credit re- the rest of 1980 was broadly acceptstraint program intended to curb the ed. With respect to price prospects, expansion in credit extensions by a it was suggested that the underlying variety of financial institutions. inflation rate would not be reduced 2. A special deposit requirement very much in the short run by the of 15 percent for all lenders on in- rather moderate contraction in activcreases in certain types of consumer ity generally being projected. credit. Contrary to widespread expecta- 3. An increase from 8 percent to tions, it was noted, expansion in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 some sectors of the economy had mittee took note of a staff analysis been strong enough in recent months indicating that growth of M-1A and to sustain overall output despite con- M-1B over the first two months of siderable weakness in the automo- the year had substantially exceeded bile and housing markets. For the the pace consistent with the objecperiod immediately ahead, the tives for the December-March pericourse of total output appeared to be od established by the Committee at dependent to a considerable degree its preceding meeting. Accordingly, on whether consumer expenditures extension of the first-quarter objecfor goods and services remained ab- tives for M-1A and M-1B through normally high in relation to dis- the second quarter, in keeping with posable income or tended to decline. the Committee's objectives for mon- While the strength of investment ac- etary growth over the whole year, tivity and apparently balanced in- would imply a considerable slowing ventory behavior suggested a mild of growth from February to June. recession, the possibility was recog- The staff analysis also noted that nized that a recession, whenever it monetary growth had subsided in reoccurred, could be exacerbated by cent weeks; available data indicated the accumulation of sizable amounts little if any growth of M-1A in of debt, by businesses as well as March, even if growth resumed in consumers, at exceptionally high in- the latter part of the month. terest rates and by other developing Growth of M-2 over the first half strains in the financial system. associated with extension of the ear- At its meeting on February 4-5, lier objectives for M-1A and M-1B 1980, the Committee had agreed that would be more rapid than had been from the fourth quarter of 1979 to the contemplated for the first quarter, fourth quarter of 1980 average rates but the projected rate nevertheless of growth in the monetary aggre- was well within the range estabgates within the following ranges ap- lished for the year as a whole. Owing peared to be consistent with broad to the public's response to the high economic aims: M-1A, Vh to 6 per- market interest rates prevailing, excent; M-1B, 4 to 6V2 percent; M-2, 6 pansion of money market mutual to 9 percent; and M-3, 6V2 to 9lli funds in the first two months of the percent. The associated range for year had been stronger than exthe rate of growth in commercial pected. Whether their expansion bank credit was 6 to 9 percent. It had would remain relatively strong dealso been agreed that the longer-run pended in part on the adjustments ranges, as well as the particular ag- the funds made to the new special gregates for which such ranges were deposit requirement imposed on the specified, would be reconsidered in increase in their assets. July or at any other time that condi- In the Committee's discussion of tions might warrant, and also that policy for the period immediately short-run factors might cause con- ahead, most members favored essiderable variation in annual rates of sentially an extension through the growth from one month to the next second quarter of the objectives for and from one quarter to the next. the first quarter that had been estab- In contemplating policy for the pe- lished at the meeting in early Februriod immediately ahead, the Com- ary. Specifically, they favored annu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions al rates of growth over the first half next meeting of the Committee. Senof the year of about 4V2 percent for timent was expressed for a number M-1A and about 5 percent for M-1B, of variations: retaining the widened with an associated rate of about VI4 range of IIV2 to 18 percent existing percent for M-2. Such a policy was since the Committee's vote on viewed as sufficiently restrictive, es- March 7 to raise the upper limit; repecially in light of its implication for storing the range to the more cusa significant slowing of monetary tomary 4 percentage points by raisgrowth over the period from Febru- ing the lower limit to 14 percent; and ary to June. However, some senti- raising the upper limit to 20 percent, ment was also expressed for seeking with no change in the lower limit or slightly lower rates of growth over with an increase in that limit to 13 V2 the first half, to underscore support or 14 percent. It was observed, in for the new anti-inflation program by this connection, that the Committee making clear that general credit re- had, and frequently used, estabstraint would not be relaxed. lished procedures for changing spec- Many members expressed con- ifications during periods between cern about the possibility that a meetings when circumstances seemed bulge in monetary growth in April, to warrant such changes. even if it followed little growth or a The suggestion was made that the decline in March, would have an ad- language of the domestic policy diverse impact on market psychology rective take account of the new voland on assessments of the likely suc- untary special credit restraint process of the new program in helping gram. That might be done by includto contain inflation. While favoring ing a reference in the operational essentially an extension of the first- paragraphs to an expectation of an quarter objectives for monetary appropriate slowing of growth in growth that had been established at bank credit in the months ahead. the preceding meeting, they also ad- At the conclusion of the disvocated directing operations in the cussion, the Committee agreed that period immediately ahead toward open market operations in the period working against any bulge that might until the next meeting should be dibe developing and assuring that ex- rected toward expansion of reserve cessive growth in April, should it oc- aggregates consistent with growth cur, would be compensated for in over the first half of 1980 at annual succeeding months. These members rates of 4V2 percent for M-1A and 5 in general felt that, in the process, percent for M-1B, or somewhat less, they would be willing to tolerate provided that in the intermeeting pesomewhat less growth over the first riod the weekly average federal half of the year than the annual rates funds rate remained within a range of 472 percent for M-1A and 5 per- of 13 to 20 percent. Consistent with cent for M-1B that represented an this short-run policy, in the Comextension of the first-quarter objec- mittee's view, M-2 should grow at an tives. annual rate of about VU percent Members differed in their views over the first half, and expansion concerning the range to be specified of bank credit should slow in the for the weekly average federal funds months ahead to a pace compatible rate during the period before the with growth over the year as a whole Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 within the range of 6 to 9 percent Growth of M-l A and M-1B, which had agreed upon. If it appeared during remained moderate in January, accelerated sharply in February, and growth of the period before the next regular M-2 also quickened. In recent weeks, meeting that the constraint on the however, monetary growth has subfederal funds rate was inconsistent sided. Expansion of commercial bank with the objective for the expansion credit picked up in the first two months of reserves, the Manager for Domes- of this year from the reduced pace in the fourth quarter of 1979. Market interest tic Operations was promptly to notirates have risen substantially in recent fy the Chairman who would then de- weeks. An increase in Federal Reserve cide whether the situation called for discount rates from 12 to 13 percent was supplementary instructions from the announced early on February 15, effective immediately. Committee. On March 14 the President announced The following domestic policy dia broad program of fiscal, energy, credit, rective was issued to the Federal Re- and other measures designed to moderserve Bank of New York: ate and reduce inflationary forces in a manner that can also lay the groundwork The information reviewed at this for a return to stable economic growth. meeting suggests that real output of Consistent with that objective and with goods and services continued to grow in the continuing intent of the Federal Rethe first quarter of 1980 and that the rise serve System to restrain growth in monin prices accelerated. In February retail ey and credit during 1980, the Board of sales declined moderately, but the de- Governors took the following actions to crease followed an exceptionally large reinforce the effectiveness of the meaincrease in January. Industrial produc- sures announced in October 1979: (1) A tion expanded somewhat in both special credit restraint program; (2) A months, after a period of little change, special deposit requirement for all lendand nonfarm payroll employment contin- ers on increases in certain types of conued to rise. The unemployment rate sumer credit; (3) An increase in the maredged down in February to 6.0 percent. ginal reserve requirement on managed Private housing starts declined further in liabilities of large member banks; (4) A January and were more than one-fifth be- special deposit requirement on increases low the rate in the third quarter of last in managed liabilities of large nonyear. The rise in producer prices of fin- member banks; (5) A special deposit reished goods and in consumer prices was quirement on increases in total assets of more rapid in the first month or two of money market mutual funds; (6) A sur- 1980 than in 1979, despite some easing charge of 3 percentage points on frein prices of foods. Over the first two quent borrowing of large member banks months of 1980 the rise in the index of from Federal Reserve Banks. average hourly earnings was somewhat Taking account of past and prospecbelow the rapid pace recorded in 1979. tive economic developments, the Feder- The dollar has been in strong demand al Open Market Committee seeks to fosin exchange markets since mid-Febru- ter monetary and financial conditions ary, largely in response to rising U.S. that will resist inflationary pressures interest rates; by early March the trade- while encouraging moderate economic weighted value of the dollar against ma- expansion and contributing to a sustainjor foreign currencies had returned to able pattern of international transacabout the level reached at the end of last tions. At its meeting on February 4-5, October, and since then, it has risen fur- 1980, the Committee agreed that these ther. Intervention by foreign monetary objectives would be furthered by growth authorities to support their currencies of M-1A, M-1B, M-2, and M-3 from the was very heavy in February and the first fourth quarter of 1979 to the fourth quarhalf of March. The U.S. foreign trade ter of 1980 within ranges of 3lh to 6, 4 to deficit rose sharply in January although 6V2, 6 to 9, and 6V2 to 9V2 percent rethe volume and value of imports of pe- spectively. The associated range for troleum were somewhat reduced. bank credit was 6 to 9 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions In the short run, the Committee seeks rizations and directives. The Comexpansion of reserve aggregates consis- mittee reaffirmed the authorization tent with growth over the first half of for domestic open market opera- 1980 at an annual rate of 4l/i percent for tions, the foreign currency directive, M-1A and 5 percent for M-1B, or somewhat less, provided that in the period be- and the procedural instructions with fore the next regular meeting the weekly respect to foreign currency operaaverage federal funds rate remains with- tions in the forms in which they were in a range of 13 to 20 percent. The Comcurrently outstanding. mittee believes that, consistent with this short-run policy, M-2 should grow at an Votes for these actions: Messrs. annual rate of about VI4 percent over the Volcker, Guffey, Morris, Partee, first half and expansion of bank credit Rice, Roos, Schultz, Mrs. Teeters, should slow in the months ahead to a Messrs. Wallich, Winn, and Timlen. pace compatible with growth over the Votes against these actions: None. year as a whole within the range agreed (Mr. Timlen voted as alternate memupon. ber.) If it appears during the period before the next meeting that the constraint on the federal funds rate is inconsistent with In reviewing the authorization for the objective for the expansion of re- domestic open market operations, serves, the Manager for Domestic Oper- the Committee took special note of ations is promptly to notify the Chairman paragraph 3, which authorizes the who will then decide whether the situa- Reserve Banks to engage in the lendtion calls for supplementary instructions from the Committee. ing of U.S. government securities held in the System Open Market Ac- Votes for this action: Messrs. Volckcount under such instructions as the er, Guffey, Morris, Partee, Rice, Committee might specify from time Roos, Schultz, Mrs. Teeters, Messrs. Winn, and Timlen. Vote against this to time. That paragraph had been action: Mr. Wallich. (Mr. Timlen added to the authorization on Octovoted as alternate member.) ber 7, 1969, on the basis of a judgment by the Committee that such Mr. Wallich dissented from this lending of securities was reasonably action because he favored pursuit of necessary to the effective conduct of a more restrictive policy for the periopen market operations and to the od immediately ahead to assure implementation of open market polimaintenance of firm general credit cies, and on the understanding that restraint, especially as a means of the authorization would be reviewed buttressing the new anti-inflation periodically. At this meeting the program. Committee concurred in the judgment of the Manager for Domestic Operations that the lending activity 2. Review of in question remained reasonably Continuing Authorizations necessary and that, accordingly, the This being the first regular meeting authorization should remain in effect of the Federal Open Market Com- subject to annual review. mittee following the election of new members from the Federal Reserve 3. Authorization for Banks to serve for the year begin- Foreign Currency Operations ning March 1, 1980, the Committee followed its customary practice of The Committee reaffirmed the aureviewing all of its continuing autho- thorization for foreign currency op- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 erations, with a technical modifica- ' 'warehouse" foreign currencies— tion. In paragraph 6, the title that is, to make spot purchases of 4'Manager for Foreign Operations" foreign currencies from the ESF and was substituted for " Manager" the simultaneously to make forward first time the latter appeared, in rec- sales of the same currencies at the ognition that positions and titles re- same exchange rate to the ESF. Purlating to management of the System suant to that agreement, the Com- Open Market Account had been mittee had agreed in December 1978, changed since the Committee had that the Federal Reserve would be last conducted its annual review of prepared to warehouse for the its continuing authorizations and di- Treasury or for the ESF up to $5 bilrectives. lion of eligible foreign currencies for periods of up to 12 months. In view Votes for this action: Messrs. Volcker, Guffey, Morris, Partee, Rice, of the U.S. program of issuing notes Roos, Schultz, Mrs. Teeters, Messrs. denominated in foreign currencies, Wallich, Winn, and Timlen. Votes the Committee voted at this meeting against this action: None. (Mr. Timto reaffirm the agreement to warelen voted as alternate member.) house up to $5 billion of foreign currencies and to drop the 12-month Pursuant to paragraph 3 of the aulimitation on the period such curthorization for foreign currency oprencies could be warehoused. It was erations, the Committee expressly understood that the basic agreement authorized the Federal Reserve would be subject to annual review. Bank of New York, for the System Open Market Account, to enter into Votes for this action: Messrs. Volckcontracts to purchase foreign ex- er, Guffey, Morris, Partee, Rice, Roos, Schultz, Mrs. Teeters, Messrs. change at specified rates that reflected Wallich, Winn, and Timlen. Votes market rates of late February and against this action: None. (Mr. Timlen early March when contract dis- voted as alternate member.) cussions were initiated and simultaneously to transfer the foreign ex- 5. Authorization for Domestic change so acquired directly to the Open Market Operations Exchange Stabilization Fund (ESF) at those same rates. On April 16, 1980, the Committee voted to increase from $3 billion to Votes for this action: Messrs. Volck- $472 billion the limit on changes beer, Guffey, Morris, Partee, Rice, Roos, Schultz, Mrs. Teeters, Messrs. tween Committee meetings in Sys- Wallich, Winn, and Timlen. Votes tem Account holdings of U.S. govagainst this action: None. (Mr. Tim- ernment and federal agency securlen voted as alternate member.) ities specified in paragraph l(a) of the authorization for domestic open 4. Agreement with market operations, effective immedi- Treasury to Warehouse ately, for the period ending with the Foreign Currencies close of business on April 22, 1980. At its meeting on January 17-18, Votes for this action: Messrs. Volcker, Guffey, Morris, Partee, Rice, Roos, 1977, the Committee had agreed to a Schultz, Mrs. Teeters, Messrs. Wallich, suggestion by the Treasury that the Winn, and Timlen. Votes against this Federal Reserve undertake to action: None. Absent and not voting: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions Mr. Solomon. (Mr. Timlen voted as al- erably in January and February and ternate for Mr. Solomon.) dropped sharply further in March to an annual rate of just over one mil- This action was taken on recom- lion units, about 40 percent less than mendation of the Manager for Do- in the second and third quarters of mestic Operations. The Manager 1979 and the lowest rate since April had advised that since the March 1975. Building permits for new units meeting, large-scale purchases of also declined substantially further in securities had been undertaken to March. In February sales of singlecounter the effects on member bank family homes fell for the fifth conreserves of a decline in float, an in- secutive month. crease in currency in circulation, The index of industrial production and a rise in required reserves asso- fell 0.8 percent in March, after ciated with the System actions an- changing little on balance in other renounced on March 14. As a result, cent months. The March decline rethe leeway for further purchases had flected widespread cutbacks in outbeen reduced to less than $200 mil- put of final products and materials. lion. It appeared likely that addition- The rate of capacity utilization in al purchases would be required be- manufacturing fell nearly 1 percentcause projections indicated a need age point in March to 83 percent, for further reserve-providing opera- about 4 percentage points below its tions in the week ahead. recent high in March 1979. Nonfarm payroll employment de- Meeting tfiici on April 22, 1980 clined appreciably in March following a substantial rise earlier in the Domestic Policy Directive year, and the rate of unemployment The information reviewed at this rose 0.2 percentage point to 6.2 permeeting suggested that economic ac- cent. Employment in manufacturing tivity turned down in the latter part fell somewhat in March after changof the first quarter of 1980. For the ing little in January and February, quarter as a whole, however, real and the length of the average workgross national product grew at an an- week was reduced for the second nual rate of about 1 percent, accord- consecutive month. ing to preliminary estimates of the The rise in average prices, as mea- Commerce Department, compared sured by the fixed-weight price index with a rate of 2 percent in the fourth for gross domestic business product, quarter of 1979. accelerated to an annual rate of Retail sales on a constant-dollar about 12 percent in the first quarter basis fell sharply in February and from a rate of about 10 percent dur- March, after having increased in ing 1979. Producer prices of finished January, and were estimated to have goods and consumer prices rose at declined over the first quarter as a annual rates of about 19 percent and whole. Unit sales of new automo- 18 percent respectively during the biles slowed in both February and first quarter. The advances reflected March from a brisk pace in January a continuing surge in prices of enerand apparently remained weak in gy-related items and substantial inearly April. creases in prices of numerous other Private housing starts fell consid- items. The index of average hourly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 earnings of private nonfarm produc- reserves continued strong in relation tion workers rose at an annual rate to the supply being made available of 9V2 percent during the first quar- through open market operations, ter, compared with a rise of about and the federal funds rate rose from 872 percent during 1979. an average of 1674 percent in the In foreign exchange markets the statement week ending March 19 to strong demand for dollars that about 193/8 percent in the week endemerged in mid-February persisted ing April 2. Subsequently, the dethrough early April, but some selling mand for bank reserves eased, and pressure developed in the second the funds rate dropped to an average week of April, in large measure be- of about 183/8 percent in the week cause accumulating signs of a reces- ending April 16. Member bank borsion in the United States led many rowings averaged around $274 bilmarket participants to conclude that lion in the three statement weeks U.S. interest rates had peaked. De- ending April 16, down from an averspite the recent weakening of the age of about $374 billion in the predollar, its trade-weighted value ceding two weeks. against major foreign currencies was The monetary aggregates weakcurrently about 5 percent above its ened substantially in March after level of early February. growing at accelerated rates in Feb- The U.S. foreign trade deficit rose ruary. M-1A and M-1B, which had further in February following a sharp expanded at annual rates of around increase in January. The marked in- 12 percent in February, declined at crease over the first two months of annual rates of 372 and 2 percent re- 1980 reflected a surge in imports, as- spectively in March, and available sociated in large part with rising data suggested further contraction in prices, that was only partly offset by early April. Growth in M-2 slowed a moderate expansion in exports. from an annual rate of 103/4 percent At its meeting on March 18, the in February to 372 percent in March, Committee had agreed that open reflecting mainly the contraction in market operations in the period until the narrow measures of the money this meeting should be directed to- stock. Growth in money market muward expansion of reserve aggre- tual funds slowed markedly on a gates consistent with growth over monthly average basis, but the imthe first half of 1980 at annual rates pact on M-2 was offset by greater of 4V2 percent for M-1A and 5 per- strength in small-denomination time cent for M-1B, or somewhat less, deposits, principally reflecting rapid provided that in the intermeeting pe- growth in money market certificates. riod the weekly average federal From December to March, M-1A funds rate remained within a range and M-1B grew at annual rates of of 13 to 20 percent. In the Com- about 4 percent and 472 percent remittee's view, this short-run policy spectively, and M-2 expanded at a should be consistent with growth in rate of 7 percent. M-2 at an annual rate of about 73/U Expansion of total credit outpercent over the first half of the standing at U.S. commercial banks year. slowed substantially in March after During the first part of the inter- accelerating earlier in the year. The meeting period, demands for bank slowdown was especially pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions nounced for business loans, but cline in overall activity had probably growth in real estate loans also mod- begun, especially in light of new evierated appreciably. Overall expan- dence that had accumulated since sion in short-term business credit the Committee's meeting in March. remained relatively strong as non- It was emphasized, however, that financial corporations continued to uncertainties concerning the outlook issue large amounts of commer- persisted and that, in any case, forecial paper. casting the severity and duration of a Most market interest rates de- recession was always difficult. clined considerably on balance dur- The degree of prospective weaking the intermeeting period. Follow- ness in consumer spending was viewed ing the Committee's meeting on as a major source of uncertainty. March 18, interest rates extended The anti-inflationary measures anearlier advances and reached new nounced on March 14 appeared highs in late March or early April. to have curbed considerably spend- Subsequently, most interest rates ing in anticipation of price increases. turned down, with the federal funds It was noted in this connection that a rate falling moderately and other rise in the saving rate from the abrates declining sharply as market normally low levels of the most reparticipants reacted to accumulating cent two quarters to a more normal signs of a slowdown in economic ac- rate would imply a marked cutback tivity and to weakening in the mone- in consumer spending. Such a develtary aggregates. During the period opment would also tend to depress commercial banks initially raised business investment in inventories their loan rate to prime business bor- and plant and equipment. However, rowers from I8V2 percent to 20 per- it would be premature to conclude cent and then lowered it to 1972 per- that inflationary attitudes and behavcent. In primary markets for home ior had been fundamentally altered, mortgages, average rates on new especially in view of the prospect commitments leveled out at around that the rapid rise in the consumer I6V2 percent. price index would persist for a num- Staff projections prepared for this ber of months. meeting suggested that real GNP At its meeting on February 4-5, would decline in the current quarter 1980, the Committee had agreed that and continue to move lower for a from the fourth quarter of 1979 to the number of quarters. The contraction fourth quarter of 1980 average rates in activity was projected to be some- of growth in the monetary aggrewhat larger than had been antici- gates within the following ranges appated a month earlier and to be ac- peared to be consistent with broad companied by a substantial increase economic aims: M-1A, Vli to 6 perin unemployment. The rise in aver- cent; M-1B, 4 to 6V2 percent; M-2, 6 age prices was projected to remain to 9 percent; and M-3, 6V2 to 9V2 rapid, although some moderation percent. The associated range for was expected after the current quar- the rate of growth in commercial ter. bank credit was 6 to 9 percent. It had In the Committee's discussion of also been agreed that the longer-run the economic situation, the judg- ranges, as well as the particular agment was broadly shared that a de- gregates for which such ranges were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 specified, would be reconsidered in meeting, but some sentiment was al- July or at any other time that condi- so expressed for lower rates of montions might warrant, and also that etary growth. The members generalshort-run factors might cause con- ly accepted the view that retention siderable variation in annual rates of of the earlier objectives for monegrowth from one month to the next tary growth was likely to be associand from one quarter to the next. ated with further downward pres- In contemplating policy for the pe- sure on interest rates. riod immediately ahead, the Com- Several members noted their conmittee took note of a staff analysis cern that if a large decline in interest indicating that M-1A and M-1B were rates were to occur over the next likely to decline further on the aver- few weeks, it was likely to be perage in April and, consequently, that ceived by some market particigrowth over the first four months of pants—depending upon which varithe year would fall considerably ables they thought important—as an short of the objectives for the first easing of monetary policy and could half of the year established by the have very undesirable repercussions Committee at its meeting in March. on inflationary psychology and on Thus, realization of those objectives the dollar in foreign exchange marwould require substantial expansion kets. Such a decline in interest rates in M-1A and M-1B over May and could ultimately prove especially June. A significant rebound in their troublesome and unsettling to finangrowth was likely over the two- cial markets if after a short interval a month period, given the staflF projec- stronger-than-expected resurgence tion of a fairly sizable expansion in in monetary and credit expansion led nominal GNP in the current quarter to its reversal. The view was also exand the associated increase in the pressed that the course of economic transactions demand for money, but activity would not be adversely afefforts to realize the first-half objec- fected if any decline in interest rates tives for growth established in were gradual rather than precipi- March could require System open tous. market operations that would put Other members, however, stressed further downward pressure on the the risk that a continued shortfederal funds rate. The staff analysis fall in monetary growth and peralso suggested that growth of M-2 sistence of relatively high interest over the half year was likely to be rates could exacerbate recessionary lower in relation to growth of the forces in the economy. It was obnarrower monetary aggregates than served that a significant decline in inhad been thought a month earlier, terest rates, if that were to occur in owing to a scaling down of expected coming weeks, should be regarded expansion in money market mutual as a consequence of the Comfunds. mittee's continuing emphasis on its In the Committee's discussion of announced objectives for achieving policy for the period immediately limited monetary growth and not as ahead, most members favored reaf- a shift toward a stimulative policy. firming the monetary growth objec- The Committee's monetary objectives for the first half of 1980 that had tives should be perceived as fully been established at the previous consistent with a moderation of in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions flationary forces over time as well as the months ahead to a pace compatwith resistance to recessionary ten- ible with growth over the year as a dencies in the short run. With re- whole within the range of 6 to 9 perspect to foreign exchange markets, cent agreed upon. It was generally the view was expressed that the pos- recognized that conditions could sibility of downward pressure on the arise that might make desirable a redollar in association with a relative view of the situation in advance of decline in U.S. interest rates would the next regular meeting scheduled have to be faced sooner or later. On for May 20. In any case, if it apthe other hand, some decline in U.S. peared that the constraint on the fedinterest rates might already have eral funds rate was inconsistent with been discounted, and exchange mar- the objective for the expansion of rekets should in any event be reas- serves, the Manager for Domestic sured by the general thrust of mone- Operations was promptly to notify tary policy and the prospect for the Chairman who would then deimprovement over time in the per- cide whether the situation called for formance of the current account. It supplementary instructions from the was also noted that U.S. interest Committee. rates remained higher than key inter- The following domestic policy diest rates abroad. rective was issued to the Federal Re- In light of the outlook for a some- serve Bank of New York: what lower federal funds rate in the weeks immediately ahead, most The information reviewed at this meeting suggests that economic activity members believed it would be approturned down in the latter part of the first priate to reduce the upper limit of quarter of 1980, although for the quarter the current range, and several mem- as a whole real GNP expanded somebers suggested 19 percent for the what further and the rise in prices accelerated. Retail sales in real terms declined new upper limit. Most members exsharply in February and March, after pressed a preference for retaining having increased in January. In March the current lower limit of 13 percent. industrial production and nonfarm pay- At the conclusion of the dis- roll employment declined, and the unemployment rate edged up to 6.2 percussion, the Committee agreed that cent. Private housing starts declined open market operations in the period throughout the first quarter, to a rate in until the next meeting should contin- March about two-fifths below that in the ue to be directed toward expansion third quarter of last year. The rise in proof reserve aggregates consistent with ducer prices of finished goods and in consumer prices was considerably more growth over the first half of 1980 at rapid during the first three months of annual rates of 4lh percent for M-1A 1980 than in 1979. Over the first quarter, and 5 percent for M-1B, or some- the rise in the index of average hourly what less, provided that in the inter- earnings was somewhat above the rapid pace recorded in 1979. meeting period the weekly average The strong demand for the dollar in federal funds rate remained within a exchange markets that began in midrange of 13 to 19 percent. Consistent February persisted through early April. with this short-run policy, in the Some selling pressure developed in the Committee's view, M-2 should grow second week of April as market particiat an annual rate of about 63A* per- pants reacted to indications that U.S. interest rates might have peaked, but cent over the first half, and expan- the trade-weighted value of the dollar sion of bank credit should slow in against major foreign currencies re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 mained well above its level of early Feb- Votes for this action: Messrs. Volckruary. The U.S. foreign trade deficit rose er, Guffey, Morris, Partee, Rice, further in February. Roos, Schultz, Solomon, Mrs. Teeters, M-1A and M-1B, which had expanded and Mr. Winn. Vote against this acsharply in February, contracted in March tion: Mr. Wallich. and early April; M-2 increased relatively little in March. From December Mr. Wallich dissented from this to March, M-1A and M-1B grew at annual rates of about 4 percent and 472 action because he believed that it percent respectively, and M-2 grew at a represented a premature and excesrate of 7 percent. Expansion of com- sive relaxation of restraint. He famercial bank credit slowed substantially vored a policy for the period until in March from the accelerated pace earlier in the year. Since mid-March, most the next meeting directed toward market interest rates on balance have de- lower rates of monetary growth over clined considerably. the first half of the year, accom- Taking account of past and prospec- panied by an intermeeting range for tive economic developments, the Federthe federal funds rate that would alal Open Market Committee seeks to foster monetary and financial conditions low for considerably less decline. that will resist inflationary pressures while encouraging moderate economic expansion and contributing to a sustain- On May 6 the Committee held a able pattern of international transac- telephone conference to review the tions. At its meeting on February 4-5, situation and to consider whether 1980, the Committee agreed that these objectives would be furthered by growth supplementary instructions were of M-1A, M-1B, M-2, and M-3 from the needed. Available data suggested fourth quarter of 1979 to the fourth quar- that the demand for money and ter of 1980 within ranges of 3l/i to 6, 4 to hence the demand for reserves had 672, 6 to 9, and 6V2 to 9l/i percent reremained weak, and the federal spectively. The associated range for bank credit was 6 to 9 percent. funds rate most recently had fallen In the short run, the Committee seeks below the 13 percent lower limit of expansion of reserve aggregates consis- the intermeeting range of 13 to 19 tent with growth over the first half of percent. The Committee voted to re- 1980 at an annual rate of 472 percent for duce the lower limit of the inter- M-1A and 5 percent for M-1B, or somewhat less, provided that in the period be- meeting range for the funds rate to fore the next regular meeting the weekly IOV2 percent. average federal funds rate remains within a range of 13 to 19 percent. The Com- On May 6 the Committee modified the mittee believes that, to be consistent domestic policy directive adopted at its with this short-run policy, M-2 should meeting on April 22, 1980, to reduce the grow at an annual rate of about 63/4 per- lower limit of the range for the federal cent over the first half and that bank funds rate to IOV2 percent. credit should grow in the months ahead at a pace compatible with growth over Votes for this action: Messrs. Volckthe year as a whole within the range er, Morris, Rice, Roos, Schultz, agreed upon. Mrs. Teeters, and Mr. Winn. Votes If it appears during the period before against this action: Messrs. Guffey, the next meeting that the constraint on Solomon, and Wallich. Absent: Mr. the federal funds rate is inconsistent with Partee. the objective for the expansion of reserves, the Manager for Domestic Oper- Messrs. Guffey and Solomon votations is promptly to notify the Chairman who will then decide whether the situa- ed against this action because they tion calls for supplementary instructions preferred smaller reductions in the from the Committee. lower limit of the federal funds Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions rate and Mr. Wallich voted against it nounced in automobile- and conbecause he preferred to maintain the struction-related industries. The lower limit at 13 percent. length of the average workweek fell for the third successive month. Private housing starts declined Meeting Held on throughout the first quarter and May 20,1980 edged down further in April to an annual rate of about 1 million units. 1. Domestic Policy Directive Building permits for new units were The information reviewed at this down substantially further in April. meeting suggested that real output of In March sales of single-family goods and services was declining homes fell for the sixth consecutive markedly in the current quarter after month. increasing at an annual rate of 0.6 The rise in producer prices of finpercent in the first quarter. How- ished goods moderated appreciably ever, average prices, as measured by in April, reflecting a large drop in the fixed-weight price index for prices of consumer foods and a less gross domestic business product, rapid advance in prices of energy-rewere continuing to rise at a rapid lated items than in earlier months. In pace following increases at an annu- the first quarter both producer prices al rate of about 11 percent in the first and consumer prices had risen at acquarter and nearly 10 percent during celerated rates following rapid ad- 1979. vances in 1979. The index of average The dollar value of total retail hourly earnings of private nonfarm sales fell substantially further in production workers rose at an annu- April after declining sharply in Feb- al rate of about 8 percent over the ruary and March. Unit sales of new first four months of the year, comautomobiles slowed markedly fur- pared with an increase of 8V2 perther in April to the lowest level since cent during 1979. the spring of 1975 and apparently re- In foreign exchange markets the mained exceptionally weak in early dollar had remained under down- May. ward pressure over most of the pre- The index of industrial production vious four weeks. Such pressure, fell 1.9 percent in April, following which had emerged in early April, small reductions in February and reflected primarily a sharp decline in March. The April decline reflected interest rates on dollar assets in relawidespread cutbacks in output. The tion to those on foreign-currency asrate of capacity utilization in manu- sets. The trade-weighted value of the facturing fell 2 percentage points fur- dollar against major foreign curther in April to 81 percent, 6 percent- rencies had fallen about VI2 percent age points below the recent peak in since the Committee's meeting on March 1979. April 22 and about Vli percent since In April nonfarm payroll employ- early April. ment declined substantially follow- The U.S. foreign trade deficit ining a moderate reduction in March, creased substantially from the fourth and the rate of unemployment rose quarter of 1979 to the first quarter of from 6.2 to 7.0 percent. Decreases in 1980 despite a considerable reducemployment were especially pro- tion in March from the average in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 January and February. For the quar- meeting range and available data had ter as a whole, imports, including suggested that the demand for monboth petroleum and nonpetroleum ey and for reserves had remained products, rose at a much faster rate weak, the Committee voted to rethan exports even though non- duce the lower limit of the interagricultural exports exhibited con- meeting range for the funds rate to siderable strength. IOV2 percent. In the statement week At its meeting on April 22, the ending May 14, the funds rate aver- Committee had agreed that open aged 107/s percent, down from an avmarket operations in the period until erage of about 183/8 percent in the this meeting should continue to be statement week ending April 16. directed toward expansion of re- In April M-1A and M-1B conserve aggregates consistent with tracted at annual rates of I8V2 and growth over the first half of 1980 at HV2 percent respectively following annual rates of 4V2 percent for M-1A small declines in March, while M-2 and 5 percent for M-1B, or some- fell at an annual rate of about 3 perwhat less, provided that in the inter- cent after increasing moderately in meeting period the weekly average March. As a result, expansion of federal funds rate remained within a the monetary aggregates—especially range of 13 to 19 percent. In the M-1A and M-1B—over the first four Committee's view, this short-run months of the year averaged well bepolicy should be consistent with low the growth paths set by the growth in M-2 at an annual rate of Committee for the first half; M-1A about VI4 percent over the first half declined at an annual rate of 1V2 perof the year. The Committee had also cent over that period; M-1B was unagreed that if the constraint on the changed; and M-2 expanded at an federal funds rate appeared to be in- annual rate of 4V2 percent. In early consistent with the objective for the May, however, there were subexpansion of reserves, the Mana- stantial increases in demand deposger for Domestic Operations was its and money market mutual funds. promptly to notify the Chairman, Total credit outstanding at U.S. who would then decide whether the commercial banks contracted in situation called for supplementary April after expanding at a subinstructions from the Committee. stantially reduced pace during Immediately after the meeting, re- March. The April decline reflected quired reserves and thus member reductions in both investments and bank demands for reserves began to loans, which included a drop in busifall substantially in relation to the ness loans. Net issues of commercial supply being made available through paper by nonfinancial corporations open market operations, reflecting a moderated in April from an exsharp weakening of the monetary ceptionally strong pace during the aggregates during April. Consequent- first quarter. ly, member bank borrowings for Interest rates fell sharply further adjustment purposes and the fed- during the intermeeting period as eral funds rate both declined sharp- market participants reacted to acly. On May 6, after the funds rate cumulating signs of a slowdown in had fallen below the 13 percent economic activity, to sustained weaklower limit of the Committee's inter- ness in the money stock, and to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions decline in the federal funds rate. The some moderation of the rise over the rate declines were especially pro- months ahead. nounced in short-term debt markets, At its meeting on February 4-5, but bond yields also moved substan- 1980, the Committee had agreed that tially lower. Commercial banks re- from the fourth quarter of 1979 to the duced their loan rate to prime busi- fourth quarter of 1980 average rates ness borrowers from \9l/i to I6V2 of growth in the monetary aggrepercent over the interval. In primary gates within the following ranges apmarkets for home mortgages, average peared to be consistent with broad rates on new commitments at sam- economic aims: M-1A, 3V2 to 6 perpled savings and loan institutions fell cent; M-1B, 4 to 6V2 percent; M-2, 6 more than 2 percentage points to to 9 percent; and M-3, 6V2 to 97 2 about 14Vs percent. On May 6 the percent. The associated range for Federal Reserve announced the re- the rate of growth in commercial moval of the surcharge of 3 percent- bank credit was 6 to 9 percent. It had age points on frequent borrowings also been agreed that the longer-run from the Federal Reserve Banks by ranges, as well as the particular agmember banks with deposits of $500 gregates for which such ranges were million or more. This surcharge had specified, would be reconsidered in been imposed in mid-March as part July or at any other time that condiof a broad program of credit re- tions might warrant, and also that straint. short-run factors might cause con- Staff projections prepared for this siderable variation in annual rates of meeting suggested a larger decline in growth from one month to the next real GNP in the current quarter than and from one quarter to the next. had been anticipated a month ear- In contemplating policy for the pelier. Further declines were expected riod immediately ahead, the Comin subsequent quarters, and unem- mittee took note of a staff analysis ployment was projected to increase indicating that growth of M-1A and substantially. Prices of goods and M-1B over the first four months of services were projected to continue the year had fallen considerably under substantial upward pressure, short of the rates consistent with the although the rate of increase was not objectives for the first half of the expected to be so rapid as in the first year that the Committee had estabquarter. lished at its meeting in March and Committee members agreed that a reaffirmed at its meeting in April. marked contraction in real GNP was Some rebound in growth of these agunder way in the current quarter. gregates was likely to occur over the The rapidity of the decline, reflect- May-June period, assuming interest ing in part the abrupt weakening in rates at around current levels and consumption expenditures, sug- given the staff projection of expangested a risk that the contraction sion in nominal GNP during the secwould prove to be deeper than was ond quarter and the public's lively widely expected. At the same time, need to rebuild depleted cash balinflation remained a serious prob- ances. It still seemed likely, howlem. The rise in prices appeared ever, that growth of these aggregates likely to remain rapid, even though over the first half of 1980 would fall there were grounds for anticipating considerably short of the rates con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 sistent with the Committee's ranges money had shifted downward once for the year from the fourth quarter again, so that vigorous efforts in the of 1979 to the fourth quarter of 1980. short run to bring monetary growth Growth of M-2 and M-3 appeared to into line with the Committee's longbe less weak relative to the Com- er-run objectives could result in exmittee's longer-run ranges than that cessive creation of money. of the narrowly defined aggregates. Other members of the Committee In the Committee's discussion of preferred efforts to bring monetary policy, the members agreed that op- growth more promptly into line with erations in the period immediately the Committee's objectives for the ahead should be directed toward year. Such an approach, which they expansion of monetary aggregates regarded as more consistent with the at rates high enough to promote operating procedures the Committee achievement of the Committee's ob- had been following since early Octojectives for monetary growth over ber 1979, could make an important the year, recognizing that a number contribution to moderating the seof months might well be required in verity of the recession. the process. They differed to some At the conclusion of the disextent in their views concerning the cussion, the Committee agreed that speed with which that goal should be open market operations in the period sought and about the further near- until the next meeting should be diterm decline in the federal funds rate rected toward expansion of reserve that might be tolerated in its pursuit. aggregates consistent with growth of Several members believed that if M-1A, M-1B, and M-2 at rates high the demand for money were to re- enough to promote achievement of main weak, the Committee should the Committee's objectives for monmove in a relatively gradual fashion etary growth for the year as a whole, over the balance of the year to re- provided that in the period before store the desired longer-run rates of the next regular meeting the weekly money growth. Concern was ex- average federal funds rate remained pressed that a more aggressive ap- within a range of 8V2 to 14 percent. proach would lead to such sharp de- Specifically, the Committee agreed clines in the federal funds rate and that operations should be directed other short-term interest rates in the toward encouraging growth of M-l A, period immediately ahead that there M-1B, and M-2 over May and could be a perverse impact on long- June at annual rates of 7 to lxli perterm interest rates by exacerbating cent, 772 to 8 percent, and about 8 inflationary expectations, and there percent respectively. The Comcould also be strong adverse effects mittee also agreed that, in light of the on the value of the dollar in foreign recent shortfall, moderately faster exchange markets. Moreover, ag- monetary growth would be acceptgressive efforts to promote monetary able if that developed in response to growth might have to be reversed a strengthening of the demand for before long, perhaps leading to sig- money. It was understood that if the nificant increases in interest rates demand for money and for bank rein a period of substantial weakness serves proved to be weak and the in the economy. The possibility was federal funds rate declined signifialso suggested that the demand for cantly within its specified range, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions Committee would review the situa- investments, contracted in April after tion in advance of the next regular having slowed substantially in March. meeting scheduled for July 9. In any Over recent weeks, market interest rates have declined sharply further. case, if it appeared that the con- Taking account of past and prospecstraint on the federal funds rate was tive economic developments, the Federinconsistent with the objective for al Open Market Committee seeks to fosthe expansion of reserves, the Man- ter monetary and financial conditions that will resist inflationary pressures ager for Domestic Operations was while encouraging moderate economic promptly to notify the Chairman, expansion and contributing to a sustainawho would then decide whether the ble pattern of international transactions. situation called for supplementary At its meeting on February 4-5, 1980, the Committee agreed that these objectives instructions from the Committee. would be furthered by growth of M-1A, The following domestic policy di- M-1B, M-2, and M-3 from the fourth rective was issued to the Federal Re- quarter of 1979 to the fourth quarter of serve Bank of New York: 1980 within ranges of 372 to 6, 4 to 672, 6 to 9, and 672 to 972 percent respectively. The information reviewed at this The associated range for bank credit was meeting suggests a marked contraction 6 to 9 percent. in real GNP in the current quarter. In In the short run, the Committee seeks April the dollar value of total retail sales expansion of reserve aggregates consisdeclined substantially for the third con- tent with growth of M-1A, M-1B, and secutive month. Industrial production M-2 at rates high enough to promote and nonfarm payroll employment were achievement of the Committee's objeccurtailed sharply, and the unemployment tives for monetary growth over the year, rate rose from 6.2 to 7.0 percent. Private provided that in the period before the housing starts, which had declined next regular meeting the weekly average throughout the first quarter to a relative- federal funds rate remains within a range ly low rate, edged down further in April. of 87 2 to 14 percent. The overall rise in prices of goods and If it appears during the period before services has remained rapid in recent the next meeting that the constraint on months, although in April the rise in pro- the federal funds rate is inconsistent with ducer prices of finished goods was the objective for the expansion of reslowed by a large decrease in foods and serves, the Manager for Domestic Operby a lessening of the rapid rise in energy ations is promptly to notify the Chairman items. Over the first four months of the who will then decide whether the situayear, the rise in the index of average tion calls for supplementary instructions hourly earnings was somewhat less than from the Committee. the rapid pace recorded in 1979. Votes for this action: Messrs. Volck- The downward pressure on the dollar er, Guffey, Morris, Rice, Schultz, in exchange markets that emerged in Solomon, Mrs. Teeters, Messrs. Walearly April has continued over most of lich, and Winn. Votes against this acthe past four weeks, in response primarition: Messrs. Partee and Roos. ly to the sharp decline in U.S. interest rates relative to foreign interest rates; the trade-weighted value of the dollar Mr. Partee dissented from this acagainst major foreign currencies has detion because he believed that it inclined about 372 percent. The U.S. foreign trade deficit was substantially larger volved a risk of extending the shortin the first quarter of 1980 than in the pre- fall in monetary growth relative to ceding quarter, despite a considerable the Committee's growth ranges for decline in March from the average in the the year. In an effort to guard against preceding two months. the continuation of such a shortfall, M-1A and M-1B contracted sharply further in April, and M-2 also declined. which could worsen recessionary Commercial bank credit, both loans and prospects, he preferred to direct op- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 erations toward achieving somewhat which are among those designated by the higher rates of monetary growth in Board of Governors of the Federal Reserve System under Section 214.5 of the May-June period. He also pre- Regulation N, Relations with Foreign ferred an intermeeting range for the Banks and Bankers, and with the apfederal funds rate with a lower limit proval of the Committee to renew such below 8V2 percent, because such a arrangements on maturity: range would be less likely to interfere with reserve-supplying opera- Amount of arrangement tions consistent with the objectives Foreign bank (millions of dollars equivalent) for the aggregates. Mr. Roos dissented because in his Austrian National Bank 250 view the annual growth rate objec- National Bank of Belgium 1,000 Bank of Canada 2,000 tive of 372 to 6 percent for M-lA es- National Bank of Denmark 250 tablished by the Committee in Feb- Bank of England 3,000 Bank of France 2,000 ruary 1980 was consistent with German Federal Bank 6,000 reduction of inflation without aggra- Bank of Italy 3,000 Bank of Japan 5,000 vating recessionary pressures. He Bank of Mexico 700 believed that the 872 to 14 percent Netherlands Bank 500 Bank of Norway 250 constraint on the federal funds rate Bank of Sweden ..500 was incompatible with that agreed- Swiss National Bank 4,000 Bank for International Settlements: upon objective and would cause Dollars against Swiss francs 600 Dollars against authorized European money growth to remain below it. currencies other than Swiss francs 1,250 Such slow growth would unnecessarily exacerbate the current economic slowdown. Historically, deep Any changes in the terms of existing swap arrangements, and the proposed recessions had inevitably brought terms of any new arrangements that may about countermeasures that inbe authorized, shall be referred for retensified inflation. view and approval to the Committee. Votes for this action: Messrs. Volck- 2. Authorization for Foreign er, Guffey, Morris, Partee, Rice, Currency Operations Roos, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, and Winn. The Committee approved an in- Votes against this action: None. crease from $300 million to $500 million in the System's swap arrange- This action was taken to expand ment with the Bank of Sweden and the short-term financing facilities the corresponding amendment to available to the Bank of Sweden. paragraph 2 of the authorization for foreign currency operations, ef- Meeting Held on fective May 23, 1980, for a period of July 9, 1980 one year. With this change paragraph 2 read as follows: 1. Domestic Policy Directive 2. The Federal Open Market Com- The information reviewed at this mittee directs the Federal Reserve Bank meeting indicated that real output of of New York to maintain reciprocal cur- goods and services had declined rency arrangements ("swap" arrangemarkedly in the second quarter after ments) for the System Open Market Account for periods up to a maximum of 12 having expanded at an annual rate of months with the following foreign banks, 1.2 percent in the first quarter. Aver- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions age prices, as measured by the fixed- erably further in May to an annual weight price index for gross domes- rate of 920,000 units, one of the lowtic business product, continued to est monthly rates in the postwar perise at a rapid pace, but not so rapid- riod, while residential building perly as in the first quarter. mits edged up. There were some The dollar value of total retail indications of improvement in newsales declined substantially in May home sales in May. for the fourth consecutive month; in The rise in producer prices of finreal terms such sales had fallen 10 ished goods and of materials moderpercent below their peak in January, ated substantially in the second the sharpest four-month drop on rec- quarter following exceptionally rapord. Unit sales of new automobiles id advances in other recent quarters. slowed considerably further in May The rate of increase in consumer and remained weak in June. prices slowed appreciably in April The index of industrial production and May from the accelerated pace fell 2.1 percent in May, following a in the first quarter. The recent modsimilar reduction in April. The de- eration in both producer and concline was broadly based, reflecting sumer prices was due largely to a reductions in output for all major lessening of the rapid rise in prices of product groupings. The rate of ca- energy-related items. The index of pacity utilization in manufacturing average hourly earnings of private fell 2 percentage points further to 79 nonfarm production workers rose at percent, 8 percentage points below an annual rate of about 9lli percent its recent high in March 1979. over the first half of 1980, compared Nonfarm payroll employment de- with an increase of 8V2 percent durclined in May and fell sharply further ing 1979. in June. Employment decreases In foreign exchange markets the were concentrated in manufacturing downward pressure on the dollar and construction in both months, that had developed in early April and in June the service-producing abated in mid-June but reemerged in sector registered its first decline early July. The renewed pressure apsince the previous recession. The parently reflected concern about the unemployment rate, however, edged possibility of further declines in U.S. down from 7.8 to 7.7 percent in interest rates. The trade-weighted June, following large increases in the value of the dollar against major forpreceding two months. eign currencies, which had fallen The Department of Commerce about 3V2 percent since the Comsurvey of business spending plans mittee's meeting on May 20 and taken in late April and May indicated about 11 percent since early April, that expenditures for plant and was close to its level in early 1980. equipment would be about 10 per- The U.S. foreign trade deficit for cent higher in 1980 than in 1979. The April and May was well below the survey also suggested, however, average for the first quarter, reflectlittle real growth in such ex- ing a reduction in both oil and nonpenditures over the year after allow- oil imports. Nonagricultural exports ance for expected increases in increased slightly after exhibiting prices. considerable strength in 1979 and in Private housing starts fell consid- the first quarter of 1980. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 At its meeting on May 20, the ly, following little change in May and Committee had agreed that open sharp contraction in April. Growth market operations in the period until in M-2 also accelerated in June to an this meeting should be directed to- annual rate of about 171U percent, ward expansion of reserve aggre- up from a rate of 83/4 percent in May gates consistent with growth of and a small decline in April; the fast- M-1A, M-1B, and M-2 at rates high er growth in M-2 partly reflected enough to promote achievement of rapid expansion in money market the Committee's objectives for mutual funds. From the fourth quargrowth over the year, provided that ter of 1979 to the second quarter of in the intermeeting period the week- 1980, M-1A and M-1B grew at annuly average federal funds rate re- al rates of about V2 and l3/4 percent mained within a range of 8V2 to 14 respectively, considerably below the percent. Specifically, the Committee growth paths consistent with the had agreed that operations should be Committee's ranges for the year directed toward encouraging growth ending in the fourth quarter of 1980; of M-1A, M-1B, and M-2 over May M-2 and M-3 grew at rates just above and June at annual rates of 7 to lxh the lower bounds of their ranges. percent, I112 to 8 percent, and about Following rapid expansion in the 8 percent respectively. The Com- first quarter, total credit outstanding mittee also had agreed that, in light at U.S. commercial banks conof the earlier shortfall, moderately tracted in June for the third confaster growth would be acceptable if secutive month. The June decline rethat developed in response to a flected continuing weakness in strengthening of the demand for loans, including business loans. money. However, short-term business bor- In pursuit of the Committee's ob- rowing was sustained by rapid jective of encouraging growth in the growth in net issuance of commonetary aggregates, System open mercial paper by nonfinancial cormarket operations were directed porations following a surge of such during the intermeeting period at issuance to a record rate in May. fostering an ample availability of Over the first half of 1980, total comnonborrowed reserves, and condi- mercial bank credit grew at an annutions in the money market eased fur- al rate of about 4V2 percent, somether. The federal funds rate declined what below the lower bound of the from an average of about 107/s per- Committee's range for the year. cent in the statement week ending Market interest rates declined May 14 to around 93/s percent in the considerably further in late May and statement week ending July 2. In the first half of June but since then recognition of the easier conditions most rates have retraced part of the in money markets, reductions in decline. On balance, private short- Federal Reserve discount rates from term rates declined 100 to 125 basis 13 percent to 11 percent in two equal points over the intermeeting period steps were announced on May 28 while most long-term rates fell 10 to and June 12. 50 basis points; municipal bond Growth in M-1A and M-1B accel- yields, however, rose somewhat. erated in June to annual rates of WU Over the interval, commercial banks percent and 163A percent respective- reduced their loan rate to prime busi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions ness borrowers from I6V2 percent to tinue well into the second half of IIV2 percent. In primary markets for 1980 and that a recovery in 1981 was home mortgages, average rates on likely to be modest compared with new commitments at savings and most earlier periods of recovery. All loan associations declined to about members believed that the rise in 127s percent. prices would remain rapid in 1981, On May 22 the Board of Gover- although a few anticipated a somenors announced a partial phaseout what more significant slowing than of the special measures of credit the staff projected; one or two memrestraint that had been put in place, bers expected little if any improveor reinforced, on March 14. Sub- ment. However, it was suggested sequently, on July 3, the Board that uncertainty about the forecasts announced plans to complete the was especially great, partly because phaseout of the special credit re- of the difficulty of evaluating the imstraint program. The Board noted pact that persistent inflation might that recent banking and other data have on expectations and thus on clearly indicated that credit expan- various categories of expenditures. sion was running at a moderate pace, At its meeting on February 4-5, and accordingly the special condi- 1980, the Committee had agreed that tions necessitating the extraordinary from the fourth quarter of 1979 to the credit restraint measures were no fourth quarter of 1980 average rates longer present. of growth in the monetary aggre- According to staff estimates pre- gates within the following ranges apsented at this meeting, the decline in peared to be consistent with broad real GNP during the second quarter economic aims: M-1A, 372 to 6 perwas larger than had been anticipated cent; M-1B, 4 to 672 percent; M-2, 6 at the time of the meeting in May. to 9 percent; and M-3, 672 to 972 The staff's projections suggested percent. The associated range for that real GNP would continue to de- the rate of growth in commercial cline in the remaining quarters of bank credit was 6 to 9 percent. In es- 1980, although at a progressively tablishing the ranges then, the Comless rapid pace, and that the mittee had agreed that monetary unemployment rate would increase growth should slow further in 1980, substantially further. A modest re- following some deceleration in 1979, covery in real GNP appeared likely in line with the continuing objective to begin around the turn of the year. of curbing inflation and providing the The rise in prices, as measured by basis for restoration of economic the fixed-weight index for gross do- stability and sustainable growth in mestic business product, was ex- output. pected to remain rapid, but some- At this meeting, in accordance what less rapid during 1981 than with the Full Employment and Bal- 1980. anced Growth Act of 1978 (the Hum- Although members of the Com- phrey-Hawkins Act), the Committee mittee differed somewhat in their ap- reviewed the ranges for growth of praisals of the depth of the overall the monetary and credit aggregates decline and of the pace of the recov- for the period from the fourth quarery, they generally agreed that the ter of 1979 to the fourth quarter of contraction in real GNP would con- 1980 that it had established at its Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 meeting in February and gave pre- for interest-bearing transactions acliminary consideration to objectives counts over demand deposits that for monetary growth that might be was greater than anticipated, it apappropriate for 1981.1 In doing so, peared likely that M-1B would grow the Committee continued to face un- somewhat faster relative to M-1A usual uncertainties concerning the than had been projected earlier in forces affecting monetary growth. the year. As noted earlier, expansion of both The stronger performance of the M-1A and M-1B from the fourth broader aggregates over the first half quarter of 1979 to the second quarter of the year in relation to their ranges of 1980 fell considerably below the for the year reflected rapid growth in growth paths consistent with the instruments yielding market rates of Committee's ranges for the year. interest, including shares in money However, growth of M-2 and M-3 market mutual funds. As short-term was considerably stronger: over the market interest rates declined sharptwo quarters both of these aggre- ly toward the end of the period, congates grew at rates just above the traction in savings deposits in banks lower bounds of their ranges. By and other depository institutions midyear, growth of M-2 was near the slowed and then gave way to a rise. midpoint of its range, and it ap- For part of the period, growth of M-3 peared to be moving higher. was also promoted by issuance of The weakness in the narrower large-denomination time deposits by measures of money that developed commercial banks and thrift instituin the second quarter was unusual. It tions, but the outstanding volume of raised the question of whether the such deposits began to contract in demand for money in relation to in- late spring as credit demands weakcome and interest rates had shifted ened. downward once again, perhaps as a For 1981, the prospective relationresponse to the unusually high level ships among the various monetary of interest rates of the preceding aggregates were subject to even quarter. It was also possible that greater uncertainty because of, part of the second-quarter decline in among other things, certain institumoney balances was a temporary tional changes expected to result phenomenon associated with the from the Monetary Control Act of substantial repayments of short-term 1980. In particular, relationships debt that followed the special mea- among the aggregates will be afsures of credit restraint announced fected by introduction of NOW acon March 14. In the latter case, the counts on a nationwide basis as of public would probably make some December 31, 1980, as authorized by effort to rebuild balances in the sec- that act. During 1981, shifts of funds ond half of the year, which would from demand deposits to NOW acstrengthen the demand for both counts are likely to be substantial, M-1A and M-1B. In any event, in view and will retard the growth of M-1A. of recent evidence of a preference At the same time, transfers from savings deposits and other interestbearing assets to NOW accounts will 1. The Board's midyear report under the act enhance the growth of M-IB. To the was transmitted to the Congress on July 21, 1980. extent that funds are shifted into Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions NOW accounts from other deposit bank credit occurred. It was noted, components of M-2 and M-3, growth however, that a substantial portion of these aggregates will be unaf- of business credit needs was being fected. The behavior of these aggre- met through other sources of funds, gates, however, will also be influ- particularly the issuance of comenced by the further development of mercial paper and the flotation of money market mutual funds, which corporate bonds. are included in M-2. The possibility Thus the Committee decided to rethat the apparent downward shift in tain the ranges for 1980 that it had the demand for narrow money will established in February: for the peripersist into next year was an addi- od from the fourth quarter of 1979 to tional element of uncertainty. the fourth quarter of 1980, 3V2 to 6 In the Committee's discussion, all percent for M-1A, 4 to 6V2 percent but one member favored retention of for M-lB, 6 to 9 percent for M-2, and the ranges for 1980 that had been 6V2 to 972 percent for M-3. The asadopted at the meeting in February. sociated range for commercial bank The likely shift in relative growth of credit remained 6 to 9 percent. As in M-1A and M-1B was not considered the past, it was understood that the large enough to justify "fine-tuning" longer-run ranges, as well as the parthe growth ranges at the expense of ticular aggregates for which ranges causing public confusion about the were specified, would be reconsidmeaning of the adjustments. One ered at any time that conditions member advocated a reduction in might warrant, and that short-run the ranges for both M-l A and M-1B. factors might cause considerable In reaffirming the existing ranges variation in annual rates of growth for 1980, Committee members in from one month to the next and from general recognized that growth of one quarter to the next. the narrow aggregates over the year With respect to objectives for as a whole might reasonably fall be- monetary growth in 1981, most low the midpoints of their ranges and Committee members expressed possibly near the lower bounds. On strong reservations about attempting the other hand, the recent behavior to be numerically precise at this of the interest-bearing nontrans- time, owing to the unusual unceractions components of M-2 and M-3, tainties about the relationships along with a possible pickup in de- among the monetary aggregates and mands for transactions balances, sug- about their relationship to economic gested that growth of the broader ag- activity; they felt that a more general gregates over the year as a whole statement, consistent with the letter might rise to about the midpoints of and intent of the law as they undertheir ranges or, in the case of M-2, stood it, would be more meaningful well into the upper part of the range. and less confusing. The members Committee members also recog- generally wished to reaffirm the nized that the sharp contraction in Committee's long-standing objective commercial bank credit during the of moving gradually toward rates of second quarter raised the possibility monetary expansion consistent with that growth over the year would fall general price stability. Some memshort of its range, even if the antici- bers emphasized a possible inconsispated resumption of expansion in tency between reduced monetary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 growth and satisfactory recovery in ranges for rates of growth in monetary activity should strong price pres- aggregates for the period from the fourth quarter of 1979 to the fourth quarter of sures persist, as assumed in the ad- 1980: M-1A, 3V to 6 percent; M-1B, 4 to ministration's forecast. A few were 2 6V2 percent; M-2, 6 to 9 percent; and unwilling to assume, pending further M-3, 6V2 to 9V2 percent. The associated appraisal of price and other develop- range for bank credit is 6 to 9 percent. ments in coming months, that progress could be made in 1981 toward Votes for this action: Messrs. Volcker, Gramley, Morris, Partee, Rice, the longer-term goal of reduced Roos, Schultz, Solomon, Mrs. Teemonetary growth. However, most ters, Messrs. Winn, and Balles. Vote members believed that the Com- against this action: Mr. Wallich. (Mr. mittee should indicate firmly its in- Balles voted as alternate for Mr. Guftent to make more progress in 1981 fey.) toward its objective of reduction in monetary growth over time. One Mr. Wallich dissented from this view was that the reduction in mone- action because he believed that the tary growth should be stated only ranges for growth of M-1A and M-1B with respect to the narrowly defined over the year ending in the fourth monetary aggregates, even if it were quarter of 1980 should be reduced by not feasible to do so in specific quan- V2 percentage point. In his opinion, titative terms. Another was that the efforts to bring these aggregates up objective should be stated only in into the ranges adopted in February terms of a small reduction in the implied excessively rapid monetary ranges for the broader aggregates, in growth over the months ahead. light of the distorted behavior of In the Committee's discussion of M-1A and M-1B anticipated because policy for the short run, the memof the prospective growth of NOW bers agreed that operations in the peaccounts on a nationwide basis. riod before the next meeting should At the conclusion of the dis- be directed toward expansion of cussion, there was rather general monetary aggregates over the third agreement among members of the quarter at rates that would promote Committee that it would be appro- achievement of its monetary objecpriate to plan for some further prog- tives for the year. In doing so, the ress in 1981 toward reduction in the members recognized that a number targeted ranges, but that it would be of months might be required in the premature at this time to set forth process and that, in any case, precise ranges for each monetary ag- growth of the narrower aggregates gregate for next year, especially giv- over the year as a whole might well en the uncertainty generated by the fall near the lower bounds of their institutional changes affecting the ranges. relationships among the aggregates. Specifically, the Committee agreed Moreover, the appropriate monetary that open market operations in the growth in 1981 relative to 1980 period until the next meeting should would depend to some extent on ac- be directed toward expansion of retual growth this year—that is, on ex- serve aggregates consistent with actly where in the present ranges the growth of M-1A, M-1B, and M-2 various aggregates fall at year-end. over the third quarter of 1980 at an- The Committee adopted the following nual rates of about 7 percent, 8 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions cent, and 8 percent respectively, in exchange markets that emerged in provided that in the period before early April abated in mid-June, and then was resumed in early July. The average the next regular meeting the weekly U.S. foreign trade deficit for April and average federal funds rate remained May was well below the average for the within a range of 8V2 to 14 percent. first quarter, reflecting reduced oil and The Committee also agreed that in non-oil imports. light of the shortfall in monetary Monetary expansion was rapid in growth over the first half of the year, June, following weakness earlier in the spring. Over the first half of the year moderately faster growth would be growth of M-1A and M-1B fell short of acceptable if it developed in re- the rates consistent with the Comsponse to a strengthening in the pub- mittee's ranges for the year from the lic's demand for money balances as fourth quarter of 1979 to the fourth quarter of 1980; the rate of growth for M-2 narrowly defined. In assessing the was just above the lower bound of its behavior of M-1A and M-1B, it was range. Outstanding bank loans to busialso understood that the rate of ness declined substantially during the growth in M-2 would be taken into second quarter following a large increase account. If it appeared during the pe- in the first quarter. Market interest rates declined considerably further in late May riod before the next regular meeting and the first half of June, but since then that the constraint on the federal most rates have retraced part of the defunds rate was inconsistent with the cline. Reductions in Federal Reserve objective for the expansion of re- discount rates from 13 to 11 percent in serves, the Manager for Domestic equal steps were announced on May 28 and June 12. Operations was promptly to notify Taking account of past and prospecthe Chairman who would then detive economic developments, the Federcide whether the situation called for al Open Market Committee seeks to fossupplementary instructions from the ter monetary and financial conditions Committee. that will resist inflationary pressures while encouraging moderate economic The following domestic policy di- expansion and contributing to a sustainrective was issued to the Federal Re- able pattern of international transacserve Bank of New York: tions. The Committee agrees that these objectives would be furthered by growth The information reviewed at this of M-1A, M-1B, M-2, and M-3 from the meeting indicates a marked contraction fourth quarter of 1979 to the fourth quarin real GNP in the second quarter. In ter of 1980 within ranges of 3V2 to 6 per- May total retail sales declined sub- cent, 4 to 6V2 percent, 6 to 9 percent, and stantially for the fourth consecutive 6V2 to 972 percent respectively. The asmonth, and housing starts, industrial sociated range for bank credit is 6 to 9 production, and nonfarm payroll em- percent. ployment continued to decline. Employ- In the short run, the Committee seeks ment fell sharply further in June; how- expansion of reserve aggregates consisever, the unemployment rate edged tent with growth of M-1A, M-1B, and down from 7.8 to 7.7 percent, following M-2 over the third quarter of 1980 at anlarge increases in April and May. The nual rates of about 7 percent, 8 percent, overall rise in prices of goods and ser- and 8 percent respectively, provided that vices has moderated in recent months, in in the period before the next regular meetlarge part owing to a lessening of the rap- ing the weekly average federal funds rate id rise in energy items. Over the first six remains within a range of 8V2 to 14 permonths of the year, the rise in the index cent. of average hourly earnings was moder- If it appears during the period before ately faster than the pace recorded in the next meeting that the constraint on 1979. the federal funds rate is inconsistent with The downward pressure on the dollar the objective for the expansion of re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 133 serves, the Manager for Domestic Oper- Votes for this action: Messrs. ations is promptly to notify the Chairman Volcker, Gramley, Guflfey, Partee, who will then decide whether the situa- Rice, Roos, Schultz, Solomon, Waltion calls for supplementary instructions lich, Winn, and Eastburn. Vote from the Committee. against this action: Mrs. Teeters. (Mr. Eastburn voted as alternate for Mr. Votes for this action: Messrs. Volck- Morris.) er, Gramley, Morris, Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, Mrs. Teeters dissented from this Messrs. Wallich, Winn, and Balles. Votes against this action: None. (Mr. action because she believed that it Balles voted as alternate for Mr. Guf- was undesirable to specify precise fey.) numerical ranges for monetary growth in 1981 so far in advance Subsequent to the meeting, Chairwhile economic activity was still man Volcker advised the Committee contracting. In her opinion, monethat its attempt to cut through the intary goals for 1981 specified at this stitutional uncertainty affecting the time could prove to be inconsistent behavior of and relationships among with other, as yet undetermined, ecothe various monetary aggregates and nomic policies and with the objecto describe the broad substance of tive of reducing inflation while enits intent with respect to monetary couraging a sustainable recovery in growth ranges for 1981 apparently economic activity. She was espehad led to some misunderstanding at cially concerned about a possible inthe monetary oversight hearings beconsistency in view of the unusually fore the Senate and House banking great uncertainties generated by the committees on July 22-23. In an atintroduction of NOW accounts natempt to clear up that misundertionally and by shifts in the relationstanding, the Chairman recommendship among money, interest rates, ed that the Committee indicate its and nominal GNP. general intent of looking toward a reduction in ranges of growth for M-1A, M-1B, and M-2 for 1981 on the order of lli percentage point, ab- 2. Authorization for Domestic stracting from the institutional influ- Open Market Operations ences affecting the behavior of the At this meeting the Committee voted aggregates. The Committee voted to to increase from $3 billion to $4 bilapprove the Chairman's recommenlion the limit on changes between dation. It was understood that all of Committee meetings in System Acthe ranges would be reassessed in count holdings of U.S. government February 1981, or before, in accordand federal agency securities speciance with usual procedures. fied in paragraph l(a) of the authorization for domestic open market op- On July 29, 1980, the Committee erations, effective immediately, for agreed that for the period from the fourth the period ending with the close of quarter of 1980 to the fourth quarter of business on August 12, 1980. 1981, it looked toward a reduction in the ranges for growth of M-1A, M-1B, and M-2 on the order of lli percentage point Votes for this action: Messrs. Volckfrom the ranges adopted for 1980, ab- er, Gramley, Morris, Partee, Rice, stracting from institutional influences af- Roos, Schultz, Solomon, Mrs. Teeters, fecting the behavior of the aggregates. Messrs. Wallich, Winn, and Balles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions Votes against this action: None. (Mr. units in May, and building permits Balles voted as alternate for Mr. for new units also increased marked- Guffey). ly. The steep decline in sales of new homes during March and April was This action was taken in light of reversed in May and in June. Sales projections indicating a need for sub- of existing homes also picked up in stantial reserve-absorbing operations June, following a marked decrease over the coming intermeeting interval over the preceding eight months. to counter the effects of significant The index of industrial production reductions in required reserves asso- fell 2.4 percent in June, about the ciated with the phaseout of the spe- same as in both April and May. The cial credit restraint program. decline was broadly based, reflecting reductions in output for all major Meeting Held on product groupings. The rate of ca- August 12, 1980 pacity utilization in manufacturing fell 2.3 percentage points further to Domestic Policy Directive 76.1 percent; the cumulative decline The information reviewed at this from its recent peak in March 1979 meeting suggested that the decline in exceeded 10 percent. real output of goods and services be- Nonfarm payroll employment fell gan to moderate toward the end of further in July but by considerably the second quarter. For the quarter less than the average monthly deas a whole real GNP fell at an annual cline in the second quarter. Employrate of 9.1 percent, according to pre- ment decreases continued sizable in liminary estimates of the Commerce manufacturing, and the factory Department. The rise in average workweek remained at a reduced prices, as measured by the fixed- level. However, employment in the weight price index for gross domes- service-producing sector expanded tic business product, moderated to significantly following only two an annual rate of about Wi percent months of decline. In contrast to the in the second quarter from a rate of establishment data, employment as about \\XA percent in the first quar- measured by the survey of houseter. holds increased substantially in July Following four months of sub- after falling sharply earlier in the stantial decreases, the dollar value year. The civilian labor force also inof total retail sales rose considerably creased and the unemployment rate in both June and July. While increas- edged up from 7.7 to 7.8 percent. es in sales were fairly widespread, The rise in both producer prices sharp gains in the automotive sector and consumer prices moderated in accounted for much of the two- the second quarter following exmonth advance. Sales of new auto- ceptionally rapid advances in the mobiles were at an annual rate of 9 first quarter. The moderation reflectmillion units in July, compared with ed primarily a lessening of the rapid a recent low of about 1XA million in rise in prices of energy-related May. items. The index of average hourly Private housing starts rose sub- earnings of private nonfarm producstantially in June, to an annual rate tion workers rose at an annual rate of 1.2 million units from 910,000 of about 8% percent over the first Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 seven months of the year, somewhat erations were directed toward profaster than in 1979. viding the reserves consistent with In foreign exchange markets the that monetary growth. Later in the trade-weighted value of the dollar period, however, both M-1B and against major foreign currencies had M-2 appeared to be growing considrisen somewhat since late July, after erably faster than their specified fluctuating in a narrow range earlier rates, and System operations were in the month, and was about 2 per- not directed toward accommodating cent above its level at the time of the this additional growth. As the de- Committee's meeting on July 9. The mand for reserves expanded in asso- U.S. foreign trade deficit was re- ciation with the growth of deposits, duced further in June, bringing the excess reserves appeared to increase average for the second quarter well to exceptional levels, and conditions below that for the first. A decline in in the money market firmed. Memboth oil and non-oil imports account- ber bank borrowing expanded temed for the improvement as exports porarily, and the federal funds rate, were about unchanged. after having fallen from an average At its meeting on July 9, the Com- of about 9% percent in the statement mittee had agreed that open market week ending July 2 to about 8% peroperations in the period until this cent in the week ending July 23, rose meeting should be directed toward to an average of slightly more than expansion of reserve aggregates con- Wi percent in the week ending Ausistent with growth of M-1A, M-1B, gust 6. and M-2 over the three months from Growth of M-1A and M-1B mod- June to September at annual rates of erated in July to annual rates of about 7 percent, 8 percent, and 8 about IV2 and 10% percent respecpercent respectively, provided that tively from rates of about HVi and in the intermeeting period the week- 15 percent in June. In July, M-2 grew ly average federal funds rate re- at an annual rate of 17 percent, only mained within a range of SVi to 14 slightly below the exceptional rate percent. The Committee also had recorded in the previous month; agreed that, in light of the shortfall in money market mutual funds, overmonetary growth over the first half night repurchase agreements, and of the year, moderately faster savings deposits continued to exgrowth would be acceptable if that pand rapidly. As a result of the developed in response to a strength- June-July resurgence, growth of ening in the public's demand for M-1A over the period from the fourth money balances as narrowly de- quarter of 1979 to July was much fined; in assessing the behavior of closer to, but still somewhat below, M-1A and M-1B, the rate of growth the rate consistent with the lower in M-2 would be taken into account. limit of the Committee's range for Early in the intermeeting period, the year ending in the fourth quarter the monetary aggregates appeared to of 1980; growth of M-1B was at be growing at rates slightly above about the lower limit of its range for those that had been specified for the the year, but growth of M-2 was at period from June to September. In about the upper bound of its range. accordance with the Committee's Total credit outstanding at U.S. objectives, System open market op- commercial banks apparently ex- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 FOMC Policy Actions panded in July after three months of nounced than had appeared likely a decline. The July rise reflected a month earlier. A modest recovery in sharp increase in bank holdings of real GNP was expected to begin securities and a cessation of declines around the turn of the year. Neverin loan portfolios; business loans in- theless, the rise in the unemploycreased marginally and real estate ment rate over the months ahead loans rose moderately while con- was still projected to be substantial. sumer loans were estimated to have The projections of price changes fallen further. Net issues of com- were essentially the same as a month mercial paper by nonfinancial corpo- ago: the rise in the fixed-weight inrations moderated substantially in dex for gross domestic business July from an exceptionally strong product was anticipated to remain pace in other recent months. rapid, although somewhat less rapid Market interest rates rose consid- during 1981 than 1980. erably further over the intermeeting Members of the Committee agreed period. Markets were called upon to in general that further declines in ecoabsorb large amounts of Treasury nomic activity would be more modand corporate securities, and market erate than had appeared probable a participants reacted to prospects for month earlier and that a modest retax reductions and enlarged govern- covery was likely to begin before or ment deficits, to more rapid mone- around the turn of the year. Howtary growth, and to indications of ever, a few members emphasized some improvement in the economic that the evidence supporting such a outlook. Over the interval, short- judgment was quite limited and that term rates increased about 50 basis the recession still could prove to be points and long-term rates about 75 more severe and more protracted basis points. In primary markets for than projected. With respect to inflahome mortgages average rates on tion, a number of members felt that new commitments at savings and prospects had deteriorated and that loan associations rose slightly, to little if any reduction in the rate of 12V4 percent. Over this period, how- increase in prices was to be exever, commercial banks reduced pected. their loan rate to prime business bor- At its meeting in July, the Comrowers from HVi to 11 percent. On mittee reaffirmed the ranges for July 25 the Board of Governors an- monetary growth in 1980 that it had nounced a reduction in Federal Re- established in February. Thus, the serve Bank discount rates from 11 to Committee agreed that from the 10 percent to bring the discount rate fourth quarter of 1979 to the fourth into closer alignment with the level quarter of 1980 average rates of of short-term market interest rates growth in the monetary aggregates and bank lending rates. within the following ranges appeared The staff projections prepared for to be consistent with broad economthis meeting, like those of early July, ic aims: M-1A, V/i to 6 percent; suggested that real GNP would de- M-1B, 4 to 6Vi percent; M-2, 6 to 9 cline at a progressively less rapid percent; and M-3, 6Vi to W2 percent. pace in the third and fourth quarters The associated range for the rate of of the year, and the contraction was growth in commercial bank credit now anticipated to be less pro- was 6 to 9 percent. For the period Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 from the fourth quarter of 1980 to the quarter of 1979 to the fourth quarter fourth quarter of 1981, the Com- of 1980 at a rate slightly above the mittee looked toward a reduction in lower bound of the Committee's the ranges for growth of M-1A, range for that period. If the relation- M-1B, and M-2 on the order of Vi ships of the third quarter persisted, percentage point from the ranges growth of M-1B over the year would adopted for 1980, abstracting from be near the midpoint of its range; institutional influences affecting the growth of M-2 would be at about the behavior of the aggregates. It was upper bound and that of M-3 near understood that the longer-run the midpoint of their ranges. ranges would be reconsidered as In the Committee's discussion of conditions might warrant. policy, several members stressed the In contemplating policy for the pe- unusual uncertainties about both the riod immediately ahead, the Com- relative rates of growth in the monemittee took note of a staff analysis tary aggregates in this period and the suggesting that over the two months relationships between growth of the of August and September growth of aggregates and the course of eco- M-1B was likely to moderate in rela- nomic activity. In the light of the tion to growth of M-1A, as the recent special factors accounting for the rise in market interest rates contrib- larger differentials than had been anuted to a slowing of growth in ATS ticipated earlier, many members balances from the extraordinarily were satisfied to retain for the period rapid rates of recent months. (Such from June to September the 7 perbalances tend to include varying cent annual rate for growth of M-1A amounts of ordinary passbook sav- that had been specified a month earings.) It was also anticipated that lier and to accept the higher rates of growth of M-2 would slow relative to growth in M-1B and M-2 that now that of M-1B, as expansion of money appeared to be associated with that market mutual funds moderated fur- rate for M-1A. In general, they felt ther in reponse to a reduction in the that any appreciable lowering of the attractiveness of their yields relative June-September rate for M-1A to yields on competing investments. would require a reduced provision of Nevertheless, the apparent shifts in nonborrowed reserves, provoking a the public's preferences for different rise in member bank borrowings and types of assets suggested that if further increases in interest rates in M-1A grew from June to September the near term, although the Comat or even somewhat less than the mittee's longer-run targets did not at annual rate of 7 percent that had this time clearly suggest the need for been specified at the meeting in early reduced growth of the monetary ag- July, growth of M-1B and, still more gregates. In that view, prospects for so, growth of M-2 would exceed the economic activity did not appear to annual rate of 8 percent that had support leaning toward lower growth been specified for both aggregrates. in the aggregates at this time. The The staff analysis also suggested observation was made that inflation that extrapolation of growth in M-1A was still a major problem but that at an annual rate of 7 percent in the monetary policy evidently was alfinal three months of the year would ready exerting some restraint. It was result in growth from the fourth also noted that if in the period ahead Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 FOMC Policy Actions monetary growth appeared to be sig- limit, in the upper limit, or in both nificantly stronger than anticipated, limits, as well as to retain the range the Committee's operating proce- of SV2 to 14 percent. dures were likely to result in increas- At the conclusion of the dises in member bank borrowings and cussion, the Committee agreed to thus in the federal funds rate and specify a slightly lower rate of other short-term rates; in those cir- growth for M-1A over the third quarcumstances, increases in interest ter and higher rates for M-1B and rates would be seen more clearly as M-2 than the rates specified a month a consequence of the need to avoid earlier. Specifically, the Committee excessive monetary growth. agreed that open market operations A few members preferred to re- in the period until the next meeting duce somewhat the specified rate for should be directed toward expansion growth of M-1A over the period of reserve aggregates consistent with from June to September and to spec- growth of M-1A, M-1B, and M-2 ify a rate for growth of M-1B that dver the period from June to Sepwas closer to or the same as the rate tember at annual rates of about (sVi that had been specified a month ear- percent, 9 percent, and 12 percent lier. It was suggested that it would respectively, provided that in the pebe appropriate at this time to take riod before the next regular meeting steps to provide greater assurance the weekly average federal funds that growth of the aggregates would rate remained within a range of 8 to be moderate over the remainder of 14 percent. Member bank borrowthe year, in view of the rapid growth ings were not expected to increase recently and the resulting progress in appreciably from the recent, nearovercoming the April-May shortfall. frictional levels unless the monetary The indications of some improve- aggregates grew more rapidly than ment in the outlook for economic ac- the specified rates. If it appeared tivity recently, combined with the during the period before the next perceived deterioration in prospects regular meeting that the constraint for inflation, seemed consistent with on the federal funds rate was incona slightly lower rate of reserve provi- sistent with the objective for the exsion. The opinion was also ex- pansion of reserves, the Manager for pressed that, at least for the present, Domestic Operations was promptly M-1B was the most reliable of the to notify the Chairman, who would monetary aggregates as a guide to then decide whether the situation policy. called for supplementary instruc- It was generally expected that tions from the Committee. with any of the approaches to the ag- The following domestic policy digregates under discussion, the feder- rective was issued to the Federal Real funds rate on a weekly average serve Bank of New York: basis would remain well within the range of SV2 to 14 percent that had The information reviewed at this been specified at the meeting in early meeting suggests that the decline in economic activity, which was marked in the July, although in the statement week second quarter as a whole, has been ending July 23 it had fallen as low as moderating. While industrial production 8% percent. There were proposals to and nonfarm payroll employment continmake a slight reduction in the lower ued to decline sharply in June, total retail Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 sales advanced after four months of sub- These ranges will be reconsidered as stantial decreases, and housing starts conditions warrant. rose from a depressed level. In July retail In the short run, the Committee seeks sales advanced further; nonfarm payroll expansion of reserve aggregates consisemployment declined, but not so sharply tent with growth of M-1A, M-1B, and as during the second quarter, and the M-2 over the third quarter of 1980 at anunemployment rate edged up from 7.7 to nual rates of about &/i percent, 9 percent, 7.8 percent. The overall rise in prices of and 12 percent respectively, provided goods and services moderated in the sec- that in the period before the next regular ond quarter, in large part owing to a less- meeting the weekly average federal funds ening of the rapid rise in energy items. rate remains within a range of 8 to 14 Over the first seven months of the year, percent. the rise in the index of average hourly If it appears during the period before earnings was somewhat faster than the the next meeting that the constraint on pace recorded in 1979. the federal funds rate is inconsistent with The weighted average value of the dol- the objective for the expansion of relar in exchange markets has risen some- serves, the Manager for Domestic Operwhat since late July, after having fluc- ations is promptly to notify the Chairtuated in a narrow range earlier in the man, who will then decide whether the situation calls for supplementary instrucmonth. A reduced U.S. foreign trade tions from the Committee. deficit in June brought the average for the second quarter well below the aver- Votes for this action: Messrs. Volckage for the first quarter. er, Gramley, Morris, Partee, Rice, Monetary expansion remained rapid in Roos, Schultz, Solomon, Mrs. Tee- July, although not so rapid as in June. ters, Messrs. Wallich, Winn, and The recent resurgence brought growth of Balles. Votes against this action: M-1A closer to and that of M-1B about to None. (Mr. Balles voted as alternate the lower bounds of the Committee's for Mr. Guffey.) ranges for the year from the fourth quarter of 1979 to the fourth quarter of 1980. However, the rate of growth for M-2 was Meeting Held on near the upper bound of its range. Mar- September 16,1980 ket interest rates have risen considerably further in recent weeks. Domestic Policy Directive Taking account of past and prospective economic developments, the Feder- The information reviewed at this al Open Market Committee seeks to fos- meeting suggested that the decline in ter monetary and financial conditions real output of goods and services that will help to reduce inflation, encourhad moderated in the third quarter, age economic recovery, and contribute to a sustainable pattern of international following a contraction at an annual transactions. At its meeting in July, the rate of 9.0 percent in the second Committee agreed that these objectives quarter, and some recent data inwould be furthered by growth of M-1A, dicated that the decline might have M-1B, M-2, and M-3 from the fourth quarter of 1979 to the fourth quarter of ended, at least temporarily. Average 1980 within ranges of V/i to 6 percent, 4 prices, as measured by the fixedto 6V2 percent, 6 to 9 percent, and 6V2 toweight price index for gross domes- W2 percent respectively. The associated tic business product, were continrange for bank credit was 6 to 9 percent. uing to rise at a rapid pace, which For the period from the fourth quarter of 1980 to the fourth quarter of 1981, the was, however, slightly below the an- Committee looked toward a reduction in nual rate of increase of about IOV2 the ranges for growth of M-1A, M-1B, percent indicated for the second and M-2 on the order of Vi percentage quarter. point from the ranges adopted for 1980, abstracting from institutional influences The dollar value of total retail affecting the behavior of the aggregates. sales rose considerably further in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions August, according to the advance re- Sales of new houses increased for port, after increasing sharply in June the third successive month, bringing and July. Sales of new automobiles the number of unsold units to its were at an annual rate of 8.6 million lowest level in more than four years. units, down from 9.0 million in July Sales of existing homes, which had but appreciably above the second- picked up in June after eight conquarter rate. secutive months of decline, rose The index of industrial production substantially further in July. rose an estimated 0.5 percent in Au- Producer prices of finished goods gust, following a cumulative decline rose rapidly in July and August, after of about 8.5 percent over the preced- increasing at a sharply reduced pace ing six months. The August increase during the second quarter; the recent was fairly widespread among indus- advances reflected mainly a surge in try groupings, with notable gains in food prices. At the consumer level, output of construction supplies and increases in prices of food and many consumer home goods. commodities accelerated in July, but Nonfarm payroll employment ex- a sharp decline in measured costs of panded in August after several months homeownership held the overall of decline, and the unemployment consumer price index to its monthrate edged down from 7.8 to 7.6 per- earlier level. The index of average cent. Employment in manufacturing, hourly earnings of private nonfarm which accounted for about half of production workers rose at an annuthe August increase, registered its al rate of about 83A percent over the first monthly gain since December first eight months of the year, some- 1979, and the length of the average what faster than in 1979, but the rate workweek rose substantially. of increase in July and August was The Department of Commerce more moderate than that earlier in survey of business spending plans the year. taken in July and August indicated In foreign exchange markets the that current-dollar expenditures for trade-weighted value of the dollar plant and equipment would be about against major foreign currencies had 83/4 percent higher in 1980 than in declined somewhat over the interval 1979. In view of the expenditures in since the Committee's meeting on the first half of 1980, the indicated in- August 12. The U.S. foreign trade crease for the year as a whole im- deficit was reduced further in July to plied a marked decline in real out- a level significantly lower than the lays for the second half. New orders average for the second quarter. A for nondefense capital goods and sharp decline in petroleum imports contracts for business construction accounted for most of the change as strengthened in June and July but exports and non-oil imports were were still well below their levels about unchanged. early in the year. At its meeting on August 12, the Private housing starts edged up in Committee had decided that open July to an annual rate of about 1.3 market operations in the period until million units, following a substantial this meeting should be directed torebound in June from the depressed ward expansion of reserve aggrelevels of earlier months; building gates consistent with growth of permits for new units rose markedly. M-1A, M-1B, and M-2 from June to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 September at annual rates of about half of its range, while growth of M-2 6V2 percent, 9 percent, and 12 per- was somewhat above the upper limit cent respectively, provided that in of its range. the intermeeting period the weekly Total credit outstanding at U.S. average federal funds rate remained commercial banks picked up in July within a range of 8 to 14 percent. and expanded substantially further Early in the intermeeting interval, in August, following a decline in the incoming data indicated that growth second quarter. Bank holdings of of M-1A and M-1B would probably securities grew rapidly in both exceed the Committee's third-quar- months, and total loans increased ter objectives, as well as earlier pro- substantially in August, after changjections, by a wide margin, and ing little in July. Loans to businesses growth of M-2 was also expected to exhibited renewed strength in Aube relatively rapid. Required re- gust, and real estate lending exserves, and thus member bank de- panded moderately. A sharp decline mands for reserves, rose sub- in net issues of commercial paper by stantially in relation to the supply nonfinancial corporations partly offbeing made available through open set the growth in business loans. market operations. As a consequence, Market interest rates fluctuated member bank borrowings for reserve- widely but rose on balance over the adjustment purposes moved up sharp- intermeeting interval. Upward presly from a weekly average of about sures on rates reflected market re- $110 million at the time of the Au- sponse to the exceptionally rapid gust meeting to an average of about growth in money and the associated $825 million in the two latest state- impact on bank reserve positions, to ment weeks. The pressures on bank further indications of improvement reserve positions were also associ- in real economic activity, to the disated with increases in the federal appointing performance of measures funds rate from the 8V2 to 9 percent of inflation, and to concerns about area at the time of the August meet- prospective budgetary deficits. On ing to around IOV2 to 11 percent balance, short-term rates increased in recent days. about 172 to 2 percentage points Growth of M-1A and M-1B accel- over the intermeeting period and erated in August to record annual long-term rates rose about lU to 3U rates of about 1972 percent and 22 percentage point. Commercial banks percent respectively from rates of raised their loan rate to prime busiabout VU percent and 11 percent in ness borrowers from 11 percent to July. Expansion in M-2 remained 1274 percent. In primary markets for rapid in August at an annual rate of home mortgages, rates on new comabout 1474 percent but was down mitments at savings and loan associfrom growth rates averaging 18 per- ations averaged a little over 13 percent in June and July. For the period cent compared with 1274 percent at from the fourth quarter of 1979 the time of the August meeting. through August, growth of M-1A The staff projections presented at was in the lower half of the Com- this meeting suggested that the demittee's range for the year ending cline in real GNP would be much with the fourth quarter of 1980; less pronounced in the third quarter growth of M-1B was in the upper than had appeared likely a month Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 FOMC Policy Actions earlier; a modest recovery in real within the following ranges appeared GNP was expected to begin by year- to be consistent with broad economend and to continue in 1981. The ic aims: M-1A, Vli to 6 percent; unemployment rate was projected to M-1B, 4 to 6V2 percent; M-2, 6 to 9 increase somewhat more gradually percent; and M-3, 6V2 to 9lli percent. over the months ahead than had The associated range for the rate of been anticipated earlier. While the growth in commercial bank credit projections suggested slightly larger was 6 to 9 percent. For the period price increases, the staff continued from the fourth quarter of 1980 to the to expect that the rise in the fixed- fourth quarter of 1981, the Comweight index for gross domestic mittee looked toward a reduction in business product would be some- the ranges for growth of M-1A, what less rapid in 1981 than in 1980. M-1B, and M-2 on the order of V2 The Committee's discussion of the percentage point from the ranges economic outlook indicated a broad- adopted for 1980, abstracting from ly shared judgment that a recovery institutional influences affecting the in economic activity was under way, behavior of the aggregates. It was and some members believed that the understood that the longer-run ranges economy was likely to be somewhat would be reconsidered as conditions stronger in the fourth quarter than warranted. the staff was projecting. Other mem- In contemplating policy for the pebers were less sanguine about the riod immediately ahead, the Comnear-term outlook, and some ex- mittee took note of a staff analysis pressed the view that a renewed indicating that growth of M-1A and downturn could not be ruled out. M-1B was running well above, and With regard to the outlook for 1981, growth of M-2 moderately above, the members were in broad agree- the objectives established by the ment with the staff projection of a Committee for the June-to-Septemmodest recovery. Concern was ex- ber period. Given the recent behavpressed that, despite the competitive ior of money, achievement of the pressures in many industries and rel- Committee's monetary growth obatively high levels of unemployment, jectives for the year would require a a substantial rise in wages and prices marked slowing in growth over the remained in prospect for the year balance of the year and the staff proahead. Under such circumstances jection suggested that such a slowing several members noted a potential was likely in September. dilemma between the need for sus- In the Committee's discussion of tained recovery and the need for sig- policy, all of the members favored nificant progress toward bringing in- operations over the period ahead diflation under control. rected toward the deceleration in At its meeting in July, the Com- monetary growth needed to promote mittee had reaffirmed the ranges for achievement of the Committee's obmonetary growth in 1980 that it had jectives for the year. The members established in February. Thus, the recognized that achievement of the Committee agreed that from the growth objectives for M-1A and fourth quarter of 1979 to the fourth M-1B might be associated with exquarter of 1980, average rates of pansion in M-2 at a rate slightly in exgrowth in the monetary aggregates cess of the Committee's 1980 range Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 for that broader measure of money, ahead, that economic recovery was given the shifts that had occurred in in its very early stages, and that the public's preferences for deposits some sectors such as housing were of various types. The members also especially sensitive to emerging recognized that, in light of the rapid credit conditions. expansion in NOW and ATS ac- Still other members proposed a counts, growth in M-1B for the year middle course—a policy approach was likely to be higher relative to that was adopted. It was generally growth in M-1A than was implied by recognized that differences in apthe ranges set for each of these mon- proach were relatively minor: All of etary aggregates at the start of the the members favored a policy that year. would greatly reduce growth in the While there was general agree- aggregates over the balance of the ment that monetary expansion year. In the discussion, it was obshould be reduced substantially from served that the reserve path to the recent pace, differing views achieve restraint in money growth emerged concerning the specific would probably not involve an imgrowth objectives that should be es- mediate change in money market tablished for the August-to-Decem- conditions, assuming that money ber period. Some members favored growth did slow sharply in Septemgrowth-rate objectives on the low ber. Differences for the most part side of the ranges that were consid- turned on the degree of pressure on ered at this meeting in order to pro- bank reserve positions that could vide greater assurance that the Com- emerge should money demand begin mittee would achieve its objectives to exceed the money supply path. for the year as a whole. Members At the conclusion of the dissupporting this view emphasized the cussion the Committee agreed that need for a policy posture that would open market operations in the period minimize any risk of exacerbating in- until the next meeting should be diflationary forces in the economy or rected toward expansion of reserve worsening inflationary expectations. aggregates consistent with growth of Other members believed that, in M-1A, M-1B, and M-2 over the Aulight of present economic and finan- gust-to-December period at annual cial market conditions, growth in the rates of about 4 percent, 6V2 per- August-to-December period might cent, and 8V2 percent respectively, reasonably be a bit higher, consist- provided that in the period before ent with growth for the year in the the next regular meeting the weekly upper part of the range established average federal funds rate remained for M-1B and around the midpoint of within a range of 8 to 14 percent. If it the range set for M-1A; this ap- appeared during the period before proach was also viewed as consist- the next regular meeting that the ent with broad, longer-run policy constraint on the federal funds rate objectives. In this connection it was was inconsistent with the objective observed that interest rates had al- for the expansion of reserves, the ready risen appreciably from their Manager for Domestic Operations recent lows, that these increases was promptly to notify the might well begin to reduce money Chairman, who would then decide and credit demands over the months whether the situation called for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 FOMC Policy Actions supplementary instructions from the ternational transactions. At its meeting Committee. in July, the Committee agreed that these objectives would be furthered by growth The following domestic policy diof M-1A, M-1B, M-2, and M-3 from the rective was issued to the Federal Refourth quarter of 1979 to the fourth quarserve Bank of New York: ter of 1980 within ranges of VI2 to 6 percent, 4 to 6V2 percent, 6 to 9 percent, and The information reviewed at this 6V2 to 9V2 percent respectively. The asmeeting suggests that the decline in eco- sociated range for bank credit was 6 to 9 nomic activity has moderated in the third percent. For the period from the fourth quarter following a sharp contraction in quarter of 1980 to the fourth quarter of the second quarter. Industrial produc- 1981, the Committee looked toward a retion and nonfarm payroll employment duction in the ranges for growth of expanded in August after several months M-1A, M-1B, and M-2 on the order of V2 of decline; the unemployment rate edged percentage point from the ranges down from 7.8 to 7.6 percent; and total adopted for 1980, abstracting from instiretail sales advanced considerably fur- tutional influences affecting the behavior ther. In July housing starts rose slightly, of the aggregates. These ranges will be following a substantial rebound in June, reconsidered as conditions warrant. and were well above the depressed levels In the short run, the Committee seeks of the preceding three months. Producer expansion of reserve aggregates consistprices of finished goods rose rapidly in ent with growth of M-1A, M-1B, and July and August, after increasing at a M-2 over the August-to-December period sharply reduced pace in the second quar- at annual rates of about 4 percent, 6V2 ter; the recent advance reflected mainly percent, and 8V2 percent respectively, a surge in food prices. Over the first eight provided that in the period before the months of the year, the rise in the index next regular meeting the weekly average of average hourly earnings was some- federal funds rate remains within a range what faster than the pace recorded in of 8 to 14 percent. 1979. If it appears during the period before The weighted average value of the dol- the next meeting that the constraint on lar in exchange markets has declined the federal funds rate is inconsistent with somewhat over the past five weeks. The the objective for the expansion of re- U.S. trade deficit in July was significant- serves, the Manager for Domestic Operly lower than the monthly average in the ations is promptly to notify the Chairsecond quarter, reflecting a sharp decline man, who will then decide whether the in petroleum imports. situation calls for supplementary instruc- M-1A and M-1B grew at record rates tions from the Committee. in August, while growth in M-2 moder- Votes for this action: Messrs. ated from an exceptionally rapid pace in Volcker, Gramley, Morris, Partee, June and July. For the year through Au- Rice, Schultz, Solomon, and Mrs. gust growth of M-1A was in the lower Teeters. Votes against this action: half and growth of M-1B in the upper half Messrs. Guffey, Roos, Wallich, and of their respective ranges set by the Winn. Committee for the year from the fourth Messrs. Guffey, Roos, Wallich, and quarter of 1979 to the fourth quarter of Winn dissented because they believed 1980, while growth in M-2 was somewhat that, given the excessive monetary above the upper limit of its range. Mar- expansion in recent months and the ket interest rates have fluctuated widely outlook for inflation, the directive since mid-August and on balance short- adopted at this meeting incurred too term rates have risen considerably while much of a risk that the Committee's long-term rates have increased moder- objectives for monetary growth in ately. 1980 would be exceeded. To enhance The Federal Open Market Committee the prospects for restraining moneseeks to foster monetary and financial tary growth to rates consistent with conditions that will help to reduce infla- the longer-run ranges, they favored tion, encourage economic recovery, and specifying lower rates of growth for contribute to a sustainable pattern of in- M-1A, M-1B, and M-2 over the Au- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 gust-to-December period than those sold units fell further to its lowest that were adopted. level in more than four years. Sales of existing homes, which had accelerated in July, rose somewhat fur- Meeting Held on ther in August. October 21,1980 The index of industrial production rose an estimated 1 percent in Sep- 1. Domestic Policy Directive tember; the index had increased 0.6 The information reviewed at this percent in August after declining meeting suggested that economic ac- somewhat more than 8 percent over tivity had expanded in the third the previous six months. The inquarter. According to preliminary crease in September, like that in Auestimates of the Commerce Depart- gust, was broadly based and includment, real GNP increased at an an- ed notable gains in output of nual rate of 1 percent in the quarter, materials, construction supplies, and following a contraction at an annual consumer home goods. The rate of rate of about 9lli percent in the sec- capacity utilization in manufacturing ond quarter. Average prices, as mea- increased nearly 1 percentage point sured by the fixed-weight price index during August and September, folfor gross domestic business product, lowing a cumulative decline of more continued to rise at the annual rate than 12 percentage points from the of about IOV2 percent recorded in peak in March 1979. the second quarter. Nonfarm payroll employment ex- The dollar value of total retail panded in September for the second sales rose in September for the consecutive month, and the unemfourth consecutive month. Sales at ployment rate edged down from 7.6 food stores and gas service stations to 7.5 percent. Employment gains rose sharply, while combined sales were especially strong in trade and at general merchandise, apparel, and service industries. Employment in furniture and appliance stores were manufacturing rose further, and the unchanged, following large increases length of the average workweek in July and August. Sales of new au- edged up to a level one-half hour tomobiles changed little in Septem- above its July trough. ber, but for the third quarter as a Producer prices of finished goods whole they were up substantially declined slightly in September, but from the depressed rate in the sec- they rose substantially on the averond quarter. age during the third quarter as a Private housing starts rose consid- whole. At the consumer level, inerably further in September, to an creases in food prices accelerated annual rate of more than 1.5 million sharply in August, but prices of enunits. Most of the increase was in ergy items continued to rise at a multifamily units and apparently re- greatly reduced pace and homeownflected a bulge in starts associated ership costs declined somewhat furwith federal subsidies at the end of ther; excluding those categories, the fiscal year. In August, sales of consumer prices increased at about new houses declined somewhat, af- the 8 percent pace that had prevailed ter rising markedly over the previous since April. The rise in the index of three months, but the stock of un- average hourly earnings of private Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 FOMC Policy Actions nonfarm production workers moder- in the four statement weeks ending ated in the third quarter, but the in- on October 15 from an average of crease over the first nine months of about $835 million in the preceding the year was at an annual rate of 8V2 four weeks. These developments percent, about the same as in 1979. were associated with additional up- In foreign exchange markets the ward pressures on the federal funds trade-weighted value of the dollar rate and other short-term interest against major foreign currencies had rates. Those pressures were intensirisen somewhat on balance over the fied by an increase in Federal Reinterval since the Committee's meet- serve discount rates from 10 to 11 ing in mid-September. The U.S. for- percent announced on September eign trade deficit in August remained 25. In the days preceding this meetat a level well below the monthly av- ing, the funds rate was in the area of erage in the second quarter. The vol- 12V2 to 13 percent, compared with ume and value of oil imports fell IOV2 to 11 percent in the days just sharply in the July-August period, before the Committee's meeting on while the value of other imports was September 16. about unchanged and the value of In September, M-1A and M-1B exports increased. grew at annual rates of 1274 and At its meeting on September 16, 15V4 percent respectively, down the Committee had decided that markedly from the record rates set in open market operations in the period August but still far above the rates until this meeting should be directed consistent with the Committee's obtoward expansion of reserve aggre- jectives for the period from August gates consistent with growth of to December. Expansion in M-2 M-1A, M-1B, and M-2 over the peri- moderated further in September, to od from August to December at an- an annual rate of about 8V4 percent, nual rates of about 4 percent, 6V2 reflecting in part a further slowing in percent, and 8V2 percent respective- the growth of nontransaction acly, provided that in the period until counts included in that measure of the next regular meeting the weekly money. However, M-3 grew more average federal funds rate remained rapidly than M-2 for the first time within a range of 8 to 14 percent. since the spring, as both banks and Early in the intermeeting period, in- thrift institutions stepped up their iscoming data indicated that the mone- suance of large-denomination certifitary aggregates, particularly M-1A cates of deposit and other managed and M-1B, were growing faster than liabilities. For the period from the the rates consistent with the Com- fourth quarter of 1979 through Sepmittee's objectives for the August- tember, growth of M-1A was just to-December period. Required re- above the midpoint of the Comserves and member bank demands mittee's range for the year ending in for reserves expanded substantially the fourth quarter of 1980; M-IB and in relation to the supply of reserves M-2 grew at rates somewhat above being made available through open the upper limits of their respective market operations. Consequently, ranges, and growth of M-3 was near member bank borrowings for re- the upper limit of its range. serve-adjustment purposes increased Expansion in total credit outsharply, to an average of $1.4 billion standing at U.S. commercial banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 147 was relatively rapid in September, ever, prospects for 1981 were viewed although somewhat below the Au- with much more uncertainty, and gust pace. Bank acquisitions of secu- considerable skepticism was exrities moderated in September from pressed about the degree of conthe brisk pace in the previous two fidence with which consumer and months; but growth in total loans, in- business behavior could be forecast cluding business loans, accelerated, in the current environment. following a substantial increase in Major sources of uncertainty as August. Net issuance of commercial well as of concern with regard to the paper by nonfinancial corporations business outlook were the continued declined further in September. rapid pace of inflation and the sub- Short-term market interest rates stantial rebound of interest rates so rose 5/s to IV2 percentage points fur- soon after the turnaround in ecother over the intermeeting period, nomic activity. In these circumwhile long-term rates changed little stances, the outlook for consumer on balance. Over the interval, com- spending was very clouded. It was mercial banks increased their loan suggested, for example, that continrate to prime business borrowers ued expansion in consumption exfrom 12V4 to 14 percent. In primary penditures and a further decline in markets for home mortgages, aver- the already low personal saving rate age rates on new commitments for might tend to sustain the recovery in conventional loans at savings and activity for a time, as consumers atloan associations rose to about 133/4 tempted to maintain their standards percent from a little over 13 percent of living or even to anticipate addiat the time of the September meet- tional increases in prices. Alternaing. tively, consumer spending might be The staff projections presented at constrained by the low saving rate, this meeting suggested that the rise by increases in prices of foods and in real GNP in the third quarter other necessities, and by rising intermarked the beginning of a recovery, est rates. Similarly, concern was exbut a sluggish one that was likely to pressed that the rise in interest rates, be associated with some further in- aggravated by the prospect of sizcrease in the rate of unemployment able budget deficits, would have sigover the next few quarters. The pro- nificantly adverse consequences for jections continued to suggest that residential construction and busithe rise in the fixed-weight price in- ness investment; but it was also sugdex for gross domestic business gested that in the current inflationproduct would be somewhat less ary environment the higher levels of rapid in 1981 than in 1980. interest rates might have consid- During the Committee's dis- erably less inhibiting effects than cussion of the economic situation, they would have had in the past. the members agreed that recovery in At its meeting in July, the Comeconomic activity had begun, and mittee had reaffirmed the ranges for several suggested that growth in real monetary growth in 1980 that it had GNP could well be greater in the established in February. Thus, the current quarter than that incorporat- Committee had agreed that from the ed in the staff projections and greater fourth quarter of 1979 to the fourth than that in the third quarter. How- quarter of 1980, average rates of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 FOMC Policy Actions growth in the monetary aggregates GNP, because of the substantial acwithin the following ranges appeared cumulation of cash balances in the to be consistent with broad econom- third quarter and the large increase ic aims: M-1A, 3lh to 6 percent; in short-term interest rates since M-1B, 4 to 6V2 percent; M-2, 6 to 9 midyear. The analysis also emphapercent; and M-3, 6V2 to 9V2 per- sized that the differential between cent. The associated range for the growth of M-1A and M-1B would rerate of growth in commercial bank main appreciably greater than had credit was 6 to 9 percent. For the been anticipated when the ranges for period from the fourth quarter of growth of the aggregates during 1980 1980 to the fourth quarter of 1981, were first adopted in February. the Committee looked toward a re- In the Committee's discussion of duction in the ranges for growth of policy for the period immediately M-1A, M-1B, and M-2 on the order ahead, all of the members favored of V2 percentage point from the pursuit of a sharp reduction in moneranges adopted for 1980, abstracting tary expansion over the final three from institutional influences affect- months of the year from the rapid ing the behavior of the aggregates. pace of recent months. The uncer- It was understood that the longer- tainty concerning projections of run ranges would be reconsidered as much slower growth in the monetary conditions warranted. aggregates was emphasized, and it In contemplating policy for the pe- was generally recognized that furriod immediately ahead, the Com- ther evidence that growth was promittee noted that growth of the nar- ceeding faster than targeted in the rower monetary aggregates in short run would require greater pres- September had substantially ex- sure on bank reserve positions. The ceeded the rates consistent with the members differed somewhat in their growth objectives for the period views with respect to the precise from August to December adopted growth rate targets that should be at the meeting on September 16. adopted for the period ahead. A Those objectives in turn had been number of members favored growth consistent with growth for M-1A just objectives for the final three months below the midpoint of the Com- of the year that would arithmetically mittee's range for the year from the compensate for the overshoot in fourth quarter of 1979 to the fourth September and thus would be conquarter of 1980 and with growth for sistent with the growth rates for the M-1B just below the upper bound of period from August to December its range. The members had recog- that had been adopted at the Comnized that, owing to shifts in the pub- mittee's meeting in September. Most lic's preferences for deposits of vari- members, on the other hand, faous types, growth of M-2 over the vored adoption of objectives that year might slightly exceed its range. would contemplate slightly higher According to a staff analysis, ex- growth over the final three months of pansion in the public's demands for the year, given the developments in money might be expected to slow the aggregates since the last meetsubstantially in the final three ing, although they were willing to acmonths of the year even with some cept lower rates of growth should further pickup in growth of nominal such rates emerge as a result of pres- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 149 sures already placed on bank re- further pressures on bank reserve serves. positions. Those who favored the objectives During the Committee's disprecisely consistent with the growth cussion, most members agreed that rates adopted at the preceding meet- the differences concerning the nuing believed that such a stated objec- merical targets for growth over the tive was appropriate in the interest last three months of the year should of reducing inflationary expectations be reconciled by small adjustments and strengthening confidence. It was among the competing views, with considered in this context that, while the general understanding that some the differences discussed were shortfall from the specified rates of small, the lower objective could bet- monetary growth would be acceptter assure the maintenance of growth ed. It was pointed out that, in light of of M-1B, as well as that of M-1A, the recent excessive rate of monewithin its range for the year, which tary expansion, growth of M-1B could be psychologically important. could marginally exceed the upper The point was made, moreover, that bound of its range for 1980 if increasvery slow monetary growth in the es over the months ahead equaled course of the fourth quarter could be or exceeded the numerical specificatolerated in view of the rapid growth tions. In that connection, it was also in the third quarter, and also that emphasized that an inconsistency such a development would contrib- had become apparent during the ute toward gradual year-to-year re- course of the year between the longduction in monetary growth. er-run ranges for M-1A and M-1B Other members, while also seek- as a result of faster-than-expected ing sharply reduced growth rates of growth of ATS and NOW accounts, the aggregates in the months ahead, which had been at the expense partly attached less significance to targets of demand deposits and partly of precisely consistent with the Au- savings deposits or other sources of gust-to-December objectives adopt- funds not included in M-l. In light of ed a month earlier, in light of the those developments during the past inherent volatility of the data in the year, the range for growth of M-lB short run. Committee actions affect- in 1980 presumably should have ed the money supply only with some been somewhat higher than that aclag, and given actions already in tually adopted, while the range for place and the uncertainties in the M-l A should have been somewhat economic outlook, the possibility lower, to achieve the intended ecocould not be excluded that very am- nomic result. It was understood that bitious short-run objectives with re- the agreed approach would be assospect to restraint could generate un- ciated with significant further presdesirable instability in both interest sures on bank reserve positions if rates and the money supply over a growth of the monetary aggregates somewhat longer period and thus be and the associated demands for recounter to the Committee's more serves proved to be greater than anfundamental goals. These members ticipated. In light of the recent rise in agreed, however, that further in- the federal funds rate and the objecdications of excessive monetary tive of sharply reducing monetary growth would need to be reflected in growth, sentiment was expressed for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 FOMC Policy Actions raising the intermeeting range for the risen somewhat over the past month. funds rate from the range of 8 to 14 The U.S. trade deficit in August remained well below the monthly average percent specified at the September in the second quarter. meeting. M-1A and M-1B continued to grow At the conclusion of the dis- rapidly in September, although not so cussion the Committee agreed that rapidly as in August, while growth in open market operations in the period M-2 moderated further. From the fourth quarter of 1979 to September, growth of until the next meeting should be di- M-1A was slightly above the midpoint of rected toward expansion of reserve the range set by the Committee for aggregates consistent with growth of growth over the year ending in the fourth M-1A, M-1B, and M-2 over the Sep- quarter of 1980, while growth of M-1B and M-2 was somewhat above the upper tember-to-December period at annulimits of their ranges. Expansion in comal rates of about 2lh percent, 5 per- mercial bank credit was relatively rapid cent, and 7V4 percent respectively, in both August and September. On balor somewhat less, provided that in ance short-term market interest rates have risen considerably further since the period before the next regular mid-September while long-term rates meeting the weekly average federal have changed little; average rates on new funds rate remained within a range home mortgage commitments have conof 9 to 15 percent. If it appeared dur- tinued upward. An increase in Federal ing the period before the next regular Reserve discount rates from 10 to 11 percent was announced on September 25. meeting that the constraint on the The Federal Open Market Committee federal funds rate was inconsistent seeks to foster monetary and financial with the objective for the expansion conditions that will help to reduce inflaof reserves, the Manager for Domes- tion, encourage economic recovery, and tic Operations was promptly to noti- contribute to a sustainable pattern of infy the Chairman, who would then ternational transactions. At its meeting in July, the Committee agreed that these decide whether the situation called objectives would be furthered by growth for supplementary instructions from of M-1A, M-1B, M-2, and M-3 from the the Committee. fourth quarter of 1979 to the fourth quar- The following domestic policy di- ter of 1980 within ranges of 3V2 to 6 percent, 4 to 6V2 percent, 6 to 9 percent, and rective was issued to the Federal Re- 6V2 to 9V2 percent respectively. The asserve Bank of New York: sociated range for bank credit was 6 to 9 The information reviewed at this percent. For the period from the fourth meeting suggests that real GNP in- quarter of 1980 to the fourth quarter of creased somewhat in the third quarter 1981, the Committee looked toward a refollowing the sharp contraction in the duction in the ranges for growth of second quarter, while prices on the aver- M-1A, M-1B, and M-2 on the order of age continued to rise rapidly. The recov- V2 percentage point from the ranges ery in retail sales and housing starts that adopted for 1980, abstracting from instibegan in June continued during the third tutional influences affecting the behavior quarter. Industrial production and non- of the aggregates. These ranges will be farm payroll employment expanded in reconsidered as conditions warrant. September for the second consecutive In the short run, the Committee seeks month, and the unemployment rate behavior of reserve aggregates consisedged down from 7.6 to 7.5 percent. The tent with growth of M-1A, M-1B, and rise in the index of average hourly earn- M-2 over the September-to-December ings moderated in the third quarter, but period at annual rates of about 2V2 perthe rise over the first nine months of the cent, 5 percent, and 774 percent respecyear was about as rapid as in 1979. tively, or somewhat less, provided that The weighted average value of the dol- in the period before the next regular lar in exchange markets on balance has meeting the weekly average federal funds Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 151 rate remains within a range of 9 to 15 Rice, Roos, Schultz, Solomon, Mrs. percent. Teeters, Messrs. Wallich, and Winn. If it appears during the period before Votes against this action: None. the next meeting that the constraint on the federal funds rate is inconsistent with This action was taken in light of the objective for the expansion of re- projections indicating a need for subserves, the Manager for Domestic Operstantial reserve-absorbing operaations is promptly to notify the Chairman, who will then decide whether the tions over the coming intermeeting situation calls for supplementary instruc- interval to counter the effects of a tions from the Committee. significant reduction in required re- Votes for this action: Messrs. Volck- serves. The anticipated reduction er, Gramley, Guffey, Partee, Rice, was associated with the implementa- Schultz, Solomon, and Mrs. Teeters. tion in November of new regulations Votes against this action: Messrs. on reserve requirements under pro- Morris, Roos, Wallich, and Winn. visions of the Monetary Control Act Messrs. Morris, Roos, Wallich, of 1980. and Winn dissented from this action because, given the excessive mone- Meeting Held tary expansion in recent months, oo November 18, 198(1 they favored specification of lower Domestic Policy Directive monetary growth rates for the period from September to December than The information reviewed at this those adopted at this meeting. In meeting suggested that real GNP, their view, such a policy stance was which had increased at an annual appropriate in order to enhance the rate of 1 percent in the third quarter prospects for restraining growth of following a sharp second-quarter the monetary aggregates within the contraction, was expanding further Committee's ranges for the period in the current quarter. Average from the fourth quarter of 1979 to the prices, as measured by the fixedfourth quarter of 1980 and thereby weight price index for gross domescontribute to restraining inflation. tic business product, appeared to be continuing to rise at a rapid pace, 2. Authorization for Domestic close to the annual rate of IOV2 per- Open Market Operations cent experienced in the second and third quarters. At this meeting the Committee The index of industrial production voted to increase from $3 billion to rose an estimated 1.6 percent in Oc- $4 billion the limit on changes betober, following substantial gains in tween Committee meetings in Syseach of the two preceding months. tem Account holdings of U.S. gov- Over the three-month period, indusernment and federal agency securi- trial production increased 4 percent, ties specified in paragraph l(a) of the but the index in October was still authorization for domestic open mar- about 4 percent below its level in the ket operations, effective immediate- first quarter of 1980. Capacity utilily, for the period ending with the zation in manufacturing increased close of business on November 18, about 1 percentage point further in 1980. October to 77.6 percent, but remained about 6 percentage points Votes for this action: Messrs. Volcker, Gramley, Guffey, Morris, Partee, below the first-quarter rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 FOMC Policy Actions Nonfarm payroll employment ex- risen about 3 percent over the interpanded substantially in October for val since the Committee's meeting in the third consecutive month, and the mid-October. In September the U.S. unemployment rate remained at foreign trade deficit was essentially about 772 percent. Employment unchanged from the August level; in gains were widespread, but were es- the third quarter the deficit was pecially strong in durable goods sharply below the average of the first manufacturing and construction—in- two quarters and was the smallest dustries in which earlier job losses since the second quarter of 1976. had been sizable—and the average The volume and value of oil imports workweek in manufacturing length- fell sharply in the third quarter, ened slightly. while the value of exports—espe- The dollar value of retail sales cially agricultural products—inchanged little in October, according creased. to the advance report, following a At its meeting on October 21, the large increase over the four preced- Committee had decided that open ing months. Sales of new automo- market operations in the period until biles were at an annual rate of 9.0 this meeting should be directed tomillion units in October, up from 8.8 ward expansion of reserve aggremillion in September. gates consistent with the growth of Private housing starts rose further M-1A, M-1B, and M-2 over the periin September to an annual rate of od from September to December at more than 1.5 million units, reflect- annual rates of about 272 percent, 5 ing in part a bulge in starts of federal- percent, and 774 percent respectively subsidized units at the end of the ly, or somewhat less, provided that fiscal year. Sales of new houses de- in the period until the next regular clined in September for the second meeting the weekly average federal successive month, although sales of funds rate remained within a range existing houses rose further. Frag- of 9 to 15 percent. Early in the intermentary data for October suggested meeting period, incoming data inthat housing activity was weakening. dicated that the monetary aggre- Producer prices of finished goods gates, particularly M-1A and M-1B, rose substantially in October after a were growing much faster than both small decline in September. Con- the rates projected at the time of the sumer prices rose at an accelerated meeting and the rates consistent pace in September, reflecting not on- with the Committee's objectives for ly continued sharp advances in food the September-to-December period. prices but increases in most other Required reserves and member bank categories as well. The index of av- demands for reserves expanded suberage hourly earnings of private non- stantially in relation to the confarm production workers rose at an strained supply of reserves being annual rate of 9 percent over the first made available through open market ten months of the year, compared operations. Consequently, member with an increase of about 874 per- bank borrowings increased sharply, cent during 1979. to an average of $1.7 billion in the In foreign exchange markets the three statement weeks ending on trade-weighted value of the dollar November 12 from an average of against major foreign currencies had $1.3 billion in the five weeks be- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 153 tween the September and October Expansion in total credit outmeetings. These developments were standing at U.S. commercial banks associated with additional upward was relatively rapid in October, alpressures on the federal funds rate though somewhat below the pace in and other short-term interest rates; August and September. Bank holdin mid-November the funds rate av- ings of securities grew at about the eraged Wh percent, compared with same pace in October as in the preabout I2V2 percent in the days just vious month, while growth in total before the Committee's meeting on loans moderated somewhat despite October 21. continuing strength in business loans. After the markets closed on No- Outstanding commercial paper of vember 14, the Board of Governors nonfinancial corporations fell by a announced an increase in Federal record amount in October, extend- Reserve discount rates from 11 to 12 ing the decline that began in August. percent and a surcharge of 2 percent- Short-term market interest rates age points on frequent borrowing rose 13A to 3 percentage points furof large institutions. The actions, ther over the intermeeting period, which were effective on Monday, while long-term rates increased November 17, were taken in view of about 3A percentage point. Over the the prevailing level of short-term interval, the prime rate charged by market interest rates and the recent commercial banks on short-term rapid growth in the monetary aggre- business loans was raised from 14 to gates and bank credit. On November I6V4 percent. In home mortgage 17, the day before this meeting, fed- markets, average rates on new comeral funds traded at an average rate mitments rose about 40 basis points of about I6V4 percent. further over the intermeeting period, Growth in M-1A and M-1B moder- and available information suggested ated further in October, but the an- a slowing in new commitment activinual rates of about 9 and 11 percent ty at nonbank thrift institutions most respectively were substantially above recently. those consistent with the Commit- The staff projections presented at tee's objectives for the period from this meeting suggested that growth September to December. Expansion in real GNP would be a little greater in M-2 accelerated slightly in Octo- in the fourth quarter as a whole than ber, to an annual rate of about 9 per- in the third. However, the recovery cent, reflecting a pickup in growth of in activity appeared to be in the nontransaction accounts included in process of weakening, and the prothat aggregate; growth in M-3 also jections suggested little growth in accelerated somewhat. From the real GNP and some increase in the fourth quarter of 1979 through Octo- unemployment rate over the next ber, growth of M-1A was in the up- few quarters. The rise in the fixedper part of the range set by the Com- weight price index for gross domesmittee for the year ending in the tic business product was projected fourth quarter of 1980; M-1B and to be only a little less rapid over the M-2 grew at rates somewhat above year ahead than during the past year. the upper ends of their respective In the Committee discussion of ranges, while M-3 grew at a rate the economic situation and its implinear the upper end of its range. cations for policy, the members con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 FOMC Policy Actions sidered the possibility that the great- The associated range for the rate of er-than-anticipated strength of the growth in commercial bank credit recovery in recent months would be was 6 to 9 percent. For the period followed in early 1981 by a decline in from the fourth quarter of 1980 to the real GNP. It was recognized that in fourth quarter of 1981, the Comthe near term the recent rise in inter- mittee looked toward a reduction in est rates would be an important the ranges for growth of M-1A, force restraining activity in some M-1B, and M-2 on the order of V2 sectors. At the same time, the higher percentage point from the ranges interest rates resulted in part from adopted for 1980, abstracting from the continuing rapid pace of infla- institutional influences affecting the tion, which remained a major source behavior of the aggregates. It was of concern and of current and pro- understood that the longer-run spective instability. The observation ranges would be reconsidered as was made that, assuming monetary conditions warranted. expansion in line with the Com- In contemplating policy for the pemittee's longer-run objectives, the riod immediately ahead, the Comprogress of recovery in the months mittee noted that growth of the narahead was likely to be limited unless rower monetary aggregates in inflation abated. It was also noted, October had substantially exceeded however, that the rise in prices had the rates consistent with the objecnot slowed and that once again the tives for growth over the period from economy might be subjected to September to December adopted at shocks from substantial increases in the meeting on October 21. If those prices of both energy and foods, and objectives were to be realized, M-1A perhaps from a reduction in supplies would have to decline slightly over of energy as well. The outlook was the final two months of the year and clouded, moreover, by unusual un- growth of M-1B would have to be certainty regarding prospective fed- very slow. eral outlays, especially for national According to a staff analysis, the defense, by the increases in federal demand for money had been quite taxes effective at the beginning of strong in recent months because rethe new year, and by the prospects covery in economic activity and in for legislation next year to reduce nominal GNP had been much larger federal taxes. than anticipated. Growth of transac- At its meeting in July, the Com- tion balances was projected to slow mittee had reaffirmed the ranges for significantly over the remainder of monetary growth in 1980 that it had the year, in part because of the established in February. Thus, the lagged effect on the demand for mon- Committee had agreed that from the ey of the sharp rise in interest rates fourth quarter of 1979 to the fourth over recent months and in part bequarter of 1980, average rates of cause of the apparent weakening of growth in the monetary aggregates the recovery in activity. within the following ranges appeared In the Committee's discussion of to be consistent with broad econom- policy for the period immediately ic aims: M-1A, Vli to 6 percent; ahead, the members generally fa- M-1B, 4 to 6V2 percent; M-2, 6 to 9 vored pursuit of a sharp reduction in percent; and M-3, 6V2 to 9V2 percent. monetary expansion from the rapid Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 155 pace of recent months. Such a slow- straining the business recovery and ing might already be developing for slowing monetary growth. Subthe reasons given in the staff analy- sequent declines in rates might be sis, but it was emphasized that un- unduly large, and if monetary certainties were great concerning the growth accelerated again in lagged projection of a weakening in the response, inflationary expectations pace of the business recovery and al- could well be heightened. At the so about the impact of nominal GNP same time, an aggressive response to and current levels of interest rates any temporary slackening in the deon monetary growth. mand for money that developed in In the circumstances, most mem- the period just ahead appeared inbers favored reaffirming essentially appropriate, particularly in the light the objectives for monetary growth of the excessive monetary growth of over the period from September to recent months. In either case, the re- December that had been adopted at sult might be undesirable instability the meeting in mid-October, with the in both interest rates and monetary same proviso that somewhat less growth over time, which could gengrowth would be acceptable if it erate uncertainty about the basic emerged. A number of members pre- thrust of Federal Reserve policy. ferred adoption of somewhat higher Reflecting these concerns, some growth rates over the near term, members suggested setting the upper with a view to scaling down mone- limit of the intermeeting range for tary growth over a slightly longer pe- the federal funds rate relatively close riod than the six weeks remaining to the average rate in the latest statebefore the end of the year, but they ment week, while others suggested also were willing to accept slower setting a lower limit not much below growth if it emerged. In addition, the latest week's average. some sentiment was expressed for At the conclusion of the disspecification of somewhat lower cussion, the Committee decided to rates of monetary growth. specify essentially the same mone- While favoring sharply reduced tary growth rates for the period from growth of the monetary aggregates September to December that had in the period immediately ahead, a been adopted at the meeting in Octonumber of members expressed con- ber, with a range for the federal cern about inadvertently contrib- funds rate that was somewhat naruting to the volatility of interest rower and was centered on about the rates, because of the implications of average rate in the most recent statesuch volatility for economic activity, ment week. Thus, the Committee for inflationary psychology, and for agreed that open market operations the functioning of financial markets. in the period until the next meeting Specifically, a substantial reduction should be directed toward expansion in the provision of nonborrowed re- of reserve aggregates consistent with serves or other measures in a highly growth of M-1A, M-1B, and M-2 aggressive pursuit of the short-run over the September-to-December monetary growth rates being con- period at annual rates of about 2V2 templated might lead promptly to percent, 5 percent, and VU percent further increases in interest rates, respectively, or somewhat less, prowhich were probably already con- vided that in the period before the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 FOMC Policy Actions next regular meeting the weekly av- ly, reflecting a pickup in expansion of its erage federal funds rate remained nontransactions component. From the fourth quarter of 1979 to October, within a range of 13 to 17 percent. growth of M-1A was in the upper part of While some shortfall from the specithe range set by the Committee for fied rates of monetary growth would growth over the year ending in the fourth be accepted, it was also understood quarter of 1980, while growth of M-1B and M-2 was somewhat above the upper that operations would not be dilimits of their ranges. Expansion in comrected toward placing substantial mercial bank credit was rapid in Octoadditional pressures on bank re- ber, although not so rapid as in August serve positions unless growth of the and September. Market interest rates monetary aggregates and the associ- have risen sharply in recent weeks; average rates on new home mortgage comated demands for reserves proved to mitments have continued upward. On be significantly greater than antici- November 14 the Board of Governors pated. If it appeared during the peri- announced an increase in Federal Reod before the next regular meeting serve discount rates from 11 to 12 percent and a surcharge of 2 percentage that the constraint on the federal points on frequent borrowing of large funds rate was inconsistent with the member banks from Federal Reserve objective for the expansion of re- Banks. serves, the Manager for Domestic The Federal Open Market Committee Operations was promptly to notify seeks to foster monetary and financial the Chairman, who would then de- conditions that will help to reduce inflation, encourage economic recovery, and cide whether the situation called for contribute to a sustainable pattern of insupplementary instructions from the ternational transactions. At its meeting Committee. in July, the Committee agreed that these The following domestic policy di- objectives would be furthered by growth of M-1A, M-1B, M-2, and M-3 from the rective was issued to the Federal Refourth quarter of 1979 to the fourth quarserve Bank of New York: ter of 1980 within ranges of 3V2 to 6 per- The information reviewed at this cent, 4 to 6V2 percent, 6 to 9 percent, and meeting suggests that real GNP is recov- 6V2 to 9V2 percent respectively. The asering further in the fourth quarter from sociated range for bank credit was 6 to 9 the sharp contraction in the second quar- percent. For the period from the fourth quarter of 1980 to the fourth quarter of ter, while prices on the average continue 1981, the Committee looked toward a reto rise rapidly. In October industrial production in the ranges for growth of duction and nonfarm payroll employ- M-1A, M-1B, and M-2 on the order of V2 ment expanded substantially for the third percentage point from the ranges consecutive month, and the unemployment rate remained around llli percent. adopted for 1980, abstracting from institutional influences affecting the behavior The value of retail sales changed little, of the aggregates. These ranges will be following four months of recovery. The reconsidered as conditions warrant. rise in the index of average hourly earnings over the first ten months of 1980 was In the short run, the Committee seeks somewhat more rapid than in 1979. behavior of reserve aggregates consist- The weighted average value of the dol- ent with growth of M-1A, M-1B, and lar in exchange markets on balance has M-2 over the period from September to risen further over the past month. The December at annual rates of about 2V2 U.S. trade deficit was essentially un- percent, 5 percent, and VU percent rechanged in September, and the rate in spectively, or somewhat less, provided the third quarter was sharply lower than that in the period before the next reguthat in the first half. lar meeting the weekly average federal Growth in M-1A and M-1B moderated funds rate remains within a range of 13 to further in October but was still relatively 17 percent. rapid; growth in M-2 accelerated slight- If it appears during the period before Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 157 the next meeting that the constraint on demands for reserves had expanded the federal funds rate is inconsistent with substantially in relation to the supply the objective for the expansion of reof reserves being made available serves, the Manager for Domestic Operthrough open market operations, ations is promptly to notify the Chairman, who will then decide whether the and member bank borrowings had situation calls for supplementary instruc- increased further. These developtions from the Committee. ments were associated with addition- Votes for this action: Messrs. Volck- al upward pressure on the federal er, Gramley, Guffey, Morris, Partee, funds rate, which in the first state- Rice, Roos, Schultz, Solomon, and ment week after the meeting had Wallich. Votes against this action: been at about or somewhat above Mrs. Teeters and Mr. Winn. the upper limit of the range of 13 to Mrs. Teeters dissented from this 17 percent specified by the Comaction because she believed that it mittee. In a telephone conference on would result in additional increases November 26, the Committee raised in interest rates, which would in- the upper limit of the intermeeting tensify downward pressures on de- range for the funds rate to 18 permands for housing, automobiles, and cent. business fixed capital and thus risk a major contraction in economic activ- On November 26, the Committee ity with a substantial rise in unem- modified the domestic policy directive ployment. In her view, open market adopted at its meeting on November 18, operations over the weeks imme- 1980, to raise the upper limit of the range diately ahead should be directed for the federal funds rate to 18 percent. toward maintaining the federal funds Votes for this action: Messrs. Volckrate within a range of 11 to 15 er, Gramley, Guffey, Morris, Partee, percent. Rice, Schultz, Solomon, Wallich, and Baughman. Vote against this action: Mr. Winn dissented from this ac- Mrs. Teeters. Absent: Messrs. Roos tion because he favored specifica- and Winn. (Mr. Baughman voted as tion of lower rates of expansion in alternate for Mr. Roos.) the monetary aggregates for the period from September to December Mrs. Teeters dissented from this than those adopted at this meeting. action for essentially the same rea- In his view, more vigorous action sons that she had dissented from the was appropriate in order to enhance action to adopt the domestic policy the prospects for restraining the ex- directive at the Committee's meeting pansion of the monetary aggregates on November 18, 1980. and establishing growth paths con- On December 4, after closing of sistent with the monetary growth ob- the markets, the Board of Governors jectives for 1981 contemplated by announced an increase in Federal the Committee in July 1980. Reserve discount rates. In light of Shortly after the meeting, in- the current level of market interest coming data indicated that M-1A and rates and consistent with existing M-1B were growing much faster policy to restrain excessive growth than the rates consistent with the in money and credit, the Board ap- Committee's objectives for the peri- proved an increase from 12 to 13 perod from September to December. cent in the basic rate and an increase Required reserves and member bank from 2 to 3 percentage points in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 FOMC Policy Actions surcharge on frequent borrowings of out operations being precisely conlarge institutions, effective Decem- strained in the current statement ber 5. week by the 18 percent upper limit of The increase in discount rates ex- the intermeeting range for the federerted additional upward pressure on al funds rate, pending another conthe federal funds rate. In trading dur- sultation in about a week if one aping the morning of December 5, the peared to be desirable. rate generally was well above 18 per- On December 5, the Committee modicent, the level to which the upper fied the domestic policy directive limit of the intermeeting range for adopted at its meeting on November 18, the weekly average funds rate had 1980, and subsequently modified on Nobeen raised about a week earlier, vember 26, to take account of the action of the Board of Governors on December and other short-term interest rates 4 to raise discount rates by providing rose substantially as well. At the leeway for pursuit of the Committee's same time, incoming data suggested short-run objectives for the behavior of that M-1A and M-1B currently might reserve aggregates without operations be growing a little less rapidly than being precisely constrained in the current statement week by the 18 percent projected a week earlier, which upper limit of the intermeeting range for would imply a somewhat lower level the federal funds rate. of required reserves and also some reduction in member bank demands Votes for this action: Messrs. Volckfor reserves in relation to the supply er, Gramley, Guffey, Morris, Partee, Rice, Roos, Solomon, and Winn. being made available through open Votes against this action: Mrs. market operations. Teeters and Mr. Wallich. Absent: Mr. Thus, it was possible that the addi- Schultz. tional upward pressure on the federal funds rate would prove to be tran- Mrs. Teeters dissented from this sitory. Alternatively, pursuit of the action for essentially the same rea- Committee's short-run objective for sons that she had dissented from the the growth of reserves might be as- action to adopt the domestic policy sociated with a federal funds rate directive at the Committee's meeting above the upper limit of the existing on November 18, 1980. range, even if some weakness in de- Mr. Wallich dissented from this mands for reserves developed, but action because he preferred to raise the extent of any upward pressure the upper limit of the federal funds on the rate was difficult to gauge rate range for the remainder of the while markets were in the process of intermeeting period, which in his adjusting to the discount rate action. view would be consistent with the In light of these uncertainties, the action on the preceding day to raise Committee decided in a telephone Federal Reserve discount rates. conference in the afternoon of De- The Committee held another telecember 5 to take account of the re- phone conference in the afternoon of percussions of the increases in dis- Friday, December 12. In the statecount rates by providing the ment week ending December 10, the Manager for Domestic Operations federal funds rate had averaged with leeway to pursue the Com- about 183/4 percent, and since then mittee's short-run objectives for the the rate had been in a range of 19 to behavior of reserve aggregates with- 20 percent. At the same time, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 159 most recent data tended to support than in the third. Average prices as the indications of the week before measured by the fixed-weight price that M-1A and M-1B currently might index for gross domestic business be growing a little less rapidly than product were continuing to rise at a projected earlier and that the de- rapid pace, close to the average anmand for reserves could be easing. nual rate of about 10V2 percent re- Market conditions were unsettled, corded in the first three quarters of however, and there was consid- the year. erable uncertainty about the rela- The dollar value of retail sales tionship between money market rose substantially further in Novemconditions and objectives for the be- ber, according to the advance rehavior of reserves. In these circum- port, after a large increase over the stances, the Committee decided to five preceding months. Sales of new extend through the period before the automobiles were at an annual rate next regular meeting, scheduled for of 9.1 million units in November, December 19, the leeway for open marginally above the October rate. market operations that it had voted A brisk selling pace of foreign cars to approve on December 5. sustained total unit sales as sales of domestic autos edged down. On December 12, the Committee mod- The index of industrial production ified the domestic policy directive issued on November 18, 1980, and sub- rose an estimated 1.4 percent in Nosequently modified on November 26 and vember, following substantial gains December 5, to extend through the peri- in each of the three preceding od before the next regular meeting months. Capacity utilization in manleeway for pursuit of the Committee's ufacturing increased about 1 pershort-run objectives for the behavior of reserve aggregates without operations centage point further in November being precisely constrained by the 18 to 78.8 percent, 3.9 percentage percent upper limit of the intermeeting points above its July trough but well range for the federal funds rate. below earlier peaks. Votes for this action: Messrs. Volck- Nonfarm payroll employment exer, Gramley, Guflfey, Morris, Partee, panded substantially in November Rice, Roos, Schultz, Solomon, and for the fourth consecutive month, Winn. Vote against this action: Mrs. Teeters. Absent: Mr. Wallich. and the unemployment rate was essentially unchanged at 7l/ percent. 2 Mrs. Teeters dissented from this Employment gains were wideaction for essentially the same rea- spread, and the average workweek in sons that she had dissented from the manufacturing lengthened slightly. action to adopt the domestic policy In November private housing directive at the Committee's meeting starts remained at the annual rate of on November 18, 1980. about IV2 million units recorded in September and October. Sales of Meeting Held new homes edged off slightly further on December 1&-19, 1980 in October, and sales of existing houses declined for the first time 1. Domestic Policy Directive since May. The information reviewed at this Producer prices of finished goods meeting suggested that real GNP ex- rose appreciably in October and Nopanded more in the fourth quarter vember, but the rate of increase over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 FOMC Policy Actions the two months was considerably of 13 to 17 percent. Shortly after the below the exceptional pace in the November 18 meeting, incoming third quarter. In October consumer data indicated that the monetary agprices continued to rise rapidly; gregates were growing considerably average prices of energy items fell, faster than the rates consistent with but mortgage interest rates rose the Committee's objectives for the sharply after having declined over September-to-December period. Rethe preceding three months. The rise quired reserves and member bank in the index of average hourly earn- demands for reserves expanded subings of private nonfarm production stantially in relation to the conworkers accelerated sharply in Octo- strained supply of reserves being ber and November; over the first made available through open market eleven months of the year the index operations. These developments rose at an annual rate of about 9l/ were associated with additional up- 2 percent, compared with an increase ward pressures on the federal funds of about 8V4 percent during 1979. rate and other short-term interest In foreign exchange markets the rates; in the first statement week trade-weighted value of the dollar after the meeting, the funds rate was against major foreign currencies had at about or somewhat above the uprisen about 2V percent over the in- per limit of the range of 13 to 17 2 terval since the Committee's meet- percent specified by the Committee, ing in mid-November. The U.S. for- compared with an average of \Al/ 2 eign trade deficit in October was percent in mid-November. In a teleessentially unchanged from the Au- phone conference on November 26, gust-September level, which was the Committee raised the upper limit well below the rate in the first half of of the intermeeting range for the funds rate to 18 percent. the year. The volume and value of oil imports were up somewhat in On December 4 the Board of Gov- October from the sharply reduced ernors announced an increase from levels of the third quarter, while the 12 to 13 percent in basic discount value of non-oil imports was little rates at Federal Reserve Banks and changed. Total exports in October an increase from 2 to 3 percentage also were close to the third-quarter points in the surcharge on frequent level. borrowings of large institutions, At its meeting on November 18, effective December 5. This action the Committee had decided that exerted additional upward pressure open market operations in the period on the federal funds rate; in trading until this meeting should be directed during the morning of December 5, toward expansion of reserve aggre- the rate generally was well above 18 gates consistent with growth of percent. At the same time, incoming M-1A, M-1B, and M-2 over the peri- data suggested that M-1A and M-1B od from September to December at currently might be growing a little annual rates of about 2l/ percent, 5 less rapidly than projected a week 2 percent, and 1% percent respective- earlier, which would imply some rely, or somewhat less, provided that duction in member bank demands for reserves in relation to the supply in the period before the next regular being made available through open meeting the weekly average federal market operations. funds rate remained within a range Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 161 In light of uncertainties about the slightly above the upper limit of its duration and extent of upward pres- range. sure on the federal funds rate while Total credit outstanding at U.S. markets were adjusting to the dis- commercial banks continued to excount rate action, the Committee pand in November at about the rapid decided in the afternoon of Decem- pace of the previous three months. ber 5 to provide the Manager for Growth in business loans remained Domestic Operations leeway to pur- especially vigorous, but expansion sue the short-run objectives for the in other bank loans was also sizable reserve aggregates without oper- and banks added further to their ations being precisely constrained in holdings of securities. Outstanding the current statement week by the 18 commercial paper of nonfinancial percent upper limit of the intermeet- corporations continued to fall in Noing range for the federal funds rate. vember, extending the decline that On December 12 the Committee de- had begun in August. cided to extend this leeway for oper- Pressures on bank reserve posiations through the period before the tions and strong business demands meeting. In the statement weeks of for credit, along with large Treasury December 10 and 17 the funds rate financings, were associated with averaged 18.8 percent and 19.8 per- sharp further increases in short-term cent. Member bank borrowings re- interest rates over the intermeeting ceded to an average of about $1.6 period. Rate increases were espebillion in the two statement weeks cially pronounced for bank CDs and ending December 17 from an aver- commercial paper, which rose 3 to 6 age of about $2.2 billion in the pre- percentage points, while Treasury ceding two statement weeks. bill rates advanced 1 to 3 percentage Growth in M-1A and M-1B moder- points. Most long-term bond yields ated further in November to annual moved up about !/ to 1 percentage 2 rates of about 7 percent and 9l/ point over the interval. The prime 4 percent respectively, but these rate charged by commercial banks growth rates were still well above on short-term business loans was those consistent with the Commit- raised from 16V percent to a new 4 tee's objectives for the period from high of 21 percent. In home mort- September to December. In early gage markets, average rates on new December growth in both measures commitments for fixed-rate loans of money slowed substantially fur- rose more than V percentage point 2 ther. Expansion in M-2 and M-3 con- further, and new commitment activtinued to accelerate in November, ity was reported to be quite limited reflecting a surge in both small- and at prevailing rates. large-denomination time deposits. The staff projections presented at From the fourth quarter of 1979 this meeting suggested that the acthrough November, growth of M-1A celerated growth of real GNP in the was in the upper part of the range set current quarter was likely to be folby the Committee for the year end- lowed by some decline in the first ing in the fourth quarter of 1980; part of 1981 and by sluggish recov- M-1B and M-2 grew at rates some- ery later in the year. Accordingly, what above the upper limits of their the unemployment rate was expectranges, while M-3 grew at a rate ed to increase during 1981. The rise Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 FOMC Policy Actions in the fixed-weight price index for fourth quarter of 1980 that it had gross domestic business product was established in February: M-1A, 3V2 projected to remain rapid, although to 6 percent; M-1B, 4 to 6V percent; 2 not quite so rapid in the second half M-2, 6 to 9 percent; and M-3, 6l/ to 2 of the year as in the first half. 9V percent. The associated range 2 In the Committee's discussion of for the rate of growth in commercial the economic situation and its impli- bank credit was 6 to 9 percent. For cations for policy, the members not- the period from the fourth quarter of ed the clear possibility of a decline in 1980 to the fourth quarter of 1981, activity in the early part of the new the Committee had looked toward a year and of a sluggish performance reduction in the ranges for growth of over 1981 as a whole, although some M-1A, M-1B, and M-2 on the order members expressed the view that of V percentage point from the 2 underlying expansive forces were ranges adopted for 1980, abstracting strong. It was observed that the sta- from institutional influences affecttistical indicators of prospective ac- ing the behavior of the aggregates. tivity had not been signaling a near- During the course of 1980, an inconterm contraction, but that the sistency had become apparent begreater-than-anticipated expansion tween the longer-run ranges for in GNP in the current quarter had M-1A and M-IB as a result of fasteritself contributed to developments, than-expected growth of ATS and including the sharp rise in interest NOW accounts, which had been at rates, that were likely to produce the expense partly of demand depossome decline in the early part of its and partly of savings deposits and 1981. Later in the year, assuming other instruments not included in the monetary expansion to be consistent narrowly defined aggregates. In that with the Committee's longer-run ob- light, the specified range for growth jectives, the recovery was likely to of M-1B in 1980 should have been be limited unless progress was made somewhat higher than that actually in reducing inflation. The need to adopted, while the range for M-1A deal with the deep-seated problem of should have been somewhat lower, inflation was emphasized, as was the consistent with the intended ecodifficulty of doing so without accept- nomic result. ing risks of unsatisfactory economic At this meeting the Committee beperformance in the short run. It was gan a review of the ranges for 1981 in generally recognized that the course the expectation that at the meeting of economic activity remained diffi- scheduled for early February it cult to forecast because of the unpre- would complete the review and esdictability of behavior based on in- tablish ranges for the year within the flationary expectations and because framework of the Full Employment of uncertainties about the fiscal and and Balanced Growth Act of 1978 other economic policies of the new (the Humphrey-Hawkins Act). The administration to be inaugurated on Committee once again faced unusual January 20. uncertainties concerning the forces At its meeting in July 1980, the affecting monetary growth, in part Committee had reaffirmed the fol- because of some sizable variations lowing ranges for monetary growth evident in the demand for both narfrom the fourth quarter of 1979 to the rowly and broadly defined money in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 163 relation to nominal GNP during over the past few months and to the 1980. For the year ahead, moreover, slackening of economic activity prothe institutional changes expected to jected for the months ahead; but result from the Monetary Control growth of M-2 was expected to be Act of 1980 would need to be evalu- greater in relation to growth of the ated and interpreted. Relationships narrowly defined aggregates than among the monetary aggregates will suggested by the tentative ranges for be affected by the introduction of 1981. NOW accounts on a nationwide ba- Most of the members favored sis as of December 31, 1980, as au- specification of monetary growth thorized by the act. A staff analysis rates for the first quarter that were suggested that during 1981 shifts of consistent with the tentative ranges funds from demand deposits into for growth over the full year ahead. NOW accounts would be substantial In view of the excessively rapid and would significantly retard the monetary growth in recent months, growth of M-1A. At the same time, they were willing to accept a shorttransfers from savings deposits and fall from those rates for a time, proother interest-bearing assets into vided that the shortfall developed NOW accounts would enhance the concurrently with some abatement growth of M-1B. However, esti- of pressures in the money market. mates of such shifts varied within However, one member favored wide ranges. Shifts of funds into specification of higher rates of mon- NOW accounts were not expected to etary growth for the first quarter, affect growth of M-2 significantly and another member favored specifibecause virtually all of the funds cation of lower rates. likely to be shifted into such ac- A number of members continued counts are included in M-2. to express concern about the eco- In the Committee's discussion of nomic and financial effects of the policy for the near term, the mem- high degree of variability of interest bers considered rates of monetary rates in 1980. In the light of the growth over the first three months of current prospects for economic ac- 1981 against the background of the tivity and for the demand for money, tentative ranges specified earlier for these members wished to set a poligrowth over the year as a whole, cy course for the near term that pending the completion of the re- would tend both to avoid additional view of those ranges scheduled for pressures in the money market and the meeting in early February. The to moderate the expected easing of midpoints of the tentative ranges for pressures. While the Committee's 1981, abstracting from the effects of general practice had been to relax the introduction of NOW accounts the constraint implied by the interon a nationwide basis, were 4l/ per- meeting range for the federal funds 4 cent for M-1A, 43/ percent for rate when the constraint became 4 M-1B, and 7 percent for M-2. It was binding, some members felt that a considered likely that the substantial somewhat narrower range than weakening of the demand for cash specified for most recent intermeetbalances evident in recent weeks ing periods might be appropriate to would persist for a time, in response provide an opportunity for review of to the sharp increase in interest rates the situation if market interest rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 FOMC Policy Actions changed by a sizable amount. It was situation called for supplementary also suggested that the Committee instructions from the Committee. hold a consultation before the next The following domestic policy discheduled meeting if it appeared that rective was issued to the Federal the rate might decline quickly to- Reserve Bank of New York: ward the lower end of the range. One member expressed the opinion that The information reviewed at this meetsetting 18 percent as the upper end ing suggests that real GNP expanded of the range, which would lead to a more in the fourth quarter than in the prompt easing in money market con- third, and prices on the average continditions consistent with a decline in ued to rise rapidly. In November retail sales, industrial production, and nonthe funds rate to or below that level, farm payroll employment expanded subwould contribute over time to a re- stantially further, and the unemployment duction in the volatility of both inter- rate was essentially unchanged at ll/ 2 est rates and monetary growth. percent. Housing starts remained at their September-October level. The rise in the At the conclusion of the discusindex of average hourly earnings has sion, the Committee decided to seek been somewhat more rapid this year than behavior of reserve aggregates asso- in 1979. ciated with growth of M-1A, M-1B, The weighted average value of the and M-2 over the first quarter along dollar in exchange markets has risen a path consistent with the ranges for considerably further over the past month. The U.S. trade deficit was ungrowth in 1981 contemplated in July changed in October, remaining well be- 1980, abstracting from the effects of low the rate in the first half. deposit shifts connected with the in- Growth in M-1A and M-1B continued troduction of NOW accounts on a to moderate in November but was still nationwide basis. The members rec- relatively rapid; growth in M-2 continued to accelerate, reflecting a further pickup ognized that the spread of NOW in expansion of its nontransaction comaccounts and ATS accounts nationponent. In early December, growth of ally was likely to widen the differen- M-1A and M-1B slowed substantially tial between growth of M-1A and further. From the fourth quarter of 1979 to November, growth of M-1A was in the M-1B to an unpredictable extent and upper part of the range set by the Comthat operational paths for reserves mittee for growth over the year ending in would have to be adjusted in the the fourth quarter of 1980; M-1B and M-2 light of the developing differential. grew at rates somewhat above the upper Some shortfall in growth would be limits of their respective ranges. Expansion in commercial bank credit was acceptable in the near term if that about as rapid in November as on the developed in the context of reduced average in the preceding three months. pressures in the money market. If it Short-term market interest rates have appeared during the period before risen sharply further in recent weeks. Long-term market yields have also risen, the next regular meeting that fluctualthough considerably less, and average ations in the federal funds rate, takrates on new home mortgage commiten over a period of time, within a ments have continued upward. On Derange of 15 to 20 percent were likely cember 4 the Board of Governors anto be inconsistent with the monetary nounced an increase in Federal Reserve discount rates from 12 to 13 percent and and related reserve paths, the Manan increase in the surcharge from 2 to 3 ager for Domestic Operations was percentage points on frequent borrowing promptly to notify the Chairman, of large institutions. who would then decide whether the The Federal Open Market Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 165 seeks to foster monetary and financial supplementary instructions from the conditions that will help to reduce infla- Committee. tion, encourage economic recovery, and contribute to a sustainable pattern of Votes for this action: Messrs. international transactions. At its meeting Volcker, Gramley, Guffey, Morris, in July, the Committee agreed that these Partee, Rice, Roos, Schultz, Soloobjectives would be furthered by growth mon, and Winn. Votes against this of M-1A, M-1B, M-2, and M-3 from the action: Mrs. Teeters and Mr. Wallich. fourth quarter of 1979 to the fourth quarter of 1980 within ranges of 3l/ to 6 Mrs. Teeters dissented from this 2 percent, 4 to 6l/ 2 percent, 6 to 9 percent, action because she believed that the and 6l/ to 9l/ percent respectively. The 2 2 objectives for monetary growth were associated range for bank credit was 6 to 9 percent. For the period from the fourth unduly restrictive in terms of their quarter of 1980 to the fourth quarter of eventual effects on output and em- 1981, the Committee looked toward a ployment without improving prosreduction in the ranges for growth of pects for significantly tempering the M-1A, M-1B, and M-2 on the order of V 2 rate of inflation. Pending completion percentage point from the ranges adopted for 1980, abstracting from institution- of the Committee's review of its al influences affecting the behavior of the ranges for growth in 1981, she preaggregates. ferred specification of moderately In the short-run the Committee seeks higher rates for monetary growth behavior of reserve aggregates associat- over the first quarter. ed with growth of M-1A, M-1B, and M-2 Mr. Wallich dissented from this over the first quarter along a path consistent with the ranges for growth in 1981 action because, given the excessive contemplated earlier, which will be re- monetary expansion in recent viewed in February 1981. Those ranges, months, he favored specification of abstracting from the effects of deposit lower monetary growth rates for the shifts connected with the introduction of NOW accounts on a nationwide basis, first quarter of 1981 than those imply growth in these aggregates cen- adopted at this meeting along with a tered on 4!/ 4 percent, 43/ 4 percent, and 7 higher intermeeting range for the percent respectively. It is recognized federal funds rate. In his view, such that the introduction of NOW and ATS a policy stance was appropriate both accounts nationwide at the beginning of 1981 is likely to widen the discrepancy to restrain monetary growth if ecobetween growth in M-1A and M-1B to an nomic activity remained strong and extent that cannot now be accurately to moderate the probable decline in estimated, and operational reserve paths interest rates if economic activity will be developed in the light of evaluation of those differences as they emerge. weakened. In the light of the rapid growth of monetary and credit aggregates in recent 2. Authorization for Domestic months, some shortfall in growth would Open Market Operations be acceptable in the near term if that developed in the context of reduced On January 23, 1981, the Committee pressures in the money market. If it voted to increase from $3 billion to appears during the period before the next $4 billion the limit on changes bemeeting that fluctuations in the federal funds rate, taken over a period of time, tween Committee meetings in Syswithin a range of 15 to 20 percent are tem Account holdings of U.S. govlikely to be inconsistent with the moneernment and federal agency tary and related reserve paths, the Mansecurities specified in paragraph l(a) ager for Domestic Operations is promptly to notify the Chairman, who will then of the authorization for domestic decide whether the situation calls for open market operations, effective Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 FOMC Policy Actions immediately, for the period ending mestic Operations. The Manager with the close of business on Febru- had advised that since the December ary 3, 1981. meeting, substantial net sales of securities had been undertaken to ab- Votes for this action: Messrs. sorb reserves in association with a Volcker, Gramley, Guffey, Morris, seasonal reduction in currency and Partee, Rice, Roos, Schultz, Solodeposits. The leeway for further mon, Mrs. Teeters, Messrs. Wallich, sales had been reduced to about $1 and Winn. billion, and additional sales in excess of that amount might be required This action was taken on recom- over the rest of the intermeeting mendation of the Manager for Do- interval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

167 Consumer and Community Affairs Introduction transfer of funds, the possible risks in its use, and the rights and respon- The Board's Division of Consumer sibilities of the consumers who use and Community Affairs focused on EFT services and of the financial intwo principal tasks in 1980. They stitutions that offer them. The Board were implementation of the Elec- added to its consumer-oriented pubtronic Fund Transfer Act and lications a 16-page pamphlet, "Alice simplification of regulations under in Debitland," describing EFT serthe Truth in Lending Act, the newest vices in story form and answering and the oldest of the more than a questions about loss of EFT cards, dozen consumer credit protection about ways to correct errors, and laws for which the Congress has as- about the requirements for documensigned special responsibilities to the tation of EFT transactions. Federal Reserve. On behalf of the System, the Fed- In addition to implementation, the eral Reserve Bank of Philadelphia Federal Reserve System began a na- produced a film, "EFT at Your Sertionwide program to educate the vice." The 14-minute color film public about the electronic transfer of shows how the electronic movement funds and the provisions of the new of funds has changed the ways in act. which Americans conduct their finan- The EFT Act is designed to protect cial affairs. The film is intended consumers in their use of electronic especially as a high school teaching fund transfers. During 1979 the aid, and is distributed with a study Board wrote rules (Regulation E) im- guide for teachers. plementing parts of the act, and in By year-end, the Federal Reserve January 1980 the Board published had printed 3 million copies of "Alice final rules for the remaining portions in Debitland," and hundreds of prints of the act that became effective in of the EFT film were in demand for May 1980. These regulations establish months ahead. ground rules for consumers and fi- In its other principal rulewriting acnancial institutions that use this new tivity in the field of consumer credit technology, by means of which con- protection in 1980, the Board intensumers can use EFT cards to pay elec- sified efforts to simplify the Truth tronically at the point of sale for in Lending rules on disclosures to goods and services, or to deposit, make it easier for creditors to comwithdraw, or transfer funds from ply and for consumers to know the their accounts at automatic tellers. full cost of borrowing. The Federal Reserve also under- The Truth in Lending Act and the took an educational program de- Board's implementing Regulation Z signed to make available, especially date from 1968 and 1969 respectively. for high schools, written and filmed Efforts to modernize, restructure, materials explaining the electronic shorten, and simplify Regulation Z Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Consumer Affairs began in 1978 under the Board's itors to apply the required disclosures Regulatory Improvement Project. to their own credit plans. The Board had meanwhile recom- The proposed new Regulation Z mended changes in the act to the Con- would be shorter and plainer than the gress as the basis for a more thorough current regulation and the Board insimplification of the implementing terpretations that it would incorregulation. The Congress subsequent- porate. But the Board made clear that ly passed Truth in Lending simplifica- the regulation will, at best, be lengthy tion and reform legislation as one sec- and complex because the act affords tion of the Depository Institutions protection to consumers in a wide Deregulation and Monetary Control variety of transactions, including Act of 1980. leasing, credit reporting, and closed- At year-end, a new draft of a sim- and open-end credit, and because so plified Regulation Z, based on the many types of credit are used in the new act, had been published for com- United States. ment, and the Board expected to The Consumer and Community complete the overhaul early in the Affairs Division continued to engage new year to meet a deadline of April in a broad range of regulatory, com- 1, 1981. pliance examination, and enforce- As an important simplification ment activities relating to the contool, the revised Regulation Z will sumer protection laws the Board adrely on disclosure forms that will ministers. The Division also resolves assure consumers that they have cor- consumer complaints for the Board. rect disclosures and assure creditors These activities are described in that they have complied with the law. subsequent sections of this Report. Five principal ideas underlie the As a participant in the Federal Board's proposed disclosure re- Financial Institutions Examination quirements: Council, the Board helped develop a 1. Precise and simple rules should new examination policy guide to imreplace statements of principles that plement the requirements of the Truth themselves often require explanation in Lending Simplification and Rethrough new rules. form Act. 2. Wider scope should be permit- Other consumer protection acted for tolerances for error and for tivities included adoption of a policy estimates in making disclosures. statement for handling protested ap- 3. The rules should emphasize plications, including applications those disclosures that are most rele- protested under the Community Revant to decisions about the use of investment Act. The policies set forth credit. in the statement are intended to give 4. Requirements not justified by the public better notice of applicasubstantial consumer benefits should tions to expand bank holding combe eliminated. panies or to merge financial institu- 5. Recognizing that regulatory tions and, in general, to improve prorules cannot span the great variety of cedures for protests. The Board excredit instruments and credit prac- pects these procedures to assist intices in common use, the regulation dividuals or groups desiring to protest should provide flexibility for cred- applications that come before the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 169 Federal Reserve and to help ap- Simplification plicants comply with relevant laws In 1980 the Board continued its efand regulations. forts to simplify truth in lending by In other educational activities, the supporting legislative simplification Federal Reserve updated and reissued and proposing simplified versions of in 1980 its most popular consumer the act's implementing regulation, pamphlet, the Consumer Handbook Regulation Z. The effort to simplify to Credit Protection Laws. Four truth in lending rules was initiated million copies of this brief, nonunder the Board's Regulatory Imtechnical guide to consumer credit provement Project and shaped by the protection rights and responsibilities Truth in Lending Simplification and have been printed since 1978. The Reform Act. The main goals of the Federal Reserve also continued its Board's effort to simplify Regulation program of workshops throughout Z are to benefit the consumer by rethe nation for high school teachers, to quiring disclosures to be clearer and acquaint them with consumer credit more useful, to help direct the enprotection laws and with the teaching forcement efforts of regulators to the aids available from the System. The most important provisions of the Federal Reserve Bank of New York Truth in Lending Act, and to elimproduced a teaching aid on consumer inate unnecessary burdens for credcredit protection, aimed at high itors. school audiences, in comic book form. The Board's Consumer Advisory Regulatory Improvement Council met four times in 1980. The The Regulatory Improvement Projcouncil is headed by Dr. Ralph ect, adopted by the Board of Gover- Rohner, of the Catholic University nors in June 1978, is broad in scope. Law School in Washington, D.C. Its Its goals are to improve the organizamembers represent a broad spectrum tion of the Board's regulations, to of consumer, creditor, and other in- broaden access to regulatory mateterests from across the nation. rials, to eliminate any unnecessary burdens imposed by regulations, to Truth in Lending clarify regulations, and to adopt nonregulatory programs when possi- This 12th Annual Report on the ble to achieve the desired results. The Truth in Lending Act summarizes the project calls for the periodic review of efforts in 1980 of the Board of Goverevery Board regulation. The objecnors of the Federal Reserve System to tives of the project were underlined simplify its truth in lending rules for by the enactment of the Regulation the benefit of consumers and cred- Simplification Act of 1980 (Title VII itors. It also discusses compliance, of the Depository Institutions Dereglegislative recommendations from en- ulation and Monetary Control Act), forcement agencies, and the educa- which establishes rulewriting goals tion of consumers and creditors similar to those of the Board's projabout truth in lending.1 ect. Proposals initiated under the Regulatory Improvement Project to 1. A report on truth in lending for the year 1980 was issued to the Congress on January 2, 1981. simplify Regulation Z generally in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Consumer Affairs elude reducing the number of dis- sulted in a process that is costly for closures that creditors are required to creditors and, because the cost may make to consumers, reorganizing the be passed on, often for consumers regulation to make it more conven- as well. Enforcement agencies have ient to use, providing model forms to tended to report high rates of nonease compliance, and simplifying compliance with the regulation, rules for computing annual percent- although they regard many violations age rates. These proposals are dis- as not harmful to the consumer. cussed in detail later in this report. While the Board sees the need for simplifying the regulation, it recog- Legislative Simplification nizes that even the most successful Legislative simplification, which the simplification effort will not produce Board supported, was accomplished a brief, simple document for three on March 31, 1980, with the enactbasic reasons. ment of the Truth in Lending Sim- First, the scope of the original plification and Reform Act (Title VI Truth in Lending Act has been greatly of the Depository Institutions expanded by statutory additions. The Deregulation and Monetary Control present Regulation Z is 53 pages long. Act of 1980). The simplification act, Besides implementing the original which amends the Truth in Lending rules on credit disclosures, the regula- Act, provides consumers with simpler tion now implements statutes governand more meaningful disclosures, ing the issuance of credit cards, the eases creditor compliance, strengthliability for their loss, resolution of ens enforcement, and limits creditor billing errors, and disclosures for civil liability to substantive violaconsumer leases. Other provisions tions. In addition, Title VI exempts discourage creditors from forcing all agricultural credit from the act consumers to buy credit life inand instructs agencies to order surance, protect consumers from uncreditors to make monetary restituwisely encumbering their homes, and tion to consumers for certain violaensure that consumers can withhold tions. The restitution provisions were payment for shoddy merchandise effective immediately; all other provipurchased with a bank credit card. In sions are effective on April 1, 1982. short, the breadth of the legislation Implementing regulations must be in that Regulation Z implements will replace by April 1, 1981, but will not be main a major impediment to brevity mandatory until a year later. From and simplicity. April 1, 1981, to April 1, 1982, Second, one goal of the simplificacreditors may comply with either the tion effort is to incorporate virtually old or the revised regulation. the entire body of published material Realities of Simplification on truth in lending into the regulation In the Board's view, the present and accompanying commentary. This Regulation Z is too complicated and material includes more than 1,500 broad in coverage. This problem is staff interpretations issued since due largely to statutory expansion of 1968, on which the credit granting inthe Truth in Lending Act and the dustry relies. It is worth noting that variety of credit offered by financial federal courts have heard about institutions. The regulation has re- 13,000 truth in lending lawsuits since Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 171 1969, or about 100 per month. The cent shorter than the current Regulaincorporation of the extensive inter- tion Z and the interpretations. pretive material is at odds with the In addition to being shorter, the goal of simply shortening the regula- proposed regulation would be relation. tively easy to use. As suggested by the Third, credit itself has become Regulatory Improvement Project, the complex. The 153 highly technical revision restructures the regulation's subsections of the present Regulation format by grouping related provi- Z bear witness to this fact. Credit sions in separate subparts. Rules may be available on a revolving or related to closed-end credit (for exclosed-end basis; payable on demand ample, installment sales and mortor in equal or graduated installments; gage loans) are presented separately with a precomputed finance charge, from those related to open-end (reon a simple interest basis, or both; volving) credit. The proposal also secured or unsecured; and with or contains model forms and clauses for without credit life and property in- use in the common, great majority of surance, which may be voluntary or transactions that are covered in the required. It may be requested in per- proposal. These forms should ease son, by mail, or by telephone; and the burden of compliance and immay be renewed, assumed, or de- prove the format of the information ferred. In most cases, implementing given to consumers. the statute requires that these varia- The final revised proposal was tions, and many more, be reflected in guided by five main ideas. The first the regulation. idea is that the regulation should contain precise, simple rules instead of Simplification Proposals principles that create ambiguity and In the spring and fall of 1980, the require additional regulatory clar- Board issued proposals to simplify ification. Second, tolerances in Regulation Z. These proposals point disclosure should be more widely aptoward a new regulation that will im- plied. Third, emphasis should be prove the delivery of credit-shopping placed on disclosures relevant to information to consumers, that will credit decision-making. Fourth, be shorter, simpler, easier to use, burdens not justified by substantial reduce costs related to compliance consumer benefit should be elimand litigation, and redirect enforce- inated. Finally, the regulation should ment efforts to the most important give creditors flexibility to tailor matters. disclosures to their credit plans. The More than 4,000 pages of com- results of applying these ideas in ments were received in response to the writing the final proposal are proposal in the spring, and in light of sketched briefly below. those comments and further staff Simple rules. The proposed rules analysis, the proposal was extensively are simple and straightforward. The revised for further public comment. proposal presents the basic rules and The resulting proposal, issued for requirements of the statute without comment in the fall, is a proposed complicating detail. The straightregulation that includes the formal forwardness makes the rules relative- Board interpretations, but is 40 per- ly easy to apply and should result in a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Consumer Affairs reduction of interpretations and themselves can sometimes design betlitigation. The Board expects the new ter disclosures than the regulation can regulation to be used with a commen- spell out. In some cases, the proposal tary that will replace letters of inter- simply sets forth a basic disclosure repretation and will provide whatever quirement and permits creditors to guidance is necessary. The commen- tailor disclosures to their own credit tary will be updated at regularly plans, as in transactions involving scheduled intervals (perhaps twice a variable rates or in certain construcyear), so that creditors and others will tion loans. know when to expect changes. The proposal reduces the number Wider application of tolerances. of disclosures in most credit transac- The act authorizes the Board to allow tions, as required by the Truth in tolerances or margins of error in Lending Simplification and Reform some disclosures and permits cred- Act. The disclosures will have less initors to use estimates in making formation than those required under disclosures. Regulation Z has always the current regulation, but the most included some such provisions. The important information—the terms proposal authorizes, for the first that are most needed by consumers in time, a tolerance for the disclosure of shopping for credit—is retained. The the finance charge. It also authorizes, proposal would require creditors to among other things, increased tol- disclose the annual percentage rate, erance in disclosing the annual finance charge, amount financed, percentage rate in complex transac- payment schedule, and total paytions for which calculations may be ments in a form that is straightfordifficult. ward, uncluttered, and therefore Disclosures related to credit deci- more accessible and usable for the sions. The proposal concentrates on consumer. disclosures that are most relevant to Comments on the proposal issued the credit-shopping process and on in the fall, were requested by Janwhich consumers are most likely to uary 19, 1981. rely in making credit decisions. This means that the regulation focuses less Simplification Amendments on terms like security interests and In 1980 the Board adopted four prepayment penalties, and also less amendments to Regulation Z. on changes in terms that take place Simplification of rules for calculaafter the credit decision is made. tion and disclosure of annual percent- Burdens justified by substantial age rate and other credit terms. On benefits. The proposal emphasizes December 31, 1979, the Board andisclosures in common transactions nounced its adoption of certain that are of clear, substantial benefit amendments, effective January 10, to consumers. The proposal focuses 1980, to simplify the calculation and less on unusual transactions that disclosure of the annual percentage would require disclosures too com- rate and other credit terms. The most plex to be useful to consumers. important of these amendments estab- Creditor flexibility. Because of the lished a tolerance of 1/8 of 1 percentvariety of instruments and practices age point in either direction from the in the credit industry, creditors exact annual percentage rate, simpli- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 173 fied the rules for treating minor varia- and Reform Act, the amendment pertions in payment schedules, and ex- mits a tolerance of up to 0.5 percentpanded the protection available to age point in the disclosure of annual creditors who have relied in good percentage rates for complex mortfaith on faulty calculation tools. gage transactions. The more generous Extension of effective date of tolerance is available until March 31, revocation of an amendment exempt- 1981. Beginning on April 1, 1981, iring open-end credit arrangements regular mortgage transactions must from certain rescission requirements. meet the general standards of ac- In 1978 the Board created an alter- curacy. native in certain circumstances to the three-day cancellation right, generally Uniform Enforcement Actions applicable to each transaction under In July 1980 the Board adopted a an open-end credit account secured policy guide to enforce the restitution by a consumer's residence. This acprovisions in the Truth in Lending tion was revoked in September 1979, Simplification and Reform Act. The effective March 31, 1980. However, guide, "Administrative Enforcement in anticipation of congressional acof the Truth in Lending Act—Restion that would endorse the altertitution," was developed by the Connative, the Board moved in February sumer Compliance Task Force of the 1980 to delay the planned revocation Federal Financial Institutions Exdate. amination Council (FFIEC), which Exemption of agricultural credit comprises representatives of the five from truth in lending requirements, federal agencies that regulate finanand elimination of disclosure recial institutions. The act requires the quirements for periodic statements in agencies to order creditors to make closed-end credit transactions. Effecmonetary restitution to the accounts tive May 21, 1980, the Board imof consumers in cases in which displemented provisions of the Truth in closure errors resulted from a clear Lending Simplification and Reform and consistent pattern or practice of Act that exempt agricultural credit violation, gross negligence, or a from disclosure requirements of truth willful violation that was intended to in lending and eliminate disclosure remislead the consumer. The policy quirements for periodic statements in guide describes rules for determining closed-end credit transactions. These violations covered by the provisions, provisions were implemented imfor calculating adjustments, and for mediately because there appeared to defining the extent of agency discrebe no sound reason for delay. tion in ordering restitution. Increase in tolerance for annual percentage rates in irregular mortgage Consumer Advisory Council transactions. This amendment was proposed on May 20, 1980, and The Consumer Advisory Council, adopted after review of the com- which was established in 1976 to adments, which were mostly favorable. vise the Board on its responsibilities Following the intent that was ex- under the Consumer Credit Protecpressed in the conference report on tion Act and other consumer-related the Truth in Lending Simplification activities, consists of 31 members Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Consumer Affairs representing the interests of con- the Board, the Office of the Compsumers and creditors in different troller of the Currency (OCC), and regions of the country. The council the Federal Home Loan Bank Board met four times in 1980. It considered (FHLBB) show a small decrease in the requirements of the Truth in noncompliance. All of the agencies Lending Simplification and Reform report high noncompliance. It should Act, and, specifically, the use and be noted that institutions reported as timing of alternative shopping not being in full compliance include disclosures for closed-end credit and those with only one, or a few, violaways to disclose changes in credit tions. It is likely that noncompliance terms that occur during the life of a would be substantially reduced if only credit contract. Other truth in lending institutions with a more significant matters discussed included legislative number of violations were counted. and regulatory amendments to in- Agencies reporting that more violategrate provisions regarding error tions have been discovered in 1980 resolution and consumer liability believe that the reason is the increased under the Truth in Lending Act and sophistication of examiners and imthe Electronic Funds Transfer Act proved examination techniques. and whether truth in lending dis- To assist member banks in complyclosure requirements adequately en- ing with truth in lending resure consumer understanding of the quirements, the Federal Reserve method of computing finance charges System provided 219 educational/adthat is called the "average daily visory visits in 1980. The Board balance (with current debits)." believes that the high level of non- The council also discussed the rela- compliance reported by each of the tionship between credit-scoring agencies is strong evidence of the systems and Regulation B, which im- need for simplification of Regulation plements the Equal Credit Oppor- Z. Many of the reported violations tunity Act; enforcement of the Com- represent failure to follow detailed remunity Reinvestment Act; whether quirements that could be simplified state usury ceilings should be pre- with no substantive loss to conempted by federal law; regulation of sumers. An example of this is the realternative mortgages; the "Holder quirement that , the specific term II" rule proposed by the Federal "balloon payment" be used in Trade Commission; and uniformity closed-end credit disclosures. in consumer credit enforcement. The FDIC issued three cease-anddesist orders in 1980 that charged violations of the act and Regulation Compliance Z. The Board entered into written The five federal agencies that super- agreements with two banks to ensure vise financial institutions reported correction of Regulation Z violations, that the 1980 compliance picture including understatement of annual shows little substantive change from percentage rates and finance charges 1979. The Federal Deposit Insurance and other violations of general dis- Corporation (FDIC) and the National closure requirements. Credit Union Administration (NCUA) According to the Board's records report small increases in the number and to summaries of examination of institutions not in full compliance; findings compiled by the OCC, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 175 FDIC, FHLBB, and NCUA, the vio- pear to persist in failing to disclose lations discovered most frequently clearly, when applicable, that credit are (1) failure to use required terms insurance in closed-end credit transsuch as "total of payments" and actions is voluntary, and in failing to "balloon payment" in disclosures make required disclosures before conrelated to closed-end credit, (2) summation. The FTC also mentioned failure to obtain separately signed that many advertisers of automobile and dated credit life insurance financing continue to advertise the authorizations, (3) failure to follow "add on" rate instead of the annual requirements related to rules that call percentage rate, and many mortgage for describing property that secures lenders advertise the simple interest credit, (4) failure to disclose either the rate. The FTC also notes that concorrect finance charge or the annual sumer complaints and inquiries sugpercentage rate, and (5) failure to dis- gest continued widespread nonclose other information related to compliance with the Fair Credit Billperiods of payments scheduled to re- ing Act and Regulation Z, especially pay indebtedness. with regard to procedures for resolv- The other agencies with statutory ing errors in consumer accounts. The authority to enforce truth in lend- FTC mentions two consent orders ing—the Civil Aeronautics Board and two consent judgments as signifi- (CAB), the Farm Credit Administra- cant enforcement actions in 1980. tion (FCA), and the Small Business These involve an oil company, a retail Administration (SBA)—report that business, a real estate firm, and a furthe institutions they supervise are niture business. generally in substantial compliance The FTC attributes the apparently with truth in lending. The CAB also high level of compliance with the reports that four carriers were found Consumer Leasing Act that it has to be in violation of certain re- noted to the sample lease disclosure quirements related to timing in the forms issued by the Board. transmission to credit-card issuers of credit statements used to make re- Legislative Recommendations funds. The regulation requires that in sales transactions involving a credit Some of the enforcement agencies card issued by a person other than the have responded in writing to the proseller, the seller must send to the card posed revisions of truth in lending issuer within seven days any credit rules, and these recommendations statements used to effect a refund. have played an important role in Consent agreements with two of the rulewriting by the Board. Beyond carriers have been negotiated, and these regulatory recommendations, two others are in process. the Board and the NCUA have rec- The Federal Trade Commission ommended the enactment of pro- (FTC) has been conducting an in- posed legislation to integrate the redustrywide investigation to see quirements of the Electronic Fund whether creditors under its jurisdic- Transfer Act with the Truth in Lendtion are correctly charging customers ing Act; the NCUA has also recomfor credit and making the disclosures mended further exploration of the required by truth in lending. The feasibility of reducing truth in lending commission reports that creditors ap- compliance burdens for small finan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Consumer Affairs cial institutions. The Comptroller of The NCUA reports that, in addithe Currency has recommended that tion to providing an advisory service real estate disclosures be simpler and and speakers to groups of credit fewer in number. unions, it entered into a contract in 1980 with the Consumers League to prepare educational materials that Education will be known as "The Informed In 1980 the Federal Reserve System Consumer." continued to provide a variety of The FTC reports that thousands of educational materials and services to copies of its new consumer credit and educate consumers and creditors. The lease advertising manual, "Advertis- Board and the Federal Reserve Banks ing Consumer Credit and Lease distributed more than 2 million copies Terms," have been distributed of its pamphlets on Regulation Z, in- through the Government Printing Ofcluding "What Truth in Lending fice. It has also distributed a series of Means to You," "If You Use a fact sheets, "Facts for Consumers Credit Card," and "Truth in Leas- from the Federal Trade Commising;" as well as 2 million copies of the sion," some of which are on truth in Board's "Consumer Handbook to lending. Credit Protection Laws," which sum- The Bureau of Consumer Protecmarizes the main provisions of seven tion of Maine, one of the states that major laws on consumer credit pro- has been granted exemptions from tection, including truth in lending, most provisions of federal truth in consumer leasing, and fair credit bill- lending requirements, publishes a ing. More than 2.3 million persons quarterly newsletter to keep creditors are estimated to have viewed the film informed of regulatory developon consumer credit protection, enti- ments. To encourage credit shopping, tled "To Your Credit." it also publishes a monthly newspaper In November 1980 a consumer ex- listing of prevailing annual percenhibit prepared by Board staff tage rates for typical consumer loans. members was recognized by the Oklahoma, also an exempt state, District of Columbia Office of Con- reports that it provides speakers to a sumer Protection and the Wash- variety of groups and is particularly ington Chapter of the Society of Con- active in developing consumer educasumer Affairs Professionals for its tion materials for use in public excellence. The exhibit was judged schools from kindergarten through for its practical value to the consumer high school. It also worked with coland for the effectiveness of its lege newspapers and radio and televimethod of presenting information. sion stations to disseminate informa- The FDIC offered 46 consumer tion on consumer credit protection. compliance seminars to banks throughout the country during the Equal Credit Opportunity year. The seminars were designed particularly to help small banks. It This fifth annual report on the Equal also established a toll-free consumer Credit Opportunity Act (ECOA) dishotline to give consumers better ac- cusses the Federal Reserve System's cess to information about credit pro- enforcement of, and assessment of tection laws. compliance with, the act and Regula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 177 tion B in 1980. It also examines the individual banks. Examination reenforcement activities of other fed- ports are also reviewed to evaluate eral agencies, their assessment of such and improve examination procedures compliance by the creditors that they and reporting methods. supervise, and, in the case of some The Board's records show signifiagencies, their efforts to educate con- cant improvement in 1980 in the comsumers and creditors about equal pliance of state member banks with credit opportunity. The report then the ECOA. The Federal Reserve Sysdescribes the rulewriting activities tem examined about 10 percent more and legislative recommendations of state member banks in 1980 than in the Board; the Consumer Advisory 1979; examination reports received as Council; and interagency activities. of December 1980 reveal that 60 percent of the banks examined had one Enforcement and Assessment or more violations, compared with 77 of Compliance percent in 1979. The most common violations were failure to provide an Most of the federal agencies that are adverse-action notice (containing a responsible for enforcing the ECOA statement of the action taken, the reand Regulation B indicated that comquired ECOA notice, and the name pliance improved in 1980. Statistics and address of the federal agency that from summaries of examination reenforces compliance); failure to ports of the Board, the Office of the notify applicants of the action taken Comptroller of the Currency (OCC), within specific time periods; and the Federal Deposit Insurance Corpofailure to make required disclosures ration (FDIC), and the Federal Home related to requests for information Loan Bank Board (FHLBB) show about "other income." varying levels of improvement. The In 1980 the Board took formal ac- Small Business Administration tion against two state member banks (SBA), the U.S. Department of Agrithat had violated consumer laws and culture (USDA), the Civil Aeronauregulations. In both cases written tics Board (CAB), the Securities and agreements were issued that required Exchange Commission (SEC), and each bank to appoint a compliance the Farm Credit Administration officer whose job description and (FCA) reported that compliance qualifications were to be reviewed by among the creditors they supervise the appropriate Reserve Bank, to subgenerally appears good. mit written compliance procedures to Federal Reserve System the Reserve Bank within a prescribed The Federal Reserve enforces the time, to establish consumer protec- ECOA and Regulation B through its tion training and educational proexamination of state member banks grams for bank employees, to deand investigation of consumer com- velop an internal program to audit plaints against these banks. Specially compliance with consumer laws and trained consumer affairs and civil regulations, to replace or correct all rights examiners from the Federal disclosure forms to ensure compli- Reserve Banks conduct the examina- ance, and to establish procedures for tions, and Board staff members re- periodic progress reports to the view selected examination reports to Reserve Bank. determine the compliance status of The Federal Reserve System replies Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Consumer Affairs to complaints and inquiries about gation that revealed a bank error, diverse areas of consumer activity. which was corrected; and 2 percent Responses range from providing con- through investigation that revealed sumers with explanations of laws to error on the part of the customer. As conducting investigations that may of October 31, 1980, the remaining 14 reveal errors made by state member percent were still under investigation. banks. In the latter case, the bank is To assist creditor compliance with asked to take corrective action. Com- the requirements of the ECOA and plaints alleging illegal credit discrimi- Regulation B in 1980, representatives nation are investigated by the appro- of the Federal Reserve System visited priate Federal Reserve Bank and the more than 219 member banks to adconsumer is informed of the results. vise them about the requirements of In cases of possible violation, the the act and other consumer laws. commercial bank is required to take These visits are made to member corrective action and the consumer is banks on request and provide them advised of his or her rights and with the opportunity to ask specific remedies. questions about how ECOA require- The Federal Reserve System re- ments relate to the actual practices ceived 284 ECOA-related complaints and procedures of the bank. against state member banks in 1980. The Federal Reserve distributed Of the 238 complaints, or 84 percent more than two million copies of the that concerned adverse actions, 31 Board's consumer pamphlets on the alleged discrimination on the basis of ECOA, including "The Equal Credit characteristics covered by the act: Opportunity Act and Women," "The eight, on age; seven, on sex; seven, on Equal Credit Opportunity Act and source of income; four, on marital Age," "The Equal Credit Opportunstatus; two, on race, color, or na- ity Act and Doctors, Lawyers and tional origin; two, on exercise of Small Retailers," "The Equal Credit rights under the Consumer Credit Opportunity Act and Credit Rights in Protection Act; and one, on religion. Housing," and "How the New Equal The other complaints alleged unfair Credit Opportunity Act Affects treatment: 83, with regard to credit You." These pamphlets are distribhistory; 29, income; 22, length of uted free on request and during preemployment; 13, length of residency; sentations to consumers and creditors. and 60, miscellaneous. In 1980 more than two million peo- Of the 238 complaints, 21 percent ple viewed the color film, "To Your were resolved by correcting the com- Credit." Designed for school and plainant's misunderstanding of the television use, the film shows how law; 57 percent, through investigation Regulation B and Regulation Z, that revealed no bank error; 1 per- Truth in Lending, protect the concent, through investigation that sumer. revealed a factual dispute between the complainant and the bank (the consumer was advised to consult an at- Other Agencies torney); 1 percent, through investi- The Civil Aeronautics Board (CAB) gation that revealed a possible bank reported a satisfactory level of comviolation; 4 percent, through investi- pliance among U.S. and foreign air- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 179 lines in 1980. The number of con- munity reinvestment; provided consumer complaints in 1980 was lower sumers with a toll-free "hotline;" than in 1979, and, according to the and prepared for a series of con- CAB, none warranted formal en- sumer-awareness seminars to begin in forcement action. early 1981. The seminars are aimed at The Farm Credit Administration neighborhood leaders and others con- (FCA) reported good compliance cerned with consumer protection and with the act. They received 12 com- civil rights issues. plaints in 1980, and investigations The Federal Home Loan Bank revealed no violations. Four of the Board (FHLBB) reported that 23 pertwelve complaints charged discrimi- cent of the institutions it examined in nation based on sex; three, on race; 1980 were found to have one or more one, on national origin; and four violations of Regulation B. About specified no particular basis. 3,000 violations were reported last The Federal Deposit Insurance year, down from 4,000 in 1979. The Corporation (FDIC) reported a mod- most frequent violations reported est improvement in compliance with were failure to provide applicants the act in 1980. Of the banks exam- with the required adverse-action ined, 47 percent were not in full com- notice, failure to provide the required pliance with Regulation B, compared information on adverse-action with 50 percent the previous year. notices, and failure to retain records The violations that were reported as required by Regulation B. most frequently, according to the The FHLBB reports that 217 com- FDIC, all related to the requirements plaints related to equal credit opporfor adverse-action notices; failure to tunity were received in 1980. Of provide a notice; failure to provide a these, 131 did not involve violations; written statement of specific reasons 17 involved interpretive problems for adverse action, or a notice of the that were settled; 18 were unresolved right of the applicant to such a state- as of September 30, 1980; 45 were ment; failure to provide the required referred to other agencies for resoluname and address of the FDIC as the tion; and 6 involved violations or enforcement agency; and failure to errors that were corrected. give the required ECOA notice. The Federal Trade Commission The FDIC received 369 consumer (FTC) reported that overall complicomplaints and 186 inquiries related ance with the act seems to have imto equal credit opportunity. The types proved, and that it received fewer of discrimination that were most fre- complaints related to credit discrimiquently alleged were related to sex, nation in 1980 than in 1979. Continumarital status, race, color, and ing compliance problems in the sales national origin, in that order. finance and small loan industries, ac- Several FDIC activities in 1980 cording to the FTC, involve requests were designed to provide information for a spouse's signature and informaand education on the ECOA to credi- tion about a spouse. The FTC has tors and consumers. The agency con- also reported that a number of crediducted consumer compliance semi- tors may treat protected income less nars for bankers on equal credit favorably than other income in both opportunity, fair housing, and com- judgmental and credit-scoring sys- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Consumer Affairs terns. It continues to be concerned tion. Educational activities of the FTC that the use of ZIP codes in credit- during 1980 included lectures at inscoring systems may have a dispro- dustry conferences and the continued portionately adverse effect on racial distribution of two consumer brominorities. Finally, the FTC reported chures, "Women and Credit Histhat its staff investigation of mort- tories" and "Equal Credit Opporgage lenders, sales finance compa- tunity." nies, and small loan companies sug- The Interstate Commerce Commisgests that various subtle forms of sion (ICC) reported that it received discrimination, such as discouraging no consumer complaints related to minorities and others from applying credit discrimination in 1980, as in for credit, may be replacing the more 1979. The ICC has created a new ofblatant discriminatory practices that fice of consumer protection to mainwere documented during hearings tain a computer record of complaints before the enactment of the ECOA. and to develop profiles of carrier The FTC initiated formal action abuses and irregularities. against two creditors that failed to The National Credit Union Admincomply with the act. A complaint istration (NCUA) reported that 63 filed by the Department of Justice on percent of the credit unions examined behalf of the FTC charged that an oil in 1980 were found not to be in full company's consideration of ZIP compliance with the ECOA; in 1979 codes had the effect of discriminating the figure was 44 percent. The NCUA against blacks and Hispanics; its attributes this increase to the intensipractice of discounting protected in- fied examination procedures of its come had the effect of discriminating new separate examination program against women and recipients of pub- for consumer compliance. The most lic assistance; and its method of dis- frequently reported violations, acclosing reasons for adverse action cording to the NCUA, were failure to failed to reveal the specific reasons provide adverse-action notices, failfor denial. In a second consent judg- ure to avoid loan policies that might ment, the FTC acted against a credit have the effect of discriminating on a union that discriminated against prohibited basis; failure to avoid cerwomen by treating anticipated mater- tain prohibited requests for informanity leave as grounds for denying tion on loan applications; and failure credit. to avoid prohibited requests for the The FTC also reports the develop- signature of a spouse. The NCUA ment of a program to monitor the issued two cease-and-desist orders in credit activities of the Farmers Home 1980. Administration. The program re- In 1980 the NCUA received 57 conquests everyone who applies to the sumer complaints. The two most Farmers Home Administration for common allegations were discriminacredit to specify his or her race, sex, tion on the basis of race and national and national origin for monitoring origin and failure to provide proper purposes; if the information is not adverse-action notices. volunteered, it must be designated by The Office of the Comptroller of the person taking the application the Currency (OCC) reported imbased on surname or visual observa- proved compliance with the ECOA. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 181 Of the banks examined in 1980, 63 consumer, civil rights, and commupercent were not in full compliance, nity groups. compared with 82 percent in 1979. The OCC reported that in the last The most frequently reported viola- quarter of 1980, a new unit was tions, according to the OCC, were formed to implement the ECOA and failure to provide adverse-action other fair lending enforcement laws. notices or notices of the right to This unit is expected to produce a receive such a statement; failure to sharper focus on civil rights enforcedisclose the rights of applicants with ment activities and a more effective regard to giving information about coordination of civil rights responsiincome from alimony, child support, bilities. The OCC also reported a new separate maintenance, part-time em- data system, the Fair Housing Home ployment, retirement benefits, or Loan Data System, designed to deterpublic assistance; failure to provide a mine national bank compliance with notice of action taken within the re- the ECOA and the Fair Housing Act. quired time periods; and failure to The system has been in operation observe prohibitions against request- since August 1980; it requires ing marital status and using certain national banks to submit information terms in applications for unsecured on home-loan activity each month, credit. The OCC reported a number and, if warranted, additional inforof administrative actions in 1980 mation on a sample of home-loan against banks failing to comply with applications. the act and Regulation B: four cease- The Securities and Exchange Comand-desist orders, eleven formal mission (SEC) reported continued agreements, and four memoranda of good compliance with the ECOA. understanding. Only one complaint relating to the act The OCC received 1,180 consumer was received in 1980, and investigacomplaints involving the ECOA. tion revealed that no violation More than two-thirds were related to occurred. the requirements for denial of credit: The Small Business Administration 16 percent alleged that the creditor (SBA) reported continued good comrefused to give reasons for adverse pliance with the ECOA; no violations action, and 52 percent claimed a lack were discovered in 1980, as in 1979. of clarity in the reasons given. Two- The SBA received 21 complaints of thirds were related to bank credit discrimination, but none were subcards. The OCC reported 44 percent stantiated. In response to an audit of of the complaints of discrimination its civil rights compliance activities by named either sex or marital status. the Department of Justice, the SBA is To educate consumers and credi- conducting onsite reviews of all small tors about the ECOA and Regulation business investment companies, de- B, the OCC provided speakers for velopment companies, and other recimeetings with consumer and civil pients of SBA funds. rights groups and assisted trade The U.S. Department of Agriculgroups in preparing educational ture (USDA) reported no compliance materials on the ECOA. In 1980 the problems in the limited program OCC began using a computerized under the Packers and Stockyards mailing list to send information to Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Consumer Affairs Rulewriting interpretations in the first quarter of 1981. In August 1980 the Board issued two Final action on two amendments to proposed interpretations of Regula- Regulation B that relate to business tion B. The first concerns the consid- credit will be considered by the Board eration of income by creditors, and at the same time. The amendments, the second, the disclosure of reasons proposed in October 1978, would for adverse action. eliminate the exemption of business The first proposal deals with the credit from requirements for recordmeaning of the requirement in Regu- keeping and notification in certain lation B that a creditor not discount transactions under $100,000, and or exclude from consideration an ap- from the prohibition against requestplicant's income that is derived from ing information on marital status in alimony, child support, separate all business credit transactions. maintenance, part-time employment, retirement benefits, or public assist- Legislative Recommendations ance. Under the proposal the creditor would be required, in evaluating a The Board received one legislative credit application, to treat protected recommendation from the Small income at least as favorably as in- Business Administration (SBA). With come from any other source. When regard to the SBA and its recipients such income would have no effect on who engage in credit activity, the the credit decision, the creditor would Equal Credit Opportunity Act is ennot have to consider it. forced by the Civil Rights Compli- The second proposal addresses the ance Division of the SBA through a question of how a creditor should letter of understanding with the select and disclose the principal rea- Federal Trade Commission. The SBA sons for denying credit. In the case of has expressed the belief that the act a credit-scoring system, the disclosed should assign this enforcement rereasons for adverse action would sponsibility directly to the SBA. have to be directly related to the factors actually scored by the creditor. Consumer Advisory Council Creditors would be required to attempt to disclose the minimum ad- The Consumer Advisory Council was justment that the applicant would established in 1976 to advise the have to make to become credit- Board on its responsibilities under the worthy. Regardless of the method Consumer Credit Protection Act and used to evaluate credit applications, other consumer-related activities. The the creditor would be required to be council has 31 members who repreconsistent in the use of that method, sent the interests of consumers and applying it to all applications. creditors and come from different In response to numerous requests, regions of the country. and to encourage public participa- The council met four times in 1980. tion, the comment period for both Regarding equal opportunity in proposals was extended to Decem- credit, the council discussed creditber 22, 1980. The Board is expected scoring systems; in particular, the adto take final action on the proposed vantages and disadvantages of judg- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 183 mental and credit-scoring systems to enforcement of the ECOA, Regulaconsumers and creditors, the use of tion B, and the Fair Housing Act. ZIP codes in scoring systems, and the Field tests to determine the operaimportance of creditors giving con- tional feasibility and the general effecsumers adequate adverse-action tiveness of the guidelines were comnotices. Some council members sug- pleted in early 1980, after which the gested that the federal government guidelines were redrafted by an intermonitor credit-scoring practices that agency work group and sent to the use ZIP codes; these members were Examination Council's Task Force concerned that the use of ZIP codes on Consumer Compliance. may have the effect of discriminating The Examination Council conagainst applicants in certain racially ducted five Consumer Compliance or ethnically concentrated neighbor- Schools in 1980 to refine its educahoods. Other members cautioned tional program before giving it foragainst federal attempts to tinker mal approval. The development of with credit-scoring systems because the lesson plans, the teaching, and the removing a particular factor can have other responsibilities associated with an undesirable effect on the classes of the school were all shared by the borrowers that the law seeks to agencies represented on the Examinaprotect. tion Council. More than 195 con- With regard to reasons for denial sumer examiners from the member of credit, many council members agencies were trained at these were firm in expressing the view that schools. About 16 percent of the the reasons should be explained as classroom time at each of the sessions fully as possible so that consumers was devoted to the ECOA, Regulahave the opportunity to refute any in- tion B, and the Fair Housing Act; accurate or unusual factor used in the about 27 percent, to civil rights in assessment. general. The council also discussed enforcement of the Community Reinvestment Act and the need for uniformity Federal Trade Commission Act in the enforcement of consumer credit protection and related civil This sixth annual report describes the rights laws. activities of the Board of Governors of the Federal Reserve System that are required under section 18(0 of the Federal Trade Commission Act. The Interagency Activities Board's responsibilities are to iden- The member agencies of the Federal tify and prohibit unfair or deceptive Financial Institutions Examination banking practices; to receive and Council—the Federal Reserve, remedy complaints against state the Comptroller of the Currency, the member banks; and within 60 days of Federal Deposit Insurance Corpora- the issuance of certain rules by the tion, the Federal Home Loan Bank Federal Trade Commission, to prom- Board, and the National Credit ulgate bank regulations that are Union Administration—have jointly substantially similar, unless certain proposed uniform guidelines for the exceptions apply. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Consumer Affairs Identification of Unfair or total of all consumer complaints, in- Deceptive Practices cluding those about regulated and unregulated practices. Table 1 iden- During 1980, the Board continued to tifies by subject the consumer commonitor consumer complaints about plaints received by the Federal Reunregulated banking practices to serve System during 1980. identify those that are unfair or In 1980, the Board used nonregudeceptive. To help in this identifica- latory means to prevent possible untion, the Board added an "early fair or deceptive practices by member warning" feature to its computerized banks; for example, the Board issued system for consumer complaints. a policy statement in October con- This feature signals the receipt of 15 cerning advertising by member banks or more complaints per quarter, or 50 of negotiable order of withdrawal annually, about any single category (NOW) accounts. The purpose was to of unregulated practices. In 1980, 971 emphasize that the advertising resuch complaints were identified by quirements of Regulation Q (Interest the early warning feature. on Deposits) apply to NOW ac- These complaints fall into 11 counts. categories: those about disputed The policy statement set out the deposits (174, or 8.8 percent of the following procedures: total number of complaints about 1. Any advertisements or promounregulated practices, including those tional materials issued before not signaled by early warning); dis- December 31, 1980, for NOW accrepancies in accounts (144, or 7.3 counts or accounts that will be conpercent); excessive time to clear check verted to NOW accounts should deposits (95, or 4.8 percent); exces- prominently indicate the unavailabilsive insufficient-fund charges and ity under federal law of NOW acmiscellaneous procedures (89, or 4.5 count services before December 31, percent); refusals to cash checks (79, 1980. or 4 percent); excessive or allegedly 2. Existing accounts that are unfair service charges (72, or 3.6 per- scheduled to be converted on Decemcent); late receipt of dividend checks ber 31 should not be characterized (73, or 3.7 percent); repossessions in before that time as NOW accounts. debt collection (60, or 3 percent); 3. Any advertisement of a specific other tactics in debt collections (75, rate of interest to be paid on a NOW or 3.8 percent); high interest rates and account must comply with the proviother terms (54, or 2.7 percent); and sions of Regulation Q regarding inalleged mismanagement of trust ac- terest on deposits. counts (56, or 2.8 percent). 4. The fact that conditions or The two most numerous kinds of charges are to be imposed on the complaints (disputed deposits and account must appear in the advertisediscrepancy in accounts) really reflect ment. factual disputes, and thus do not 5. An institution should inform its clearly involve practices that are un- customers, not later than the time a fair or deceptive. Moreover, they NOW account is opened, or an exrepresent only a small fraction (3.9 isting account is converted to a NOW and 3.2 percent respectively) of the account, of the method for com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 185 puting and paying interest on the ac- materials. Staff of the Federal count, including conditions for earn- Reserve System investigated and ing a stated return and charges that resolved complaints against state may be assessed against the account. member banks, and referred those about creditors or businesses not under the Board's supervision to the Consumer Complaints appropriate enforcement agencies. The Federal Reserve System received The Board's Division of Consumer 4,505 complaints in 1980: 2,582 by and Community Affairs has instimail, 1,860 by telephone, and 63 in tuted a new procedure for assessing person (table 1). The total number the handling of consumer complaints received represents an 11 percent in- by the Federal Reserve Banks: Recrease over 1979, which the Board serve Banks regularly submit to the believes is due largely to the System's Board all correspondence connected continuing effort to educate bank with oral and written complaints that customers about their rights and how were resolved during a representative to exercise them. The Board is en- period; members of the Board staff couraged by this evidence of success review the actions of the Reserve in its consumer education efforts. Banks for timeliness, thoroughness, In 1980, the Board staff received responsiveness, and adherence to 349 written inquiries concerning con- System procedures; and the results of sumer credit laws and bank policies the review are then conveyed to the and procedures, and responded to pertinent Reserve Bank. Because this each by explaining pertinent laws, program has been successful in furregulations, and bank practices, and ther strengthening the complaintby providing relevant printed handling systems of the Reserve Banks, the Board plans to continue it 1. Consumer Complaints Received by the in 1981. Federal Reserve System, by Subject, In 1980, staff members of the 1980 Board sent follow-up questionnaires to consumers whose complaints Subject Number against state member banks were Regulation B (Equal Credit Opportunity) .. 723 reviewed by the Board or by one of Regulation C (Home Mortgage Disclosure). 8 the Reserve Banks. A high proportion Regulation E (Electronic Fund Transfer)... 83 Regulation Q (Interest on Deposits) 428 of the responses that were returned Regulation V (Securities Credit) 2 (60 percent) were favorable to the Regulation X (Securities Credit) 1 Regulation Z (Truth in Lending) 817 way the complaints were handled by Regulation BB (Community Reinvestment). 4 Regulation CC (Consumer Credit Restraint) 104 the Federal Reserve System. About 72 percent reported that the explanation Fair Credit Reporting 125 Fair Debt Collection Practices . 87 they received was clear and under- Fair Housing Act 2 standable; 72 percent, that they were Transfer agents 17 Holder in due course 11 satisfied with the promptness in Unregulated bank practices handling; 93 percent, that they were Early warning 971 Miscellaneous 1,009 treated courteously by Federal Re- Other ' 113 serve staff; and 84 percent, that they TOTAL 4,505 will contact the Federal Reserve again 1. Includes primarily miscellaneous complaints against business entities. if they encounter another problem Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Consumer Affairs 2. Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1980 ' Type of complaint Total Loan functions Electronic Type of resolution complaints Deposit fund Trust D n is a c t r i i o m n i- Other functions transfers services Other Total complaints 4,505 737 1,582 1,360 94 56 676 Total concerning state member banks 157 313 293 285 41 25 157 Insufficient information 11 6 7 9 0 3 11 Information furnished 31 65 39 71 7 3 31 Bank legally correct No accommodation 34 135 76 64 7 8 34 Accommodation made ... 8 40 43 22 3 0 8 Clerical error, corrected 24 16 53 51 12 1 24 Factual dispute 4 3 7 17 4 14 Bank violation, resolved .... 2 3 7 4 0 0 2 Possible bank violation, unresolved 2 14 2 0 0 2 Customer error 3 5 2 8 2 0 3 Pending December 31,1979 38 39 55 37 6 9 38 January 31, 1980 5 10 12 10 0 0 5 1. The terms used in this table that are not self- tractual disputes that can be resolved only by the explanatory are defined as follows: courts. Consumers wishing to pursue the matter are Insufficient information. The staff has been unable, advised to seek legal counsel or legal aid, or to use after follow-up correspondence with the consumer, to small claims courts. obtain sufficient information to process the com- Bank violation, resolved. In these cases a bank applaint. pears to have violated a law or regulation and has Information furnished. When it is apparent that the taken corrective measures voluntarily or as ordered by complainant does not understand the law and that the Federal Reserve System. there has been no violation on the part of the bank, Possible bank violation, unresolved. When a bank the Reserve System explains the law in question and appears to have violated a law or regulation, cusprovides the complainant with other pertinent in- tomers are advised to seek civil remedy through the formation. courts. Some cases that appear to involve criminal ir- Bank legally correct, accommodation made. In regularity are referred to the appropriate law enforcethese cases the bank appears to be legally correct, but ment agency. chooses to make an accommodation. 2. Includes complaints against national banks and Factual dispute. These cases involve factual disputes nonmember banks, which are referred for resolution not resolvable by the Federal Reserve System and con- to the appropriate agencies. with a bank. Fifty-two percent found ing to bank functions—loans, dethe resolution of the complaint ac- posits, electronic fund transfers, ceptable. The proportion of those trusts, and other. About 54 percent satisfied with the outcome is lower concerned loan functions: 28 percent than the proportion of those satis- alleged discrimination and 26 perfied with the procedure because many cent dealt with credit-cost disclosures complaints involve factual disputes and other general loan functions. Apbeyond the Federal Reserve's power proximately 26 percent involved into resolve, or involve bank practices terest on deposits and general practhat, however objectionable to the tices concerning deposit accounts. consumer, do not violate state or federal law. Consumer Education Table 2 summarizes the nature and resolution of the complaints against An important part of the System's state member banks received in 1980. efforts in consumer affairs is its pro- The complaints are compiled accord- duction and distribution of materials Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 187 on consumer education. Both the disclosure requirements on creditors. Board and the Federal Reserve Banks The current proposal incorporates are active in this area. The Federal refinements that meet some of the Reserve Bank of Philadelphia, for ex- technical objections that were raised ample, has produced a film entitled during hearings conducted by the "EFT: At Your Service/' which is Federal Trade Commission in 1977 available to schools with accompany- and 1978. The comment period was ing classroom materials. The Federal extended to January 16, 1981. Reserve Banks of Minneapolis and In a letter to the Federal Trade New York have also produced class- Commission, the Board noted that room materials on how to use credit several of the credit practices that services wisely and on other topics. In would be prohibited by this proposal 1980 the Board published about 3 are already prohibited or curtailed in million copies of a consumer booklet the majority of states by state law.1 entitled Alice in Debit land, explain- Also, although the Commission's ing consumer protections under the own Bureau of Economics supported Electronic Fund Transfer Act and a few of the provisions in a memoran- Regulation E. The Board also incor- dum issued in August 1980, it was porated information about the Elec- critical of some provisions, it recomtronic Fund Transfer Act in The Con- mended substantial change before sumer Handbook to Consumer Cred- promulgation, and more important, it Protection Laws, which, like Alice it questioned the underlying basis of in Debitland, has proven quite the rule. The Board also expressed popular. concern about the growing burden of Board staff participate in consumer federal regulations. An excerpt from education fairs, which offer oppor- the letter appears on page 190. tunities to distribute information and answer questions about the various Home Mortgage Disclosure consumer and civil rights regulations. In 1980, the Board received an award The Board of Governors of the for the excellence of its exhibit at the Federal Reserve System implements Consumer Education and Informa- the Home Mortgage Disclosure Act tion Fair, which was sponsored by the (HMDA) of 1975 through its Regula- District of Columbia's Office of Con- tion C (Home Mortgage Disclosure). sumer Protection. The act, which requires financial institutions that have offices in standard metropolitan statistical areas Rulewriting and the (SMSAs) to disclose publicly the loca- Federal Trade Commission tion of their residential mortgage In August 1980, the Federal Trade loans, expired in June 1980, in ac- Commission requested comment on a cordance with a sunset provision. On revision of its proposed Credit Prac- October 8, 1980, the HMDA was tices Rule, which was first issued for reinacted for a five-year period, with comment in 1975. The proposed rule certain amendments. would prohibit the use of certain contractual terms that are sometimes in- 1. Letter, dated December 22, 1980, from cluded to aid in the collection of un- Chairman Volcker to the Honorable Michael paid debts and would impose specific Pertschuk, Chairman of the FTC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Consumer Affairs The statutory amendments require agency that regulates them—the Fed- (1) compilation and disclosure of eral Reserve Banks, the Comptroller mortgage loan data, beginning with of the Currency, the Federal Home 1980, on a calendar-year rather than Loan Bank Board, the Federal fiscal-year basis; (2) itemization of Deposit Insurance Corporation, or data by census tract or county rather the National Credit Union Administhan by census tract or ZIP code; (3) tration. State-chartered institutions use of a standard disclosure format, that are exempt from the federal law to be prescribed by the Board; (4) will submit the statements required by central data repositories in each state law to their state supervisory SMSA; and (5) aggregation of mort- agency. gage loan data to cover all institutions In February 1981, the Board pubin each SMSA. lished a proposed revision of Regula- On December 1, 1980, the Board tion C to implement the other statuamended Regulation C to implement tory amendments. The Board, while calendar-year reporting for all institu- attempting to weigh the costs of comtions. Institutions that previously pliance of each regulatory provision compiled data on a noncalendar against its benefits to the public, profiscal-year basis are required to poses to delete or reduce current reprepare a separate disclosure state- quirements in some instances where ment for any portion of 1979 not the act allows. The Board proposes to covered by their last fiscal-year state- modify others to ensure uniformity in ment. The Board established March collection and reporting aimed at 31, 1981, as the due date. facilitating the later aggregation of The requirement that disclosures be the data. At the same time, in keeping made by census tract or county was with the objectives of its Regulatory not implemented for 1980 data be- Improvement Project, the Board has cause of the difficulty in recompiling redrafted Regulation C in a simplisuch material. Similarly, the use of a fied, more concise form, which is apmandatory, Board-prescribed format proximately 30 percent shorter than for disclosure statements is being the current version and which the deferred until 1981. However, to Board believes will be easier to use. facilitate the aggregation of mortgage Among the principal changes that the loan data, institutions covered by Board proposes are the following: the act were asked to compile and 1. An institution that is exempt disclose their 1980 data in a manner and subsequently loses its exemption consistent with the Board's form will be required to compile and report HMDA-1. data starting with the calendar year Because of the statutory require- following the loss of exemption ment regarding the aggregation of rather than with the preceding year, data, these institutions will be subject as in the present regulation. to certain reporting requirements 2. The category ''total residential regarding loan data for 1980 and mortgage loans," which is the sum of subsequent years. Financial institu- the FHA-Farmers Home Administrations will be required to submit two tion-VA loan category and the concopies of their HMDA statements to ventional loan category, will no the regional office of the supervisory longer be required. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer Affairs 189 3. Geographic breakdowns will be fices will be required only for data on given in terms of census tracts or property loans in the SMSA where counties; ZIP codes will no longer be the branch is located. However, used. disclosures at home offices and at 4. Disclosures at a branch office in central data repositories will contain the SMSA where the institution's complete data for all the SMSAs in home office is located will no longer which the institution has offices. be required. 6. The availability of loan data will 5. Disclosures at other branch of- no longer have to be publicized. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Consumer Affairs Excerpt from letter, dated December 22, 1980, from Chairman Volcker to the Honorable Michael Pertschuk, Chairman of the FTC. All of us are aware of the growing con- need for the Credit Practices Rule is so cern—if not the alarm—many feel about compelling that it too should be added to the constant stream of new regulations the existing regulatory burdens. coming out of Washington. Any one of This point seems particularly worth exthese regulations taken on its own may amining because of the long history of the well seem reasonable, responsive to a gen- Credit Practices Rule. In 1975, when it uine evil, and not very costly. But the ef- was first proposed, the degree of the fects of government regulation are cumu- regulatory problem was not fully aplative, and adding one reasonable regula- preciated and all the regulatory additions tion on top of another can eventually of the late 70's were still ahead of us. create—and perhaps already has cre- Recently the Congress has repeatedly exated—an unreasonable and unmanage- pressed its concern with the burden of able burden on the public. rulemaking. This spring, it passed the The volume of rules and regulations has Truth in Lending Simplification and reached serious proportions. For exam- Reform Act expressing the clear intent to ple, financial institutions this past year trim back some of the Truth in Lending have had to cope with important revisions requirements. An even more far-reaching to federal rules governing reserve re- expression of congressional concern is the quirements, the offering of financial ser- Regulatory Flexibility Act, which requires vices by Federal Reserve Banks, credit a rigorous analysis of the burden, parcost disclosures, electronic fund transfers, ticularly on small businesses, of all new management interlocks, loans to insiders, federal regulations. Moreover, since the and disclosure of mortgage lending prac- Credit Practices Rule was first proposed, tices. Other industries have no doubt the Administration's Regulatory Council faced a similar experience in coping with was conceived as a way to help cope with numerous new requirements and changes the national problem of overregulation in procedures. This problem is felt most and, of course, the President's executive acutely by small businesses, which cannot order requiring regulatory reform projects afford counsel to influence, implement, in each agency was issued. or even monitor regulatory developments. Given that many of the practices cov- Moreover, these businesses must deter- ered by the proposal are already widely mine whether federal law supersedes state regulated at the state level, given the oplaw, which already extensively regulates position of the Commission's own ecothe creditor remedies covered by the pro- nomic staff to significant portions of the posed rule. Throughout the nation a rule, and given the nearly universal conbroad assessment of the aggregate effect sensus that a reassessment of the breadth of regulation on productivity and infla- of federal rulemaking is necessary, we do tion—two of our country's most serious not believe that this is the appropriate problems—is underway. With this as time to launch a whole new set of federal background, the question is not whether credit rules. In light of these factors, we the rule may be responsive to some real urge the Commission to reconsider isabuses in some cases, but whether the suance of the rule. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

191 Implementation of the Monetary Control Act of 1980 On March 30, 1980, the Monetary of reserve requirements created a Control Act of 1980 (Title I of Public hardship for individual former Law 96-221) was enacted. Under the member banks. On April 23, the act, the Board is required to impose Board adopted a policy prescribing reserve requirements, solely for the the procedure by which institutions purpose of conducting monetary pol- could apply for such determinations. icy, on all depository institutions that On June 4 the Board requested maintain transaction accounts or public comment on its revised nonpersonal time deposits. The Regulation D to carry out the act's Board also is empowered to receive provisions on reserve requirements. from all depository institutions, re- More than 750 comments on all asports of assets and liabilities that it pects of this proposal were received determines are necessary for monitor- from depository institutions, trade ing and controlling the monetary ag- associations, and other interested gregates. The act opens access to parties. After considering these Federal Reserve credit and services to public comments, the Board on all depository institutions. Any August 15 announced final rules, depository institution that maintains which went into effect on November transaction accounts or nonpersonal 13, 1980. In defining a transaction actime deposits is entitled to the same count, the Board struck a balance by borrowing privileges as member not imposing reserve requirement banks. The System is required to costs on those accounts that permit establish a fee schedule for its services occasional withdrawals by various and to make them available to all convenient means, while applying depository institutions beginning in such requirements to deposits that September 1981. can be used generally for transactions The Board's initial actions on purposes. In addition, the Board reserve requirements concerned the established a zero percent reserve retreatment of former member banks. quirement on time deposits with an Under the act, former member banks original maturity of four years or that left the System on or after July 1, more because such deposits are not 1979, are required to maintain full vital to effective monetary policy. member bank reserve requirements Under the act, current reserve rewithout benefit of the phase-in al- quirements for member banks are lowed nonmember banks. The legisla- phased down to prescribed levels over tive history of the act indicated that four years while reserve requirements the Board was to administer this pro- for nonmember depository instituvision flexibly with respect to the date tions generally are phased in over of withdrawal from membership and eight years. The phasing in does not in the granting of waivers for limited apply to any other category of periods in the event the maintenance deposits or accounts that are first au- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Monetary Control Act thorized by federal law after April 1, and reserve management burdens 1980. As a result, negotiable order temporarily for very small instituof withdrawal (NOW) accounts is- tions that lack staff resources, they sued by institutions outside New may encounter difficulties in the England, New York, and New Jersey future in preparing reports and in are immediately subject to full reserve managing their reserve positions. requirements. Depository institutions The Board also adopted rules to outside those eight states will be re- implement the reserve passthrough quired to maintain full reserve re- provision of the act and issued an inquirements on NOW account bal- terpretation concerning the bankers' ances without any phase-in. How- bank exemption from reserve reever, the act provides a phase-in of quirements. reserve requirements for automatic On the date of enactment of the transfer accounts (ATS), which can Monetary Control Act, the Board be offered by commercial banks and issued a statement that it would conwhich are similar to NOW accounts. sider requests for discount window After consultation with the leader- assistance from nonmember deposiship of the Senate and House Bank- tory institutions on a case-by-case ing Committees, the Board delayed basis until arrangements for forimplementation of the regulation un- malizing access to the discount wintil November 13 to afford institutions dow were implemented. On June 10, and the Federal Reserve time to make proposals for such access were pubthe necessary operational modifica- lished for public comment, and a tions. In addition, because of the revised Regulation A—Extension of number of changes that are required Credit by Federal Reserve Banks by the act, the Board further delayed (12 C.F.R. Part 204)—went into efimplementation for nonmember in- fect on September 1. In addition to stitutions with deposits of less than short-term adjustment credit, Federal $15 million. Nonmember depository Reserve assistance is available to acinstitutions that had less than $2 commodate the needs of depository million in deposits as of December institutions that may be experiencing 31, 1979, will not become subject to difficulties adjusting to changing reserve requirements until May 1981 money market conditions over a at the earliest. These 17,000 institu- longer period, particularly at times of tions account for 43 percent of the in- deposit disintermediation, as prostitutions in the country but hold only vided in the act. 0.4 percent of the total deposits. To Under the Board's rules, deposiease the burden of compliance, de- tory institutions are expected to make pository institutions of $2 million to full use of other reasonably available $15 million in deposits are subject on- sources of credit, including specially to quarterly, rather than weekly, industry lenders such as the Federal reserve maintenance and reporting, Home Loan Banks, the National beginning in January 1981. These Credit Union Administration's Cen- 10,000 institutions account for 25 tral Liquidity Facility, and corporate percent of the depository institutions central credit unions before turning in the country and hold less than 4 to the discount window for assistpercent of the total deposits. While ance. This rule was adopted to ensure these actions will reduce the reporting that discount window credit does not Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Control Act 193 interfere with the credit programs ent with the desire of the Congress that are available from other lenders; that the benefits of System services be this objective was expressed in com- provided to all depository institutions ments received from the Federal as soon as operationally possible. Home Loan Bank Board and the Na- Although the act does not require the tional Credit Union Administration. Board to begin pricing services until The Federal Reserve Board believes September 1981, pricing other than that this policy is consistent with the for float, is scheduled to begin in fundamental purposes of the discount January 1981 and will be fully imwindow and fulfills congressional in- plemented by January 1, 1982. The tent with respect to institutions with following schedule was adopted for longer-term assets; at the same time it imposing service fees and for providdoes not interfere with the credit pro- ing nonmembers access to services: grams established by the specialindustry lenders. Under the act, the Board is re- Type of service Effective date quired to publish for comment pric- Wire transfer January 29 1981 ing principles and a proposed Net settlement January 29, 1981 Check clearing and collection .... August 3, 1981 ' schedule of fees for Federal Reserve Automated clearinghouse August 3, 1981 services. On August 28, 1980, the Purchase, sale, safekeeping, and transfer of securities .... October 1981 2 Board announced such a proposed Noncash collection October 1981 2 schedule and the principles that Currency and coin January 1982 2 underlie them. The Board received 1. In view of the December 31, 1980, effective date for negotiable order of withdrawal (NOW) accounts more than 230 comments from the for all depository institutions and in order to limit the public, primarily from depository in- impact of delaying nonmember access to checkstitutions and from financial institu- collection services, the Board has decided to authorize access to current regional check processing center tion trade groups. In light of these (RCPC) arrangements without charge to all noncomments, the Board considered its member depository institutions. Nonmember compricing proposals at public meetings mercial banks currently are permitted to deposit local items in RCPCs. held on December 10 and December 2. Actual implementation dates will be announced 12, 1980, and formally announced its at the time final fee schedules are published. decisions on December 31.' The act specifies that fees must be At its December 1980 meetings, the set for the following services: (1) cur- Board also decided that future fee rency and coin; (2) clearing and col- schedules will be based on estimated lection of checks; (3) wire transfer of costs for the period in which they are funds; (4) automated clearinghouse effective, while developmental costs (ACH); (5) settlement; (6) securities may be spread (for fee-setting pursafekeeping; (7) noncash collection; poses) over the expected useful life of (8) Federal Reserve float; and (9) any the project; various means (such as new services that the Federal Reserve peak-load pricing) may be used to im- System offers. prove service efficiency. The Board The System began offering priced also announced a plan to eliminate services—for wire transfer and net Federal Reserve float over a two-year settlement—in January 1981, consist- period, primarily by improving operations. The remainder will be priced. 1. See "Record of Policy Actions of Board of Governors," p. 79. In view of the significant changes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Monetary Control Act that depository institutions are en- ducted many meetings at the local countering as a result of the Mone- level to discuss the new regulations tary Control Act, the Federal Reserve and pricing proposals in order to has made efforts to consult with all smooth the transition of depository sectors of the financial community. institutions and the Federal Reserve For example, other federal financial System to the new environment reinstitution regulatory agencies and in- sulting from the act. In addition, the dustry trade groups were consulted in Board established a Thrift Institutions developing regulations to apply to in- Advisory Council to provide such institutions with which the Federal stitutions a forum for consulting with Reserve has not had much experience. the Board, similar to the statutory The Federal Reserve Banks con- Federal Advisory Council. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

195 Legislative Recommendations The Board of Governors has made rather than a majority of the entire the following recommendations for board of directors, of loans aglegislation to the Congress of the gregating more than $25,000 to ex- United States. ecutive officers and other insiders. The suggested amendment would per- Amendments to the Financial mit the board of directors to delegate Institutions Regulatory and the authority to approve such loans to Interest Rate Control Act of 1978 a loan or executive committee of board members and would simplify The Board has recommended a the cumbersome procedure now renumber of amendments to the Finanquired. cial Institutions Regulatory and In- • Amend the civil money-penalty terest Rate Control Act of 1978 provisions of the Federal Reserve Act (FIRA) to clarify certain of its proviand the Bank Holding Company Act sions, to ease requirements that are to confirm the authority of the Board unnecessarily burdensome, to correct to compromise, remit, or modify any procedural problems, and to conpenalty. The suggested authority is tribute to the efficient enforcement of comparable to that explicitly granted the act. The Board's recommendato the Comptroller of the Currency tions for 1980 comprise the following by the FIRA. major elements: • Amend section 18(j)(2) of the • Eliminate the dollar limitations Federal Deposit Insurance Act to exof section 22(g) of the Federal Reserve clude a foreign bank that maintains a Act on a member bank's loans to its branch in the United States from executive officers for the purchase of coverage by section 22(h) of the a home or education of children. The Federal Reserve Act relating to extenstatutory limitations are burdensome sions of credit to executive officers and unnecessary in view of other proand insiders. The suggested exclusion hibitions of the FIRA regarding prefis consistent with the exemption from erential lending to bank insiders, insection 23A of the Federal Reserve cluding executive officers. Act for foreign banks under the Inter- • Eliminate the requirement connational Banking Act of 1978. tained in section 22(g) of the Federal Reserve Act that a member bank file Financial Transactions a quarterly report on loans to exwith Affiliates ecutive officers. This reporting requirement is duplicative of the report- During 1976 and 1977 the Board coning provisions of the FIRA, which re- ducted a major review of section 23A quire annual reports on such loans. of the Federal Reserve Act. Section • Amend section 22(h) of the Fed- 23A is designed to protect member eral Reserve Act to require the prior banks from abuse by restricting nonapproval of the board of directors, arm's-length financial transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Legislative Recommendations between these banks and affiliated represented on the Reserve Banks' companies. The Board's review of boards of directors as a way of acthis statute was prompted in part by complishing one of the objectives of the discovery that several relatively the Federal Reserve Reform Act of large banks had been adversely af- 1977. That act provides for the reprefected by transactions with their af- sentation of the interests of confiliates. sumers, labor, and services, in addi- One of the Board's major conclu- tion to agriculture, commerce, and sions is that bank transactions with industry, on the boards of the affiliates within the statutory limits Reserve Banks. have not caused substantial instability in the banking system. At the same Authority for time, the Board finds some flaws in Bank Holding Companies the present statute: (1) it is inor- to Acquire Banks across dinately complex; (2) it contains some State Lines in Emergency and potentially troublesome loopholes; Failing-Bank Situations and (3) it appears to be unduly restric- The Board recommends that the Contive in several ways. gress give the Federal Reserve The Board has recommended authority in certain emergency and amendments to section 23A to correct failing-bank situations to approve the these flaws. Principal among its acquisition by an out-of-state bank recommendations are those (1) to holding company of a large bank that allow a holding company greater is in severe financial difficulty. The freedom to transfer funds among its purpose of the legislation is to avoid sister subsidiary banks but to prohibit an adverse potential impact when the a bank from purchasing low-quality failing bank is one of the largest in assets from a sister subsidiary bank; the state and the public interest would (2) to broaden the definition of "afbe served best by such an acquisition. filiate" to include real estate invest- Existing law permits a foreign bank, ment trusts and other financial orbut not an out-of-state U.S. banking ganizations that are sponsored and institution, to acquire the failing advised by a banking organization; bank. and (3) to expand the types of col- The authority would be limited to lateral permitted on bank loans and cases involving a bank that had assets extensions of credit to affiliates while in excess of $1.5 billion or that was requiring that these new types of colone of the three largest in the state. lateral have a high value relative to The authority would be used only in the loan. cases in which few or no purchasers could be found within the state and in Expansion of Class C Directors which the size or other special char- The Board has submitted to the Con- acteristics of the problem bank and gress draft legislation to increase the the probability of widespread finannumber of Class C directors at each cial effects of its failure warrant an Federal Reserve Bank from three to exception to the general restrictions five. The proposal aims to diversify on out-of-state bank acquisitions by a further the backgrounds and interests bank holding company. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislative Recommendations 197 Amendments to the lending companies and agencies of International Banking Act foreign banks with consolidated worldwide assets of less than $1 The International Banking Act of billion. 1978 (IBA) required the Board to re- • To amend the Bank Holding port to the House and Senate Banking Company Act in such a way as to ef- Committees within two years of the fectively prohibit bank holding comdate of enactment its recommenda- panies from acquiring by merger adtions to improve the implementation ditional banks outside their principal of the act. The IBA provides a federal state of banking operations, and to regulatory framework governing the clarify the intent of the Congress operations of foreign banks within under section 5 of the IBA with the United States and also contains respect to a change in home state. statutory provisions governing the • To clarify the provisions of secorganization and operations of Edge tion 2(h) of the Bank Holding Comcorporations. The Board has sub- pany Act, as amended by the IBA, to mitted its report to the Congress (1) assure that the requirements for recommending that the IBA be U.S. nonbanking activities are apamended in these ways: plicable to direct offices as well as to • To authorize access for Edge subsidiaries, and (2) assure that corporations to the Federal Reserve foreign banking organizations cannot discount window without requiring conduct U.S. financial operations of them to become members of the Fed- the kinds not permissible for doeral Reserve System. mestic bank holding companies. • To authorize the Board to permit • To permit the banking agencies majority ownership of Edge corpora- to afford confidential treatment to intions by a U.S. bank that is controlled formation obtained from foreign by foreign individuals. banking organizations that is not • To eliminate the statutory limita- disclosed, either by law or custom, in tion on member-bank investments in their home countries. Edge corporations and authorize the • To authorize the banking agen- Board to control aggregate and in- cies to exchange examination and dividual investments in Edge corpora- other supervisory information with tions. foreign banking authorities about • To authorize the Board to im- banks and bank holding companies pose reserve requirements on all under suitable agreements to mainforeign banking institutions in the tain confidentiality of that informa- United States, including commercial tion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Litigation During 1980 the Board of Governors ment company that is registered was named in 33 lawsuits, compared under the Investment Company Act with 22 in 1979. Of the actions filed in of 1940. The court, on March 30, 1980, 9 raised questions under the 1979, overturned the Board's amend- Bank Holding Company Act, com- ment (606 F.2d 1004). The Board appared with 16 in 1979. As of Decem- plied for and was granted certiorari ber 31, 1980, 33 cases were pending, by the U.S. Supreme Court on Febru- 11 of which involve the Bank Holding ary 19, 1980 (444 U.S. 1070). Oral Company Act. A brief description of argument was heard by the Court on each of these cases and of those October 15, 1980. disposed of in 1980 follows. In Florida Association of Insurance Agents, Inc. v. Board of Gover- Bank Holding Companies— nors, Nos. 75-3151 to 3153 (5th Cir., Antitrust Action filed August 12, 1975), petitioner sought judicial review of three Board In 1980 the U.S. Department of orders (Federal Register, volume 40, Justice filed no challenges under the 1975, pages 30869, 30872, 30876) apantitrust laws of the United States to proving the applications of four bank acquisitions by registered bank holdholding companies to engage in cering companies or to bank mergers tain insurance agency activities in that had been approved previously by Florida to the extent permitted by the Board, and no such cases are state law. On March 19, 1979, the pending from previous years. court remanded the cases to the Board for further consideration (591 Bank Holding Companies— F.2d 334). On January 11, 1980, the Review of Board Actions Board issued an order approving the In Investment Company Institute v. application of Chase Manhattan to Board of Governors, No. 77-1862 engage de novo through its subsidi- (D.C. Cir., filed September 23, 1977), ary, Housing Investment Corporapetitioner sought judicial review of a tion of Florida, in certain insurance Board order, dated August 31, 1977 agency activities pursuant to section (Federal Reserve Bulletin, volume 63, 4(c)(8) of the Bank Holding Com- September 1977, page 856), denying pany Act (12 U.S.C. 1841 et seq.). its petition for reconsideration and The other applications were withrescission of a portion of the Board's drawn by the applicants. January 1972 amendment to Regula- In Memphis Trust Company v. tion Y (Federal Register, volume 37, Board of Governors, No. C76-64 1972, page 1463). Petitioner chal- (W.D. Tenn., filed February 19, lenged the validity, under the Glass- 1976), plaintiff requested the court to Steagall Act, of the Board's amend- set aside the Board's order of April 10, ment, which permits bank holding 1975 (Federal Reserve Bulletin, volcompanies to act as investment ad- ume 61, May 1975, page 327), denying visers to, or sponsors of, an invest- plaintiff's application to acquire Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 199 Home Owners Savings and Loan As- of Governors, Nos. 78-1581 and 78sociation, Collierville, Tennessee. In 2031 (9th Cir., filed March 17 and a decision on June 4, 1976, the court May 12, 1978), petitioners challenged held that plaintiff's application had the Board's action in denying Securbeen approved by operation of law ity Bancorp's application to become a because the Board had not acted on it bank holding company through the within 91 days after the submission of acquisition of Security National the complete record to the Board. Bank, Walnut Creek, California The district court further held that (Federal Reserve Bulletin, volume 64, it had jurisdiction over plaintiffs May 1978, page 405). On October 27, suit. 1980, the court issued an opinion The Board appealed the decision to ordering the Board to approve the apthe U.S. Court of Appeals for the plication (631 F.2d 146). On Decem- Sixth Circuit (No. 76-2183). On ber 24, 1980, the Board filed a peti- September 22, 1978, the circuit court tion for a rehearing en bane. held that the district court lacked In Mid-Nebraska Bancshares, Inc. subject-matter jurisdiction, reversed v. Board of Governors, No. 78-1658 the district court, and remanded the (D.C. Cir., filed July 14, 1978), the case for dismissal without prejudice petitioner sought judicial review of a to petitioner's right to request the Board order, dated June 16, 1978 Board to reconsider its order of (Federal Reserve Bulletin, volume 64, April 10, 1975 (584 F.2d 921). July 1978, page 589), denying the ap- Memphis Trust then petitioned the plication by Mid-Nebraska Banc- Board accordingly and was denied shares, Inc., Ord, Nebraska, to reconsideration by the Board's order become a bank holding company of April 25, 1979. Memphis Trust through the acquisition of Nebraska petitioned for review of this order in State Bank, Ord, Nebraska. Petithe U.S. Court of Appeals for the tioner claimed that the Board's order Sixth Circuit (79-3350), claiming that was not supported by substantial its original application was approved evidence and exceeded the Board's by operation of law and alleging that authority under the Bank Holding the Board had not acted on the ap- Company Act. On February 19, 1980, plication within 91 days after the sub- the court affirmed the Board's order mission of the complete record to the (627 F.2d 266), and on March 3, Board. The court affirmed the 1980, denied the petition of Mid- Board's order of February 14, 1980. Nebraska Bancshares for a rehearing. In Vickars-Henry Corporation v. In Independent Insurance Agents Board of Governors, No. 77-3890 of America, Inc., et al. v. Board of (9th Cir., filed December 13, 1977), Governors etal., Nos. 79-1280, 1398, petitioner challenged a Board deter- 1471 (D.C. Cir., filed March 14, mination, dated November 15, 1977, April 20, and May 9, 1979), petithat petitioner is not a bank holding tioners challenged orders of the company for purposes of the Bank Federal Reserve Banks of New York, Holding Company Tax Act of 1976. Kansas City, and Cleveland approv- On October 6, 1980, the court af- ing the applications of First National firmed the Board's order (630 F.2d State Bancorporation, Newark, New 629). Jersey, New Mexico Bancorporation, In Security Bancorp et al. v. Board Inc., Santa Fe, New Mexico, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Litigation Pittsburgh National Corporation, hiring and promotion practices and Pittsburgh, Pennsylvania respective- claimed that the Board should have ly, to engage de novo in certain prop- denied the application for this reason. erty and casualty insurance agency On February 8, 1980, the court afactivities. Petitioners claimed that the firmed the Board's order. orders were not based on substantial In Connecticut Bankers Associaevidence, that petitioners were tion et ai v. Board of Governors, No. unlawfully denied hearings on the ap- 79-1554 (D.C. Cir., filed May 30, plications, and that the orders 1979), petitioners challenged the violated the Administrative Pro- Board's order (Federal Reserve cedure Act and the Board's pro- Bulletin, volume 65, June 1979, page cedural regulations. On April 21, 506) approving the application by 1980, the court affirmed the Board's Citicorp, New York, New York, to orders without opinion. Petitioners engage de novo, through a subsidiary then filed a petition for rehearing, in Westport, Connecticut, in the acwhich was denied on June 10, 1980. tivities of second-mortgage lending On January 12, 1981, the U.S. Su- and the sale of credit-related inpreme Court denied a petition for a surance. Petitioners argued that the writ of certiorari, which had been Board was in error in denying them a filed by petitioners. hearing on the application. On Febru- In Credit and Commerce American ary 8, 1980, the court affirmed the Investments, B. V., et al. v. Board of Board's decision to deny a hearing on Governors et al, No. 79-1294 (D.C. the issues of branching and undue Cir., filed March 16, 1979), peti- concentration, and remanded the case tioners challenged a Board order to the Board for a determination on (Federal Reserve Bulletin, volume 65, the issue of voluntary tie-ins (627 March 1979, page 254) dismissing F.2d 245). petitioners' application to acquire In County National Bancorpora- Financial General Bankshares, Inc., tion etal v. Board of Governors, No. Washington, D.C. The Board found 79-1783 (8th Cir., filed September that it was precluded from approving 18, 1979), petitioners challenged the the application because the proposed Board's order of August 27, 1979 transaction would violate Maryland (Federal Reserve Bulletin, volume 65, law. The court dismissed the case on September 1979, page 763), denying December 12, 1980, pursuant to stip- petitioners' application to acquire TG ulation by all parties. Bancshares Co., St. Louis, Missouri, In Jackson et al. v. Board of Gov- a multibank holding company. Petiernors, No. 79-2171 (5th Cir., filed tioners allege that the Board relied May 14, 1979), petitioners challenged upon an improper standard in denya Board order dated May 2, 1979 ing the application. {Federal Reserve Bulletin, volume 65, On September 3, 1980, the court June 1979, page 500), approving the held that the Board was without application of Texas American Bane- authority to deny approval to a bank shares, Inc., Fort Worth, Texas, to holding company application to acacquire additional shares of Riverside quire a bank under section 3 of the State Bank, Fort Worth, Texas. Peti- Bank Holding Company Act for antioners alleged that Texas American ticompetitive effects unless these ef- Bancshares engaged in discriminatory fects amounted to a violation of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 201 antitrust laws. The Board was a Board order (Federal Reserve granted a rehearing en bane on Oc- Bulletin, volume 66, May 1980, page tober 10, 1980. Oral argument was 423) denying petitioner's application heard on December 9, 1980. to acquire Pan National Group, Inc., In Boggs et al. v. Board of Gover- El Paso, Texas. Petitioner claims that nors, No. 79-1891 (8th Cir., filed Oc- the Board's order is not supported by tober 19, 1979), petitioners chal- substantial evidence. Oral argument lenged the Board's order of Septem- was heard by the court on October 6, ber 21, 1979 {Federal Reserve 1980. Bulletin, volume 65, October 1979, In Martin-Trigona v. Board of page 871), approving the application Governors of the Federal Reserve of Missouri Country Bancshares, System, No. 80-1739 (D.C. Cir., filed Inc., Liberal, Missouri, to acquire July 2, 1980), petitioner challenged a Bank of Raymondville, Raymond- Board order of June 3, 1980 (Federal ville, Missouri. The court granted Reserve Bulletin, volume 66, July petitioners' motion to dismiss on 1980, page 587), approving an ap- January 31, 1980. plication by Citicorp to retain Citi- In Independent Bank Corporation corp Homeowners, Inc., Des Peres, v. Board of Governors, No. 79-3652 Missouri. On December 23, 1980, the (6th Cir., filed October 22, 1979), Board moved to dismiss for petipetitioner challenged the Board's tioner's failure to file his brief in a order of September 21, 1979 (Federal timely fashion. Reserve Bulletin, volume 65, October In Republic of Texas Corporation 1979, page 867), denying petitioner's v. Board of Governors, No. 80-1985 application to acquire The Old State (5th Cir., filed September 11, 1980), Bank of Fremont, Fremont, Michi- petitioner challenged a Board order gan. Petitioner claimed that the of August 20, 1980 (Federal Reserve Board's order was not supported by Bulletin, volume 66, September 1980, substantial evidence. On August 20, page 787), denying petitioner's ap- 1980, the court granted petitioner's plication to acquire the Citizens Namotion to dismiss the case. tional Bank of Waco, Waco, Texas. In American Trust Company of Petitioner claims that the application Hawaii et al. v. Board of Governors, should be granted by operation of law No. 80-1034 (D.C. Cir., filed Jan- because of the Board's alleged failure uary 11, 1980), petitioners sought to act within 91 days of receipt of the judicial review of the Board's order application. Petitioner also claims dated December 10, 1979 (Federal that the Board's order was not sup- Reserve Bulletin, volume 66, January ported by substantial evidence. 1980, page 66), approving the acquisi- In Independent Insurance Agents tion of Bishop Investment Corp., of America, Inc., and Independent Honolulu, Hawaii, by Crocker Na- Insurance Agents of Virginia v. tional Corporation. On April 30, Board of Governors, No. 80-1611 1980, American Trust filed a stipula- (4th Cir., filed September 15, 1980), tion of dismissal. petitioners seek review of a Board In Mercantile Texas Corporation v.order dated July 24, 1980 (Federal Board of Governors, No. 80-1528 Reserve Bulletin, volume 66, August (5th Cir., filed May 15, 1980), peti- 1980, page 668), approving the applitioner requested that the court review cation of Virginia National Bane- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Litigation shares, Inc., Norfolk, Virginia, to Board determination of November 17, engage in the sale of credit-related 1980, that petitioner continued to be property and casualty insurance. Pe- a bank holding company subject to titioners claim that the Board's action the Board's jurisdiction under the was not supported by substantial evi- Bank Holding Company Act, notdence and that approval cannot rea- withstanding the fact that petitioner's sonably be expected to produce bene- subsidiary bank has reserved the right fits to the public that outweigh the to require 14 days advance notice of adverse effects. Petitioners also claim withdrawal from its demand deposit that the Board's denial of their re- accounts. quest for a hearing was unlawful. In Wilshire Oil Company of Texas In Independent Insurance Agents v. Board of Governors et al., No. 80of America, Inc., and Independent 4156 (D. N.J., filed December 31, Insurance Agents of Missouri v. 1980), plaintiff seeks a declaratory Board of Governors, No. 80-1879 judgment that its subsidiary bank is (8th Cir., filed September 19, 1980), not a bank within the meaning of the petitioners seek review of a Board Bank Holding Company Act and also order dated August 22, 1980 {Federal injunctive relief against the cease- Reserve Bulletin, volume 66, Sep- and-desist and civil-money-penalty tember 1980, page 799), approving proceedings brought by the Board the application of Mercantile Bancor- against Wilshire and its directors for poration, St. Louis, Missouri, to failure to divest its nonbanking assets engage in the sale of credit-related and activities, as required by the property and casualty insurance. Bank Holding Company Act. Petitioners claim that the Board's action was not supported by substantial Other Litigation Involving evidence and that approval cannot Challenges to Board reasonably be expected to produce Procedures and Regulations benefits to the public that outweigh the adverse effects. Petitioners also In a case related to the failure of the claim that the Board's denial of their United States National Bank, San request for a hearing was unlawful. Diego, California, Roberts Farms, In Welch Bancshares, Inc. v. Board Inc. v. Comptroller of the Currency of Governors, No. 80-1971 (10th et al., No. 75-0268 (S.D. Cal., filed Cir., filed September 16, 1980), peti- November 20, 1975), plaintiff sought tioner sought review of a Board order damages on the grounds that the dated August 19, 1980 (Federal Federal bank regulatory agencies Reserve Bulletin, volume 66, Sep- negligently supervised the bank. The tember 1980, page 789), denying peti- case has been stayed indefinitely tioner's application to acquire Welsh pending the outcome of similar suits. State Bank of Welsh, Welsh, Okla- In Merrill v. Federal Open Market homa. On October 20, 1980, the Committee et al., No. 75-0736 court dismissed the case upon peti- (D.D.C., filed May 8, 1975), plaintiff tioner's motion. brought suit under the Freedom of In Wilshire Oil Company of Texas Information Act to compel the Comv. Board of Governors, No. 80-2568 mittee to disclose immediately upon (D.C. Cir., filed December 24, 1980), adoption its domestic policy directives petitioner sought judicial review of a and also the memoranda of discussion Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 203 of its meetings. By order of March 9, national Women's Year and numer- 1976 (413 F. Supp. 494), the court ous federal agencies and officials, inruled that the Committee's domestic cluding the Chairman of the Board of policy directives must be made Governors, to enjoin any expenditure available to the public upon adoption of federal funds in connection with and that factual portions of the the activities of the commission. The memoranda of discussion that could court granted defendants' motion to be reasonably segregated must also be dismiss for lack of standing on disclosed. The Committee appealed February 2, 1978, and the plaintiff the ruling on the domestic policy appealed the case to the U.S. Court directive (No. 76-1379) to the U.S. of Appeals for the Ninth Circuit. The Court of Appeals for the District of Court of Appeals affirmed the dis- Columbia. That court, on November trict court judgment dismissing the 10, 1977 (565 F.2d 778), affirmed the suit on September 18, 1980 (No. ruling of the district court that the 78-2210). Committee's domestic policy direc- In Emch v. United States et al, tives must be publicly released upon No. 77-C-677 (E.D. Wis., filed their adoption by the Committee. The November 18, 1977), plaintiff, a Board then filed a petition for a writ shareholder of the parent company of of certiorari with the U.S. Supreme the American City Bank & Trust Co., Court. N.A., Milwaukee, Wisconsin, a On June 28, 1979, the Supreme failed bank, alleged that the Board Court vacated the decision of the and other bank regulatory agencies court of appeals and remanded the were negligent in supervising and excase to the district court for con- amining the bank. On May 8, 1979, sideration of whether immediate the court dismissed the case without disclosure of the Committee's prejudice and on August 15, 1979, domestic policy directives would denied plaintiff's motion to file an significantly harm the U.S. govern- amended complaint. Plaintiff has ment's monetary policy functions or filed an appeal. its commercial interests, in which case Three cases were pending in 1980 the Committee's present policy of involving challenges to the Board's delaying public disclosure of each employment practices. On June 29, directive until a new directive is in 1977, the complaint in Hilliard v. force would be consistent with the Burns, No. 76-1655 (D.D.C., filed Freedom of Information Act (443 December 8, 1976), was dismissed. U.S. 340). Both parties moved for Plaintiff has filed a notice of appeal summary judgment; and oral argu- from that decision (D.C. Cir. No. ment was held on January 8, 1981. 77-1700), and the case is pending. In The Court subsequently directed the Hadigian v. Board of Governors, No. parties to submit further pleadings. 76-1694 (D.D.C., filed September 17, In Hansen v. The National Com- 1976), the court granted, on Decemmission on Observance of Interna- ber 6, 1978, the Board's motion for tional Women's Year et aL, No. summary judgment. The court held 77-1158 (D. Ida., filed September 21, that the Board's action was neither 1977), plaintiff, a U.S. congressman, arbitrary nor capricious (463 F. Supp. brought suit against the National 437). On January 29, 1980, the circuit Commission on Observance of Inter- court affirmed the district court's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Litigation decision (612 F.2d 586). In Wiley v. tionary policies. On May 2, 1980, the United States et al., No. 79-2374 court granted the Board's motion for (D.D.C., filed September 7,1979), the summary judgment. court granted the defendants' motion In Tangalos v. United States et al., for summary judgment on June 30, No. 79C-1987 (N.D. 111., filed May 1980. 16, 1979), plaintiff sought a declara- In Bollow v. Board of Governors et tion that a certain Treasury bill was al., No. Cl6-911 (N.D. Ca., filed his property and an injunction pre- May 12, 1976), plaintiff, a former venting the government from making employee of the Federal Reserve payment on the bill to another per- Bank of San Francisco, seeks son. On June 26, 1980, the court damages against the Board and the dismissed the case pursuant to plain- Reserve Bank in connection with the tiff's stipulation. termination of plaintiff's employ- In Riegle v. Federal Open Market ment at the Reserve Bank. On Sep- Committee et al., No. 79-1703 tember 23, 1977, the court granted (D.D.C., filed July 2, 1979), plainthe Board's motion for summary tiff, a member of the U.S. Senate, judgment. On November 4, 1977, sought to enjoin the presidents and plaintiff appealed the action. The first vice presidents of the Federal case is pending before the Court of Reserve Banks from serving as mem- Appeals for the Ninth Circuit (No. bers of the Federal Open Market 79-4414). Committee and to enjoin the Com- In Independent Bankers Associa- mittee from permitting such service. tion of Texas v. First National Bank Plaintiff alleged that the provisions in Dallas et al, No. CA 3-78-0918-F of the Federal Reserve Act governing (N.D. Tex., filed July 26, 1978), the appointment of the Reserve Bank plaintiff alleged that the Board and members of the Federal Open Market the Federal Reserve Bank of Dallas Committee violate the Appointments are unlawfully permitting the collec- Clause of the Constitution, Article II, tion of share drafts drawn on federal Section 2, Clause 2. On October 26, credit unions. On July 25, 1980, the 1979, the court granted defendant's court dismissed the case on plaintiff's motion to dismiss for lack of standmotion. ing; and on November 9, 1979, the In Cundari v. United States, No. court denied plaintiff's motion to 215-79C (Ct. Cl., filed May 17, alter that judgment. Plaintiff filed an 1979), plaintiff alleged that the appeal with the U.S. Court of Apmonetary policies of the United States peals for the District of Columbia caused inflation that eroded the Circuit on January 14, 1980. value of the plaintiff's assets and thus In Gregory et al. v. Board of deprived him of his property without Governors, No. 79-1787 (D.D.C., due process. He also alleged that U.S. filed July 27, 1979), plaintiffs sued monetary policy violated his right to under the Freedom of Information equal protection because, as a retiree Act claiming that the Board had imon a fixed income, he is more severely properly withheld portions of affected by inflation than employed memoranda containing staff advice persons. Plaintiff sought $500,000 in and material derived from examinadamages and asked that the court en- tion reports that concern the acquisijoin defendants from pursuing infla- tion of a failed bank in which plain- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 205 tiffs were shareholders. On March 3, C79-1427A (N.D. Ga., filed August 1980, the court partially granted and 31, 1979), petitioner challenged the partially denied each of the cross mo- action of the Federal Reserve Bank of tions for summary judgment. The Atlanta in declining to investigate court upheld the Board's position plaintiff's allegations of fraud by two respecting the confidentiality of in- national banks that acted as trustees formation derived from reports of ex- for certain real estate syndications in amination and the confidentiality of which plaintiff apparently invested advice given to the Board by its staff. and lost money. The U.S. Court of The court ordered disclosure of the Appeals for the Fifth Circuit disnames of certain staff members who missed the action on March 19, 1980, had written two staff memoranda to upon the Board's motion. Petitioner the Board, as well as general informa- applied for and was denied certiorari tion regarding a particular commer- by the U.S. Supreme Court on Occial loan. The Board appealed the tober 6, 1980 (49 U.S.L.W. 3247). later ruling with the U.S. Court of In the district court action, Appeals for the District of Columbia plaintiff asked the court to compel Circuit (No. 80-1462). defendants to investigate his allega- In American Bankers Association tions. The Northern District of v. Board of Governors et al., No. Georgia dismissed the case on June 79-2066 (D.D.C., filed August 7, 19, 1980. Plaintiff appealed to the 1979), plaintiff sought a declaration U.S. Court of Appeals for the Fifth that the guidelines (Federal Register, Circuit (No. 80-7557) and filed an advolume 44, January 4, 1979, page ditional suit on the same basis in the 1222) published by the financial in- U.S. District Court for the Northern stitutions regulatory agencies for the District of Georgia (No. C80-1245A). enforcement of the Truth in Lending In Gordon v. Board of Governors Act (12 U.S.C. 1601 et seq.) and et al, Nos. C80-1362A and C80- Regulation Z (12 C.F.R. Part 226) are 1265A (M.D. Ga., filed July 25, and void; it also sought to enjoin the August 18, 1980, respectively), plain- Board of Governors, the Comptroller tiff brought suit under the Racketeer of the Currency, and the Federal Influenced and Corrupt Organiza- Deposit Insurance Corporation from tions Act. Both of these cases were enforcing the guidelines. Plaintiff dismissed without prejudice in Dealleged that the agencies were not cember 1980. authorized to adopt or enforce such In Securities Industry Association guidelines; and that their adoption v. Board of Governors et al, Nos. was arbitrary and capricious, not ac- 80-2730 and 80-2314 (D.D.C. and cording to proper administrative pro- D.C. Cir. respectively, both filed Occedure, and in violation of the Truth tober 24, 1980), the Securities Inin Lending Act. The court granted the dustry Association seeks review of the defendants' motion to dismiss for Board's statement of September 26, lack of ripeness on February 29, 1980, denying in part petitioner's re- 1980. quest that the Board prohibit Bankers In Gordon v. Board of Governors Trust Company, a state member et al No. 79-2893 (5th Cir., filed bank, from selling third-party comy August 10, 1979), and Gordon v. mercial paper. Both cases are pend- Board of Governors et al, No. ing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Litigation In Mid America Bancorporation, vidual action and, on May 23, 1980, Inc., et al. v. Board of Governors, dismissed plaintiff's class action. No. 4-80 Civil 546 (D. Minn., filed In Peter A. Lounsbury et al. v. October 31, 1980), plaintiffs re- Board of Governors et al., No. quested an injunction against a tem- H.-80-184 (D. Conn., filed March porary cease-and-desist order issued 24, 1980), petitioners sought declaraby the Board against plaintiffs on Oc- tory and injunctive relief against the tober 20, 1980, and against then- fiscal and monetary policies of the pending Board administrative pro- U.S. federal government. On July 14, ceedings on a Notice of Charges and a 1980, the court dismissed the case for Notice of Assessment of Civil Money lack of standing. Penalty against plaintiffs. The district In Ulysses S. Crockett, Jr. v. court granted the Board's motion for United States et al., No. 80-310summary judgment on December 18, CIV-5 (E.D.N.C, filed April 4, 1980. Plaintiffs appealed to the U.S. 1980), plaintiff seeks to enjoin Court of Appeals for the Eighth Cir- various aspects of the U.S. governcuit (No. 80-2186) on December 19, ment's fiscal and monetary policy. 1980. On January 14, 1980, the court The United States has filed a motion dismissed plaintiffs' appeal with prej- to dismiss. udice. In Louis J. Roussel v. Board of In Otero Savings & Loan Associa- Governors et al., No. 80-1079 tion v. Board of Governors et al, No. (D.D.C. filed April 29, 1980), plain- 80-1066 (D. Colo., filed August 15, tiff sought declaratory and injunctive 1980), plaintiff sought declaratory relief against the Board's order of and injunctive relief, alleging that de- June 11, 1975, removing Mr. Roussel fendants exceeded their authority and from office. The court dismissed the acted arbitrarily in refusing to process case for lack of jurisdiction on Ocplaintiff's drafts through the Federal tober 27, 1980. On November 21, Reserve clearing and collection sys- 1980, plaintiff filed a notice of appeal tem. On August 15, 1980, the district with the U.S. Court of Appeals for court issued a temporary restraining the District of Columbia Circuit (No. order and on September 3, 1980, a 80-2432). preliminary injunction. The defend- In Berkovitz et al. v. Government ant, the Federal Reserve Bank of of Iran et al., No. C80-1197 (N.D. Kansas City, appealed the injunction, Cal., filed June 6, 1980), plaintiffs and it is pending in the U.S. Court of brought suit against the government Appeals for the Tenth Circuit. of Iran for damages arising out of the In Albert A. Rapoport v. Board of murder of Martin Berkovitz, a U.S. Governors et al., Nos. 80-0351 and citizen, and for imposition of a trust 80-0468 (D.D.C., filed February 4 with respect to any assets of the govand February 14, 1980), plaintiff ernment of Iran subject to the control brought an individual action and a of the United States. On September class action under the Federal Tort 19, 1980, the court entered a stipu- Claims Act for damages arising out lated stay of all proceedings pending of alleged negligence of defendants in further order of the court, and schedoverstating the money supply on Oc- uled a status conference for March tober 6, 1979. On May 21, 1980, the 16, 1981. court dismissed the plaintiff's indi- In John L. Lewis v. United States, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 207 No. 80-3093 DWW (CD. Cal., filed and agreements after deleting infor- July 15, 1980), plaintiff filed an ac- mation identifying financial institution under the Federal Tort Claims tions and third parties as well as in- Act seeking damages for injuries sus- formation not relevant to the request. tained in an automobile accident in- The court entered a consent order volving the Federal Reserve Bank of dismissing the suit on November 18, San Francisco. The case is pending. 1980. In A. G. Becker, Inc. v. Board of In William D. Bryan v. Board of Governors, No. 80-2175 (D.D.C., Governors et al., No. C78-664V filed August 25, 1980), plaintiff seeks (W.D. Wash., filed September 12, declaratory and injunctive relief, pur- 1980), plaintiff sought damages and suant to the Government in the Sun- injunctive and declaratory relief shine Act, against the Board for fail- against the Board and others. Plaining to allow the public to attend tiff asked the court inter alia to re- Board meetings at which the Board strain the Federal Reserve System considered a petition filed by plain- from dealing in U.S. government setiff. In an opinion dated November curities. On January 24, 1980, de- 26, 1980, the court granted in sub- fendants filed a motion to dismiss, stantial part the Board's motion for and on February 20, 1980, all parties summary judgment, holding that the filed a stipulation of dismissal Board acted properly in closing the without prejudice. However, the meetings to public observation but plaintiff filed an amended complaint had failed to provide public notice of for damages on October 12, 1980, meetings at the earliest practicable and the Board countered with a sectime. ond motion to dismiss on October 31, In A. G. Becker, Inc. v. Board of 1980. Governors et aL, No. 80-2614 and In Nebraska Bankers Association 80-2258 (D.D.C. and D.C. Cir. re- et al. v. Board of Governors et al., spectively, both filed October 14, No. 80-6-257 (D. Neb., filed Septem- 1980), plaintiff seeks review of the ber 25, 1980), plaintiffs sought action Board's statement of September 26, for declaratory and injunctive relief 1980, denying in part Becker's peti- against defendants' enforcement poltion that the Board prohibit Bankers icy, contained in its policy guide, with Trust Company, a state member bank, respect to reimbursable violations of from selling third-party commercial the Truth in Lending Act and Regulapaper. Both cases are pending. tion Z. The defendants have moved In Consumers Union of the Unitedto dismiss for lack of ripeness. States, Inc. v. Board of Governors et In Thomas R. Waters and Edward al, No. 80-2176 (D.D.C, filed Giles v. Board of Governors et al., August 26, 1980), plaintiff sued for No. 80-232 (D. Colo., filed February declaratory and injunctive relief 21, 1980), plaintiffs sued under the under the Freedom of Information Freedom of Information Act, claim- Act, seeking access to cease-and- ing that the Board had improperly desist orders and settlement agree- withheld certain documents. On ments against banks for violations of August 13, 1980, plaintiffs filed a the Equal Credit Opportunity and motion to amend their complaint, Truth in Lending Acts. The Board re- which eliminated the Board as a leased copies of the subject orders defendant. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Litigation In Angela Belk v. Government of plaintiff sought damages as a result Iran et al., No. 80-6936 (D.S.C., of actions of the Comptroller of the filed April 14, 1980), plaintiff, the Currency, the Federal Deposit Insurwife of William Belk, a hostage in ance Corporation, and the Federal Iran, sued the government of Iran for Reserve Bank of New York with redamages. Plaintiff also sought to spect to the failure of Franklin Nahave the Secretary of State, the tional Bank. On October 8, 1980, Secretary of the Treasury, the Chair- defendants filed a motion to dismiss man of the Federal Reserve Board, or for summary judgment. the Comptroller of the Currency, and In 9 to 5 Organization for Women the Director of the Foreign Assets Office Workers v. Board of Gover- Control place all Iranian assets sub- nors, No. 80-2905-C (D. Mass., filed ject to the control of the United December 30, 1980), plaintiff sued States in a trust account. On June 3, under the Freedom of Information 1980, plaintiff filed a voluntary non- Act, claiming that the Board unlawsuit, without prejudice. fully withheld information regarding In Corbin v. United States, No. a wage survey conducted by a consor- 209-80 (Ct. Cl., filed May 5, 1980), tium of employers in Massachusetts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

209 Legislation Enacted Depository Institutions requirements, under regulations of Deregulation and the Board, are 3 percent against Monetary Control transaction accounts of $25 million or less; between 8 and 14 percent, with Public Law 96-221, approved March an initial ratio of 12 percent, against 31, 1980, consists of nine titles. that portion of total transaction ac- Title I (Monetary Control Act) counts in excess of $25 million (the makes the following changes, among $25 million base is subject to annual others, to facilitate the implementa- adjustments for the next succeeding tion of monetary policy: calendar year, beginning in 1981, to 1. Authorizes the Board of Gover- reflect increases or decreases in total nors of the Federal Reserve System to transaction accounts); 0 to 9 percent, obtain, directly or indirectly, from all with an initial ratio of 3 percent, depository institutions, reports of against nonpersonal time deposits. their liabilities and assets that the Reserves on transaction accounts are Board determines are necessary or to be uniformly applied to all desirable for monitoring and control- depository institutions, but those on ling monetary and credit aggregates. nonpersonal time deposits may vary For these purposes, the Board may according to maturity. classify depository institutions and (b) If at least five members of impose different requirements on the Board find that extraordinary cireach class. The Board is to endeavor cumstances require such action, the to avoid imposing unnecessary bur- Board, after consultation with the dens on reporting institutions and Congress, may impose a reserve reduplicating other reporting re- quirement at any ratio on any liability quirements. of depository institutions for periods 2. Changes reserve requirements, of 180 days. as follows: (c) A supplemental reserve re- (a) Reserve requirements are im- quirement of not more than 4 percent posed on all depository institutions of its total transaction accounts may that maintain transaction accounts be imposed on every depository insti- (including demand deposits, nego- tution, after consultation with the tiable order of withdrawal (NOW) ac- Federal Deposit Insurance Corporacounts, share draft accounts, savings tion, the Federal Home Loan Bank deposits subject to automatic trans- Board, and the National Credit Unfers, and any other account that the ion Administration Board, upon the Board determines to be used to make affirmative vote of at least five payment to third parties) or nonper- members of the Board. The supsonal time deposits, solely for the plemental reserve may be imposed purpose of implementing monetary only under these circumstances: its policy. A depository institution is an sole purpose is increasing reserves to institution that is eligible to apply for a level essential for the conduct of federal deposit insurance. The reserve monetary policy; it is not imposed to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Legislation Enacted reduce the costs of basic reserve re- may be used to satisfy state and quirements; it is not imposed to in- federal liquidity requirements. crease the balances needed for clear- 3. Entitles any depository instituing purposes; and at the time it is im- tion holding transaction accounts or posed, total basic reserves are not less nonpersonal time deposits to the than those that would be required if same discount and borrowing privthe initial ratios for basic reserves ileges as a member bank. were in effect. Interest is to be paid 4. Opens access to Federal Reserve on supplemental reserves at a rate not services to all depository institutions more than the rate earned on the Sys- and requires the Board, by Septemtem's securities portfolio. ber 1, 1980, to publish for comment (d) Foreign branches, subsidi- pricing principles and a proposed fee aries, and international banking schedule covering the following serfacilities of nonmember depository vices: currency and coin services of a institutions arfe to maintain the same nongovernmental nature, check clearreserves required by the Board of ing and collection, wire transfer, such entities of member banks. automated clearinghouse, settlement, (e) Under transitional adjustment securities safekeeping, and Federal provisions, reserve requirements for Reserve float. The Board is to begin nonmember depository institutions putting the fee schedule into effect by generally are to be phased in over an September 1, 1981. eight-year period, and changes in 5. Removes collateral requirereserve requirements for member ments for Federal Reserve notes held banks generally are to be phased in in the vaults of the Federal Reserve over a four-year period. Transitional Banks. adjustments are not applicable to any 6. Expands the kinds of eligible category of deposits or accounts first collateral for Federal Reserve notes to authorized pursuant to federal law in include obligations of, or fully any state after April 1, 1980. guaranteed as to principal and in- (f) Reserves may be maintained terest by, a foreign government or in balances at the Federal Reserve agency of a foreign government, and Bank of which the depository institu- any other assets that may be purtion is a member or at which it main- chased by Federal Reserve Banks. tains an account. Reserves of non- 7. Permits a member bank to keep member depository institutions may on deposit with any depository inbe held in a correspondent depository stitution that is authorized to have acinstitution holding required reserves cess to the discount window a sum in at a Federal Reserve Bank, in a excess of 10 percent of its own paid- Federal Home Loan Bank, or in the up capital and surplus. National Credit Union Administra- 8. Abolishes the penalty rate on tion Central Liquidity Facility if such Federal Reserve advances to dereserves are passed through to a pository institutions that are secured Federal Reserve Bank. By regulation by "ineligible" paper. identical for all depository institu- Title II (Depository Institutions tions, the Board may authorize the Deregulation Act) is intended to prouse of vault cash to satisfy all or a vide for the orderly, complete phaseportion of the required reserves. Re- out of limitations on the maximum serves held by a depository institution rates of interest and dividends that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 211 may be paid on deposits and accounts tember 30, 1981, on whether to inby depository institutions. It extends crease limitations on the maximum the authority to impose such limita- rates applicable to passbook and tions for six years, subject to stan- similar savings accounts by at least lA dards designed to ensure a phaseout of 1 percent, and also vote not later to market rates of interest. To ac- than March 31, 1983, 1984, 1985, and complish these purposes Title II has 1986, on whether to increase the limithe following provisions: tations on the maximum rates ap- 1. Establishes the Depository In- plicable to all categories of deposits stitutions Deregulation Committee and accounts by at least Vi of 1 per- (Deregulation Committee) consisting cent. of the Secretary of the Treasury and 5. Authorizes the Deregulation the Chairmen of the Board of Gover- Committee to set ceilings on all nors of the Federal Reserve System, categories of deposits and accounts of the Board of Directors of the different from the targets and to Federal Deposit Insurance Corpora- create new categories not subject to tion, of the Federal Home Loan Bank limitations or with limitations set at Board, and of the National Credit market rates or by any other method. Union Administration Board, as vot- 6. Requires each member of the ing members; and the Comptroller of Deregulation Committee to make an the Currency as a nonvoting member. annual report to the Congress on the 2. Transfers to the Deregulation economic viability of depository in- Committee the authorities in the Fed- stitutions that includes the following: eral Reserve Act, the Federal Deposit (a) An assessment of whether the Insurance Act, and the Federal Home removal of any differential between Loan Bank Act to prescribe rules the rates paid by banks and those governing the payment of interest and paid by thrift institutions will dividends and the establishment of adversely affect the financing of classes of deposits or accounts, and to housing or the viability of the thrift administer the differential between industry. ceiling rates for thrift institutions and (b) Recommendations for meafor commercial banks on certain cate- sures to encourage savings, to provide gories of deposits. for the equitable treatment of small 3. Directs the Deregulation Com- savers, and to ensure a steady and mittee to exercise, by regulation, the adequate flow of funds to thrift inauthority vested in it (a) to provide stitutions and the housing market. for the orderly phaseout and elim- (c) Findings concerning disinterination of the limitations on the max- mediation of savings deposits from imum rates of interest and dividends insured institutions to uninsured that may be paid on deposits and ac- money market investments, which counts as rapidly as economic condi- pay market rates to savers. tions warrant, and (b) to work toward (d) Recommendations for legisproviding all depositors with a lative and administrative actions to market rate of return on their savings maintain the economic viability of with due regard for the safety and depository institutions. soundness of depository institutions. 7. As of March 31, 1986, repeals 4. Requires the Deregulation Com- the authorities to impose interest rate mittee to vote, not later than Sep- ceilings on deposits, terminates all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 Legislation Enacted authorities transferred to the Deregu- Reserve Act for the pricing of serlation Committee, and terminates the vices. Deregulation Committee. 6. Permits the National Credit Title III (Consumer Checking Ac- Union Administration Board to authcount Equity Act) enacts the follow- orize the Central Liquidity Facility or ing provisions, among others: its agent members to engage in the 1. Authorizes the continuation of same collection and settlement funcauthority (a) for banks to provide tions authorized for the Federal automatic transfer services, (b) for Home Loan Banks. the establishment of remote service Title IV (Powers of Thrift Instituunits by savings and loan associa- tions and Miscellaneous Provisions) tions, and (c) for the offering of share has the following provisions, among draft accounts by federally insured others: credit unions. 1. Provides various new invest- 2. Effective December 31, 1980, ment authorities, under regulations extends nationwide the authority of the Federal Home Loan Bank under federal law of depository in- Board, for federally chartered savings stitutions to offer NOW accounts. and loan associations, including the NOW accounts may consist solely of following: funds that are held entirely by one or (a) The removal of any geomore individuals or by an organiza- graphical lending restriction, a 90 tion operated primarily for religious, percent loan-to-value limit in place of philanthropic, charitable, educa- the existing $75,000 limit, and the tional, or other similar purposes and elimination of the first-lien restricnot operated for profit. tions on residential real estate loans. 3. Effective March 31, 1980, in- (b) Authority to invest up to 20 creases the insurance of accounts of percent of assets in consumer loans, federally insured banks, savings and commercial paper, and corporate loan associations, and credit unions debt securities. to $100,000. (c) Authority to invest in shares 4. Increases the interest rate ceiling or certificates of open-end investment for loans from federal credit unions companies registered with the Seto 15 percent. Under certain cir- curities and Exchange Commission if cumstances, the National Credit the company's portfolio is restricted Union Administration Board is given to investments that savings and loan authority to establish higher interest associations may make directly. ceilings for up to 18 months. (d) Authority to offer credit 5. Permits the Federal Home Loan cards. Bank Board to authorize the Federal (e) Authority to exercise trust Home Loan Banks to engage in cer- and fiduciary powers. tain collection and settlement func- 2. Authorizes a state stock savings tions in connection with instruments and loan association to convert to a of members of any Federal Home federal stock charter if the associa- Loan Bank or institutions eligible for tion existed in stock form for at least membership. A Federal Home Loan four years preceding March 31, 1980. Bank is to make reasonable charges 3. Authorizes savings and loan for clearing services consistent with associations to issue mutual capithe principles set forth in the Federal tal certificates under the regulations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 213 of the Federal Home Loan Bank similarly preempted. The Federal Board. Home Loan Bank Board is given 4. Authorizes a federal mutual authority to issue rules and regulasavings bank to make commercial, tions and to publish interpretations corporate, and business loans up to 5 governing these provisions. percent of its assets if the loan is 2. Preempts state usury laws by made in its home state or within 75 permitting a lender to charge a rate miles of its home office. not more than 5 percent above the 5. Authorizes a federal mutual Federal Reserve discount rate, insavings bank to accept demand de- cluding any surcharge thereon, subposits in connection with a commer- ject to express reinstitution by state cial, corporate, or business loan rela- action, in the case of business or tionship. agricultural loans in the amount of 6. Directs the President to estab- $25,000 or more. Subsequently, Publish an interagency task force con- lic Law 96-399, effective October 8, sisting of the Secretary of the 1980, reduced the amount of business Treasury, the Secretary of Housing or agricultural loans that would be and Urban Development, and repre- preempted to $1,000 and, retroactive sentatives of the Federal Home Loan to April 1, 1980, defined and clarified Bank Board, the Board of Governors the terms for preemption of the usury of the Federal Reserve System, the rate on business and agricultural Board of Directors of the Federal loans. Deposit Insurance Corporation, the 3. Preempts state usury ceilings to Comptroller of the Currency, and the permit federally insured state banks, National Credit Union Administra- branches of foreign banks, insured tion Board. The task force is to con- savings and loan associations, insured duct a study and to make recommen- credit unions, and small business indations by June 30, 1980, regarding vestment companies to charge interest the options available to provide on loans at a rate not more than 1 balance to the asset-liability manage- percent above the basic Federal Rement problems inherent in the thrift serve discount rate. portfolio structure, the options Title VI (Truth In Lending available to make thrift institutions Simplification and Reform Act) inmore competitive, and the options cludes the following provisions, available to federal agencies to assist among others: thrift institutions in times of 1. Reduces the number and detail economic difficulty. of Truth in Lending disclosures. Title V (State Usury Laws) pro- 2. Separates the disclosures from vides, in part, the following: other information in certain transac- 1. Preempts state usury limita- tions. tions, subject to express reinstitution 3. Requires the use of brief exby state action from April 1, 1980, to planations for key terms. April 1, 1983, on loans secured by a 4. Requires the Board to issue first lien on residential real property. model forms and clauses that, if used Also, state restrictions on the rate or properly, insulate creditors from civil amount of interest that may be paid liability. on deposits or accounts at federally 5. Authorizes the Board and other insured depository institutions are enforcement agencies to require reim- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 Legislation Enacted bursement to consumers when the ac- the holding company's home state, tual annual percentage rate or finance to include, subject to certain limitacharge exceeds that shown on the dis- tions, until October 1, 1981, a trust closure statement. company within the definition of a 6. Exempts agricultural credit bank. from coverage under Truth in Lend- 3. Amends the Bank Holding ing. Company Act to prevent the Board 7. Requires creditors to make from rejecting an application for the good-faith estimates of all required formation of a one-bank holding disclosures within three business days company solely because the transacof certain mortgage applications. tion involves a bank stock loan of 25 8. Simplifies, for small open-end years or less. This does not prohibit creditors, the rules for identifying the Board from rejecting an applicatransactions on periodic billing tion because other financial arstatements. rangements are unsatisfactory; and 9. Permits open-end creditors to the Board is to consider transactions send a summary of billing-error rights involving bank stock loans having a and obligations once rather than maturity of 12 years or more on a twice a year. case-by-case basis, and not to ap- 10. Modifies the application of the prove any transaction if the Board three-day right of rescission in certain believes it may jeopardize the safety mortgage transactions. or soundness of the bank. 11. Directs the Board to compile Title VIII (Financial Regulation and distribute on an experimental Simplification Act) reflects the conbasis information concerning annual cern of the Congress that regulations percentage rates for representative of the federal financial regulatory types of nonsale credit. agencies often impose costly, duplica- Title VII (Amendments to the Na- tive, and unnecessary burdens on tional Banking Laws) makes a both financial institutions and connumber of changes in the laws sumers. It also reflects the belief that relating to national banks and the regulations should be simple and operations of the Comptroller of the clearly written, achieve legislative Currency. The following amend- goals effectively and efficiently, and ments, among others, relate to the not impose unnecessary costs and Federal Reserve System: paperwork. Consistent with these 1. Permits the Board to extend the findings the law provides that any deadline for the divestiture of imper- regulation issued by a federal finanmissible real estate interests under the cial regulatory agency shall, to the Bank Holding Company Act from maximum extent practicable, insure December 31, 1980, to December 31, the following: 1982, after considering whether the 1. Clear establishment of its need company has made a good-faith efand purpose. fort to divest the real estate interests 2. Consideration of meaningful aland whether the extension is necesternatives. sary to avert substantial loss. 2. Amends the provision of the 3. Minimization of compliance Bank Holding Company Act pro- costs, paperwork, and other burdens. hibiting acquisition of a bank outside 4. Avoidance of conflicts, dupli- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 215 cation, and inconsistencies with authority and the Commission has regulations of other agencies. enforcement authority. 5. Timely participation and comment by others. Silver Futures Market 6. Simplicity and clarity. The federal financial regulatory Public Law 96-276, approved June 17, agencies are to establish programs of 1980, among other things, provides periodic review of existing regulations that the Commodities Future Trading to determine whether they achieve Comission shall establish a joint these policies and to revise regula- working group with the Board of tions that do not do so. Governors of the Federal Reserve Title IX (Foreign Control of System, the Department of the Treas- United States Financial Institutions) ury, and the Securities and Exchange prohibited the Board, the Comptrol- Commission to analyze the events in ler of the Currency, the Board of the silver cash and futures markets Directors of the Federal Deposit In- from September 1979 through March surance Corporation, and the Federal 1980. The group is to report its find- Home Loan Bank Board from ap- ings to the appropriate committees of proving, subject to certain limita- the Congress, together with recomtions, the acquisition by a foreign mendations for legislative changes person of a total of 5 percent or more that could prevent similar events in of the stock or assets of a domestic any futures market. financial institution. This moratorium expired on July 1, 1980. Increase in Debt Ceiling Public Law 96-286, approved June Federal Trade 28, 1980, temporarily increased the Commission Improvements public debt limit to $925 billion Public Law 96-252, approved May through February 28, 1981. Subse- 28, 1980, concerns the Federal Trade quently, Public Law 96-556, ap- Commission. Among its other provi- proved December 19, 1980, increased sions, it deals with those who alleged- that temporary ceiling to $935.1 ly have violated a federal law for billion. which the Board of Governors of the An earlier authorization (Public Federal Reserve System has rulemak- Law 96-264, approved June 6, 1980) ing authority. If the person acted in extended the temporary debt limit of good-faith reliance on, and in con- $879 billion through June 30, 1980. formity with, a rule, regulation, or statement of interpretation or of ap- Small Business proval of the Board, that reliance can Regulatory Flexibility be a defense in a proceeding against the person by the Commission or by Public Law 96-354, approved Septhe Attorney General upon request of tember 19, 1980, effective January 1, the Commission. 1981, includes, among others, the The Board is also required to act following provisions: promptly on requests for statements 1. Requires each agency to publish of interpretation or of approval of an agenda twice a year listing exconduct and practices subject to laws pected regulations with a significant for which the Board has rulemaking impact on small entities (small busi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 Legislation Enacted nesses, small organizations, and small Bretton Woods Agreements governmental jurisdictions). Public Law 96-389, approved Octo- 2. Requires that any proposed regber 7, 1980, authorizes the U.S. Govulation published in the Federal ernor of the International Monetary Register must be accompanied by a Fund to consent to an increase in the preliminary analysis of the impact of quota of the United States in the the regulation on small entities and a Fund; it also directs the Secretary of statement of alternatives that could the Treasury to establish and chair a minimize that impact consistent with commission to assess, and make recthe objectives of the law. ommendations about, the policy of 3. Requires the agency head to the U.S. government on the role of take specific steps to assure that small gold in domestic and international entities are given an opportunity to monetary systems, and to transmit to present their views on proposed regu- the Congress a report not later than lations. October 7, 1981. 4. Requires a final analysis of the The commission, in addition to the impact on small entities when the Secretary of the Treasury, consists of final rule is adopted. three members of the Board of Gov- 5. Requires each agency to estabernors and two members of the Counlish within six months a plan for a cil of Economic Advisers to be periodic review that will enable it to designated by the Secretary of the make changes to minimize the eco- Treasury; one majority and one nomic impact of its regulations on minority member each from the Joint small entities. All regulations are to be Economic Committee of the Conreviewed within 10 years. gress, the Committee on Banking, 6. Requires the Chief Counsel for Housing, and Urban Affairs of the Advocacy of the Small Business Ad- Senate, and the Committee on Bankministration to monitor agency coming, Finance and Urban Affairs of the pliance and report to the Congress House, to be designated by the annually. Speaker of the House and President of the Senate; and four distinguished Management of the Public Debt private citizens with business, financial, or academic backgrounds to be Public Law 96-377, approved Ocdesignated by the Secretary of the tober 3, 1980, has the following pro- Treasury. visions: 1. Authorizes the Secretary of the Treasury, with the approval of the Housing and President, to fix the investment yield Community Development and of U.S. savings bonds above 5Vi per- Home Mortgage Disclosure cent if the aggregate of increases in any six-month period does not exceed Public Law 96-399, approved Oc- 1 percent. tober 8, 1980, does the following, 2. Effective October 1, 1980, in- among other things: creases to $70 billion the amount of 1. Authorizes the Federal Home long-term U.S. government bonds Loan Mortgage Corporation and the that may be issued with interest rates Federal National Mortgage Associaabove the 4.25 percent statutory ceil- tion to adjust the loss limits for morting. gages that can be sold to those cor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 217 porations each year in accordance age of housing stock, income level, with the annual increase in the na- and racial characteristics. The Board tional average price of a one-family of Governors is to provide the staff home as determined by the Federal and data processing resources for Home Loan Bank Board. The initial preparing these compilations and loan limits are established at $93,750 tables. for a single-family residence, 2. Requires the Federal Financial $120,000 for a two-family residence, Institutions Examination Council, in $145,000 for a three-family residence, consultation with the Department of and $180,000 for a four-family resi- Housing and Urban Development, to dence. establish a central depository in each 2. Authorizes the Secretary of SMSA for disclosure reports of in- Housing and Urban Development to dividual institutions. undertake a demonstration program 3. Provides that lending informafor negotiated interest rates on FHA- tion may be reported by county rather insured home mortgages (excluding than by census tract in counties with a graduated-payment mortgages). population of 30,000 or less. Under this program, after disclosure 4. Directs the Federal Financial Inby the mortgagee to the borrower of stitutions Examination Council to the current maximum rate for FHA conduct a study to be submitted to mortgages and a good-faith estimate the Congress by March 1, 1981, on of the number of points associated the feasibility and usefulness of rewith that rate, the mortgagee and the quiring depository institutions to borrower may negotiate a rate and compile and disclose information specify it and the required discount with respect to small business loans. points in a commitment agreement that binds the mortgagee for at least Sunset of Credit Control 30 days. The number of negotiatedrate mortgages insured in any fiscal Public Law 96-508, approved year may not exceed 10 percent of all December 8, 1980, in addition to inthe mortgages that are insured by the creasing the authorization and ex- FHA during the preceding fiscal year, tending the duration of the Council or a total of 50,000 mortgages, on Wage and Price Stability, provides whichever is greater. The Secretary of for termination of the Credit Control HUD is to monitor this program and Act on June 30, 1982. report to the Congress by March 1, 1982. Paperwork Reduction Public Law 96-399 also extends the Home Mortgage Disclosure Act for a Public Law 96-511, approved period of five years and, among other December 11, 1980, in order to miniprovisions, makes the following addi- mize the burden of federal papertions: work on those preparing reports, to 1. Requires the Federal Financial minimize the cost of obtaining infor- Institutions Examination Council to mation, and to maximize the usefulcompile and disclose aggregate data ness of such information to the about home mortgage loans by census federal government, contains the tract for each standard metropolitan following amendments, effective statistical area (SMSA), with further April 1, 1981, among others, to the categorization according to location, Federal Reports Act: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Legislation Enacted 1. Makes the OMB the single point Farm Credit System, and includes for clearing information-collection these provisions: requests imposed upon the public by 1. The Governor of the Farm the federal agencies and independent Credit Administration is to consult regulatory agencies. regularly with the Board of Gover- 2. Gives the OMB a maximum of nors of the Federal Reserve System in 90 days in which to approve or disap- connection with the effect of the prove information-collection requests Farm Credit System's lending acand a maximum of 60 days to com- tivities on national monetary policy. ment on information-collection re- 2. The Farm Credit Administraquirements of proposed agency rules tion is to consult closely on a continuand regulations. ing basis with the Board of Governors 3. Allows any independent regula- to ensure that the regulations carrying tory agency to override an OMB out the export-and-import-loan and disapproval of a proposed informa- related authority of the banks for tion-collection request or regulation cooperatives conform to national by a majority vote of its members. banking policies, objectives, and Each such override, together with the limitations. Any regulation that poses reasons for it, is to be reported to the unresolved differences between the OMB. Farm Credit Administration and the Board of Governors about conform- Farm Credit ance must be submitted to the Con- Public Law 96-592, approved gress and is subject to a legislative December 24, 1980, revises and ex- veto by both of the Houses of the pands the lending authority of the Congress. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

219 Banking Supervision and Regulation The Federal Reserve is one of three percent of all commercial banks, but federal regulatory agencies with re- because they typically were larger sponsibilities for supervising and than average size, they held around regulating commercial banks. A de- one-fifth of all commercial bank scription of how the System carried assets. out these responsibilities during 1980 In 1980, state member banks were follows. examined annually, except when significant weaknesses call for more fre- Supervision for quent examination. System personnel Safety and Soundness conducted 1,006 such examinations. Examinations and Inspections Edge and Agreement Corporations The on-site review of operations is the Edge corporations are chartered by primary mechanism for ensuring the the Board to conduct an international safety and soundness of banking or- banking business. Agreement corganizations. Examinations of state porations are state-chartered commember banks and Edge corpora- panies that enter into an agreement tions and inspections of bank holding with the Board to limit their operacompanies entail (1) an appraisal of tions to international banking. The the quality of the institution's loans Federal Reserve examined 122 of the and investments; (2) an evaluation of 126 Edge and 5 agreement corporamanagement, along with internal op- tions in operation at year-end. erations, policies, and procedures; (3) an assessment of the key financial Bank Holding Companies factors of capital, earnings, and li- During 1980, the number of bank quidity; and (4) a review for comholding companies rose by 576 to a pliance with applicable laws and total of 3,057. These organizations regulations.1 control commercial banks that hold State Member Banks about three-fourths of the total assets There were 997 state member banks of U.S. commercial banks. at the end of 1980. They constituted 7 Most large bank holding companies, as well as small companies with significant nonbank assets, are 1. Compliance with consumer and civil rights laws is handled by the Board of Gover- inspected at least every 18 months; nors' Division of Consumer and Community the others at least every three years. Affairs and by specially trained examiners at The inspection focuses on the operathe Federal Reserve Banks. These regulatory tions of the parent holding company responsibilities are covered in the "Consumer and Community Affairs" section of this RE- and its nonbank subsidiaries because PORT. Compliance with other statutes and these entities are not already exregulations, which is treated in this section, is amined by the federal banking agenthe responsibility of the Board's Division of cies. System staff prepared 866 Banking Supervision and Regulation and of the holding company inspection reports Reserve Bank examiners who check for safety and soundness. in 1980. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Banking Supervision and Regulation Overseas Operations adopted for banks, provides stanof U.S. Banking Organizations dardized information on all holding International examinations of state companies, including those that exmember banks, Edge corporations, hibit potentially unsafe or unsound and bank holding companies are con- characteristics. ducted at the banking organization's During the year, the Federal Rehead office in the United States, serve completed its Bank Holding where the ultimate responsibility for Company Supervision Manual. This overseas facilities resides. To verify manual contains Board policies and and supplement the results of the formal inspection procedures. head-office examinations, on-site re- Futures and Forward Contracts views of significant overseas facilities The rapid growth and occasional are performed at least every three abuses in trading in futures and foryears. ward contracts resulted in two policy In 1980, the Federal Reserve exactions by the Board of Governors amined ten foreign branches of state during 1980. In March, along with member banks and eight overseas the other banking agencies, the Board subsidiaries of Edge corporations and issued revised guidelines for banks bank holding companies. that engage in futures, forward, and standby contracts on U.S. govern- Improvements to ment and agency securities. In August Examinations and Inspections it approved a policy statement on bank holding company participation During the year, the Federal Reserve in such contracts. took a number of steps including the following to enhance its examination Frequency of Examinations and inspection programs. and Inspections The Board adopted a new policy on Bank Examinations the frequency of examinations and in- In cooperation with the other bankspections that emphasized the supering agencies, the Federal Reserve vision of institutions that have probdeveloped and implemented a unilem characteristics and that are thus form examination policy for classifymost in need of frequent, on-site ing delinquent consumer installment reviews. loans and a uniform guideline for internal controls over foreign exchange operations. System staff also helped Surveillance Program prepare policies and procedures for In addition to the on-site effort, a examining the banks that participate Systemwide surveillance program in the Clearing House Interbank monitors the financial condition of Payments System (CHIPS). banks and holding companies by pro- Bank Holding Company Inspections viding computer-assisted analysis of The year 1980 was the first full year periodic financial reports these of experience with the uniform rating organizations submit to the Federal system for bank holding companies. Reserve Banks. The surveillance in- This system, which complements the formation is used in scheduling exuniform rating system previously aminations, thereby enabling limited Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 221 examiner resources to be directed to securities, and exchange or convert those organizations most in need of securities. Of the 165 state member supervisory attention. banks and bank holding companies that were registered with the Board of Specialized Examinations Governors as transfer agents, 93 percent were examined during 1980. The Federal Reserve conducts certain To reduce the reporting burden on specialized examinations. transfer agents, the Board amended Electronic-Data-Processing Regulation H to eliminate the re- Examinations quirement that a current list of issuers The Federal Reserve examines the serviced by the agent be filed with the electronic-data-processing activities Board. Together with the other superof state member banks, as well as in- visory agencies, the Federal Reserve is dependent centers that provide EDP considering additional changes to the services to these banks. During the regulation aimed at reducing the year, System EDP examiners con- amount of data required in the regisducted on-site reviews of 153 state tration statements that transfer member banks and 92 data centers. agents prepare. The Federal Reserve cooperated Examinations of with the other federal supervisors in Municipal Securities Dealers preparing and publishing the EDP and Clearing Agencies Examination Handbook. The hand- As a result of the Securities Acts book, which includes a uniform Amendments of 1975, the Board is report of examination, constitutes a responsible for supervising state comprehensive reference work. member banks and bank holding Trust Examinations companies that act as municipal se- The Federal Reserve examines trust curities dealers or as clearing agencies. departments of state member banks Forty-four of the 48 state member and trust companies that are mem- banks registered with the Board as bers of the Federal Reserve System. dealing in municipal securities for These examinations determine their trading accounts were examined whether the trust functions are con- in 1980. ducted in accordance with applicable A clearing agency acts as a custofiduciary principles and with other dian of securities for the settlement of laws and regulations. Of the 386 in- securities transactions by bookkeepstitutions exercising trust powers that ing entries. All four of the clearing are under the Board's supervision, agencies registered with the Board 376 were examined in 1980. were examined in 1980; one examination was conducted jointly with the Examinations of Securities and Exchange Commis- Transfer Agents sion. Trust examiners conduct separate reviews of state member banks and Enforcement Actions and bank holding companies that act as Civil Money Penalties transfer agents. Transfer agents countersign and monitor the issuance Under the Financial Institutions of securities, register transfers of Supervisory Act, the Board has the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Banking Supervision and Regulation authority to enter into written agree- to be considered in deciding whether, ments or cease-and-desist actions and in what amount, civil money penwith state member banks, bank alties should be imposed; and second, holding companies, and persons it established procedures for exchangassociated with these organizations ing information among the banking that engage in unsafe or unsound agencies about assessment actions practices or that violate applicable taken. laws or regulations. The Board may also assess civil money penalties for Staff Training violations of a cease-and-desist order, To keep pace with the rapidly changof the Bank Holding Company Act, ing and increasing responsibilities of or of certain provisions of the Federal its staff, the Federal Reserve com- Reserve Act. pleted a revision of its core training Forty enforcement actions, most of curriculum during 1980. which dealt with unsafe and unsound During the year, the Federal banking practices, were initiated in Reserve conducted nine banking 1980; 30 were completed by year-end. schools—four introductory, four in- The completed actions took the form termediate, and one advanced—as of 18 written agreements, 10 ceasewell as three financial analysis and-desist orders, and 2 temporary schools and one holding company apcease-and-desist orders. Seven of the plications school. For its consumer 30 actions involved state member compliance examiners, the System ofbanks; 16, bank holding companies fered one basic and one advanced or their subsidiaries; and 7, inconsumer affairs school. dividuals participating in the affairs Training is also offered in such of the financial institutions. specialized areas as international In two instances, civil money penbanking, trust activities, electronic alties were assessed for violations of data processing, consumer protecthe Bank Holding Company Act. In tion, and civil rights. The Federal January 1981, a bank holding com- Reserve assisted in the development pany and a principal stockholder and staffing of these specialized resolved these violations by paying courses, which are under the auspices substantial fines. of the interagency Federal Financial The Board made available to the Institutions Examination Council. public a description of all formal In 1980, about 450 System employsupervisory actions completed during ees attended in-house schools and 200 the year, and the reasons for them. others completed specialty courses of This action was taken to achieve the the Examination Council. Staff from fullest public disclosure of informastate banking departments and sevtion that was consistent with valid ineral foreign supervisory authorities terests of confidentiality. also attended the System schools. The Federal Reserve also took steps to coordinate its disciplinary actions with those of the other supervis- Regulation of ory agencies. In July, the Board is- U.S. Banking Structure sued a policy statement on the assessment of civil money penalties. The Board of Governors administers First, the policy specified the factors the Bank Holding Company Act, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 223 Bank Merger Act, and the Change in Reserve Banks and the Office of the Bank Control Act. As a result, the Secretary of the Board—acted on Federal Reserve passes on a variety of 1,574 bank holding company applicaproposals that directly or indirectly tions. The System approved 681 proaffect U.S. banking structure at the posals to organize holding companies local, regional, and even national and denied 9; 177 bank acquisitions level. The Board also has primary re- were approved, while 8 were denied; sponsibility for regulating the inter- and 665 requests to acquire nonbank national operations of U.S. banking companies that are closely related to organizations. banking were approved and 4 rejected. Data on all holding company decisions are shown in the accom- Bank Holding Company Act panying table. By law, a company must obtain the To shorten the processing of ap- Board's approval to form a bank plications that are objected to by holding company by securing control third parties, the Board adopted new of one or more banks. And, once procedures. The new procedures proformed, a holding company must re- vide for greater, direct public parceive the Board's approval before ac- ticipation in contested cases. quiring more banks or related, non- In 1980, the Board and the Reserve banking companies. Banks initiated a program to explain In deciding a bank holding com- more fully System policies and propany application, the Board considers cedures concerning applications. A the likely effects of the proposal on series of informative booklets on how competition, the convenience and the Federal Reserve processes and needs of the community, the appli- decides various kinds of applications cant's financial and managerial re- will be distributed. The first two sources, and the prospects of both the pamphlets, which are in the final applicant and the firm to be acquired. stages of preparation, explain how In 1980, the Board—and, under the System handles holding company delegated authority, the Federal and bank branch applications. Bank Holding Company Decisions by the Federal Reserve, 1980 Direct action Delegated authority Proposal Board of Governors Office of the Reserve Banks Total Secretary Approved Denied Approved Approved Permitted Formation of holding company 41 9 2 638 • • • 6 90 Retention of subsidiary bank. 10 0 1 ••• 2 Acquisition Bank 33 8 16 128 ••• 185 Nonbank 58 4 3 196 408 669 Certain grandfathered, nonbank company ... 0 0 0 0 17 17 VIerger of holding companies 4 3 0 4 - 11 Total 137 24 21 967 425 1,574 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 Banking Supervision and Regulation Bank Merger Act guarantee greater consistency in administering the Bank Merger Act. The Bank Merger Act requires that all proposed bank mergers receive the Change in Bank Control Act prior approval of the appropriate federal bank regulatory agency. If the The Change in Bank Control Act of surviving bank of the merger is a state 1978 gave the federal banking agenmember bank, the Federal Reserve cies the authority to disapprove has primary jurisdiction. changes in the control of banks and Before passing on a bank merger, bank holding companies. The Federal the Federal Reserve considers the Reserve is the responsible agency for competitive effects of the proposal changes in the control of state and the financial and managerial member banks and bank holding resources and prospects of the ex- companies. Factors to be considered isting and proposed institution, as in determining whether a transfer of well as the community's convenience control should be denied include the and needs. The Board must also con- financial condition, competence, exsider the views of certain other agen- perience, and integrity of the acquircies on the competitive factors in- ing person, and the effect on competivolved in the transaction. tion. During 1980, the Federal Reserve Eleven changes in ownership of the approved twenty-nine merger ap- stock of state member banks were plications, four of which were ap- reported in 1980; 63, for holding proved by the Board and the re- companies. All but three of the promainder by the Reserve Banks under posed changes were processed by the delegated authority. As required by Reserve Banks; only one was denied. law, a description of each merger is During 1980, System personnel precontained in table 20 in the Statistical pared a manual on "Procedures for Table section of this REPORT. Processing Change in Control No- When one of the other two federal tices." The manual, which has been banking agencies has jurisdiction distributed to the Reserve Banks, over a merger, the Board is asked to should lead to more effective and comment on the competitive factors consistent processing of these notices. to assure comparable enforcement of the antimonopoly provisions of the International Activities of act. U.S. Banking Organizations On behalf of the Board, the Reserve Banks submitted 122 reports on The Board has three principal competitive factors to the Comp- statutory responsibilities in connectroller of the Currency and 156 such tion with the international operations reports to the Federal Deposit In- of U.S. banking organizations. They surance Corporation. are (1) to issue licenses for foreign At midyear, the Board, along with branches of member banks and reguthe Comptroller of the Currency and late the scope of their activities; (2) to the FDIC, adopted standard termi- charter and regulate Edge corporanology for assessing competitive fac- tions; and (3) to authorize and regutors in bank merger cases that should late overseas investments by member Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 225 banks, Edge corporations, and bank tions, such as finance companies and holding companies. leasing companies, as well as in foreign banks. Foreign Branches of Member Banks In 1980, the Board approved the Under provisions of the Federal establishment of 15 Edge corpora- Reserve Act and Regulation K, memtions and the operation of 59 ber banks may establish branches in branches by established Edge corforeign countries, subject, in most porations. These actions resulted in cases, to the Board's prior approval. Edge corporations supplying interna- In reviewing proposed foreign tional banking services for the first branches, the Board considers the retime in Minneapolis, Seattle, Atlanta, quirements of the governing statute, Cleveland, and Philadelphia. the condition of the bank, and the bank's experience in international Foreign Investments business. In 1980, the Board ap- The Board has authority under the proved the opening of 22 foreign Federal Reserve Act and the Bank branches. Holding Company Act to authorize By the end of 1980, 159 member foreign investments by member banks were operating 799 branches in banks, Edge and agreement corporaforeign countries and overseas areas tions, and bank holding companies. of the United States, a net increase of In 1980, the Board reviewed and 10 for the year. One hundred twenty- approved 81 foreign investment profour national banks were operating posals. Most were for additional in- 674 of these branches, while 35 state vestments in various financial entermember banks were operating the re- prises, such as a merchant bank in the maining 125 branches. Assets of United Kingdom, a commercial bank foreign branches expanded by 13 per- in Hong Kong, and a consumer ficent during the year, totaling an nance company in Thailand. estimated $320 billion at year-end. Capitalization and Activities Edge and Agreement Corporations of Edge Corporations Under sections 25 and 25(a) of the Federal Reserve Act, Edge and agree- The International Banking Act (IBA) ment corporations may engage in in- removed the statutory limit on ternational banking and foreign liabilities of an Edge corporation financial transactions. These cor- under which the corporation's debenporations, which are usually sub- tures, bonds, and promissory notes sidiaries of member banks, provide could not exceed 10 times the cortheir owner organizations with addi- poration's capital and surplus. The tional powers in two areas: (1) They Board established a new capital remay conduct a deposit and loan busi- quirement of 7 percent of risk assets ness in states other than that of the for Edge corporations engaging in inparent, provided that the business is ternational banking in the United strictly related to international trans- States to permit these corporations to actions; and (2) they have somewhat compete more effectively with other broader foreign investment powers international organizations that are than member banks, being able to in- more highly leveraged. vest in foreign financial organiza- The 7 percent standard has, in fact, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Banking Supervision and Regulation led to some added leveraging by Edge Most benefits that were expected corporations. Nonetheless, 50 of the from increased delegation were 66 banking Edge corporations had achieved. Routine cases were reratios more than twice the new stan- moved from the Board's agenda and dard on September 30, 1980, so their more efficient use was made of Board capitalization in relation to risk assets and Reserve Bank staff. remained high by international banking standards. Timely Processing Two other important changes aris- of Applications ing from the IBA permitted Edge cor- Although the number of holding porations (1) to be owned by foreign company applications increased by 40 banks and (2) to establish branches percent from 1979 to 1980, the within the United States. By year-end System still acted on 91 percent of 1980, the Board had authorized 8 these proposals within 90 days of the foreign banks to establish Edge corfiling of a complete application. In porations and had allowed 17 Edge fact, for the last four years, the corporations to operate 63 domestic Federal Reserve has completed at branches. These branches represented least 90 percent of holding company the conversion of 26 existing corporaproposals within 90 days. tions to branches and the establish- Twenty-two of the 29 bank merger ment of 37 new offices. applications were processed within 90 days; of the 7 that took longer, 6 in- Delegation of Applications volved one applicant that was involved in lengthy protest proceedings. The Board, in exercising its respon- The System also prepared 278 reports sibility to formulate policies and proof competitive factors on proposed cedures in the applications area, mergers for the other two banking delegates certain regulatory functions agencies; all but a few were com- —including the authority to approve, pleted within a 30-day limit. Of the 74 but not deny, certain types of applicachange-of-control notices, 72 were tions—to the Reserve Banks and to handled well within 90 days. the Board's Division of Banking The System also measures its per- Supervision and Regulation and Offormance in processing international fice of the Secretary. applications against a 90-day stan- In September 1979, the Board isdard. During 1980, the Federal Resued revised rules that delegated addiserve acted on 238 international aptional authority to the Reserve Banks plications, 95 percent of which were to approve bank holding company decided in 90 days or less. and bank merger applications. During 1980, the first full year under ex- Public Notice of panded delegation, 89 percent of all Board Decisions holding company and merger applications were acted on under delegated Each action by the Board or its authority. In contrast, only 78 per- delegated representative on a bank cent were processed by the Reserve holding company, bank merger, Banks in 1978, the last full year change in control, or international before expanded delegation. banking case is effected by an order Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 227 or announcement. Orders set forth Nearly all of the 472 grandfathered the essential facts of the application, bank holding companies achieved the basis for the decision, and the compliance. Seventy-nine firms sold decision made. Announcements state their banking subsidiaries, thereby merely the action taken by the ceasing to be bank holding com- Federal Reserve. All orders and an- panies. Most of the remainder renouncements are released immediate- tained their holding company status ly to the public and are reported in by ceasing impermissible nonbanking the Federal Reserve Bulletin and the activities or by qualifying these acweekly H.2 release.2 Announcements tivities under various statutory exof applications and notices received emptions. At year-end, one company by the System, but not yet acted on, was involved in litigation with the are also made in the H.2 release. Board over the divestiture requirements of the act. Board Policy Decisions Financial Factors in Small In 1980, the Board of Governors an- One-Bank Holding Company nounced several policy actions for Formations regulating the expansion of banks One-bank holding companies are and bank holding companies. often formed to facilitate the sale of locally owned, small banks. In eval- "Grandfather" Rights of uating such formations, the Board Holding Companies previously required small one-bank Under the 1970 Amendments to the holding companies to repay all ac- Bank Holding Company Act, onequisition debt within 12 years, and to bank holding companies that acmaintain a satisfactory level of quired nonbank activities between capital in the bank subsidiary. On mid-1968 and year-end 1970 had until March 28, the Board issued a new December 31, 1980, to divest such policy that facilitated the transfer of nonbank activities; to obtain Board ownership in small banks without approval to keep them; or to cease to diluting bank safety and soundness. be a bank holding company by divest- Under the revised policy, the ing their bank holdings. holding company's debt-to-equity In December 1978 and again in Deratio must decline to 30 percent cember 1979, the Board urged bank within 12 years. The 30 percent ratio holding companies that had not filed can be achieved through debt repaydivestiture plans to do so well in adment, retention of earnings to build vance of the deadline. In May 1980, up equity, or a combination of the the Board announced a program for two. Gross capital in the subsidiary orderly compliance with the Decembank should at no time fall below 8 ber 31, 1980, deadline. As part of the percent of assets so long as the debtprogram, the Reserve Banks conto-equity ratio of the holding comtacted those companies that had not pany exceeds 30 percent. filed specific plans for meeting the deadline. Investments in Foreign Companies with U.S. Operations By statute, a U.S. banking organiza- 2. "Actions of the Board; Applications and Reports." tion may invest in a foreign company Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 Banking Supervision and Regulation only if that company does not engage rapid growth and the passage of the in business in the United States, ex- International Banking Act of 1978. cept for such business that the Board determines to be incidental to the International Banking Act company's international or foreign The International Banking Act (IBA) activities. The Board had previously created a systematic, federal role for limited incidental business to those supervising and regulating foreign activities that may be undertaken by banks in the United States. At the an Edge corporation. In 1980, the same time, the act preserved the dual Board broadened this interpretation system of federal and state responby establishing the following criteria sibilities by dividing supervisory and for such U.S. operations to be conregulatory powers among the three sidered incidental: (1) The foreign federal bank agencies and the several company is predominantly engaged in states. international or foreign business; (2) The act assigned primary superthe U.S. activities are banking or visory authority to the states in the closely related to banking; and (3) the case of uninsured, state-chartered U.S. investor does not own more than branches and agencies of foreign 25 percent of, or otherwise control, banks. The Board was named the the foreign company. primary federal supervisor of such branches and agencies, but it was to Supervision and Regulation of rely, to the extent possible, on super- Foreign Banking Operations vision by the various states. The in the United States Federal Deposit Insurance Corporation, because of its potential creditor During the 1970s, foreign entities status, received examination authorirapidly expanded their operations in ty over insured, state-chartered the United States; today they are a branches, while the Comptroller of significant element in the U.S. bankthe Currency became the supervisor ing system. At midyear 1980, some of federally chartered branches and 150 foreign banks operated 332 agencies. branches and agencies in the United Since a foreign bank may operate States with assets of $123 billion. in several states under both federal Foreign banks also owned a controland state charters, the IBA assigned ling interest in 55 U.S.-chartered to the Board residual authority to banks with assets of $65 billion, while review the overall U.S. operations of foreign individuals and foreign nonforeign banks. The Board also was to bank companies held majority inbe responsible for implementing proterests in another 40 U.S. banks with visions of the act dealing with the inassets of $5 billion. Together, foreign terstate banking activities of foreign entities now control 12 percent of banks and their nonbanking opera- U.S. banking assets. tions in the United States. This section highlights the actions taken by the Federal Reserve to im- Home-State Designations prove the supervision and regulation The IBA allowed foreign banks to of foreign banking operations in the conduct a full-service banking United States, as a result of their business in only one state, except for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 229 grandfathered facilities in other limiting the extraterritorial effects of states, which could be retained. This U.S. law. full-service banking state is desig- In December, the Board ruled that nated the "home state.'' In October a foreign organization must be en- 1980, the Board issued an amendment gaged principally in the banking to Regulation K giving foreign banks business outside the United States to 180 days to select their home state. A qualify for the exemption. Qualifying one-time change in that selection was foreign organizations are permitted, allowed, provided that banking op- without the Board's prior approval, erations in the previous home state to engage in certain nonbank, nonthat had not been grandfathered were financial businesses in the United subsequently limited. States. Foreign banking organizations, like U.S. ones, still need the Rules on Interstate Branches Board's prior approval to engage in and Agencies U.S. nonbank activities of a financial The IBA permits the establishment of nature. agencies and limited-service branches outside a foreign bank's home state. Examination of Foreign It distinguishes agencies from Branches and Agencies branches by permitting the former to hold only credit balances while allow- To improve supervision, the Federal ing the latter to accept deposits. The Reserve and the other two federal Board adopted criteria for a credit bank supervisors, in cooperation with balance, and agencies must meet this several state banking departments, definition in conducting their busi- prepared a new examination report ness.3 Branches established outside a for branches and agencies of foreign foreign bank's home state must agree banks. It is being used, in whole or in to accept only those types of deposits part, by the federal agencies and by that Edge corporations may accept. most states that permit foreign banks to establish branches and Exemptions for Nonbank, agencies. Nonfinancial Business Most branches and agencies of Foreign banks received a limited exforeign banks are state-chartered and emption under the IBA to engage in uninsured. During 1980, System excertain nonbank activities in the aminers participated with state ex- United States that are generally imaminers in 174 coordinated examinapermissible for other banking tions of such branches and agencies. organizations. This exemption reflected a balancing in the act among Reporting System the three goals of (1) maintaining the separation of banking and commerce The federal supervisory authorities in the United States, (2) promoting improved their surveillance of U.S. competitive equality between U.S. operations of foreign organizations and foreign organizations, and (3) by establishing three new reports and revising a fourth. In 1980, the three federal banking agencies instituted a new quarterly 3. See Regulation K, Subpart B, section 211.22. report of condition for U.S. branches Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Banking Supervision and Regulation and agencies of foreign banks to banking structure. This section monitor more closely the financial describes the enforcement of other developments in these entities. laws, rules, and regulations. To gather better information on the financial strength of foreign com- Other Banking Regulations panies that own U.S. banks or that operate U.S. branches and agencies, During 1980, steps were taken to the Board revised its Annual Report comply with existing duties, accomof Foreign Banking Organizations modate new ones, or curtail regulaand instituted a new report on the tory costs in several statutory areas. operations and organization of these Financial Disclosure by State firms. These two reports will assist Member Banks the Federal Reserve in appraising the The Board's Regulation F deals with foreign parent's ability to support its the disclosure requirements for state U.S. banking operations. member banks that have securities The Board also adopted a new registered under the Securities Exquarterly report on intercompany change Act of 1934. Some 72 state transactions and balances to monitor member banks, most of which are financial flows between foreign bank small- and medium-sized, were holding companies and their U.S. registered with the Board under this bank subsidiaries. regulation. These institutions must file certain materials, such as finan- Experience with cial reports and proxy statements, International Banking Act that are of interest to investors. The A comprehensive system for supervis- Board staff reviews these filings for ing and regulating foreign banking compliance with the regulation. operations in the United States is now The disclosure rules under Regulain place, and the Board's responsibili- tion F are substantially similar to ties for implementing the Interna- those issued by the Securities and Extional Banking Act are basically com- change Commission. Effective Nopleted. vember 1, 1980, the Board adopted In September 1980, the Board re- amendments to this regulation to ported to the Congress on its experi- simplify its requirements and to conence under the IBA. Noting that the form with recent rule changes made statute was still too new to judge its by the SEC. full impact, the Board undertook to Bank Secrecy Act provide the Congress with a second The Department of the Treasury report within two years on the develrelies on System examiners to verify opments in this rapidly changing the compliance of state member area. banks and Edge corporations with the Treasury's Financial Recordkeeping Enforcement of Other and Reporting Regulation, which im- Laws and Regulations plemented the Bank Secrecy Act. The The preceding sections discussed the regulation requires financial institusupervision of bank safety and tions to maintain records and reports soundness and the regulation of on certain transactions of more than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 231 $10,000. One purpose of the law is to cent of capital stock, additions to the assist law enforcement personnel in capital base from sales of suboridentifying transactions that may in- dinated debt, and waiver of the six volve funds obtained illegally. months' notice of intention to with- The Federal Reserve, with the other draw from membership in the Sysfederal supervisory agencies, tem. The Federal Reserve employs the strengthened examination procedures applications or notifications process for verifying compliance with the to enforce these statutory provisions. Bank Secrecy Act. The procedures, With few exceptions, these matters which were revised in cooperation are handled under delegated authoriwith the General Accounting Office ty by the Federal Reserve Banks, or, and the Treasury Department, were in the case of proposed sales of suborincorporated in the System's ex- dinated debt, by the Director of the amination program in early 4981. Board's Division of Banking Supervision and Regulation. Loans to Insiders On November 21, 1979, the Board Commercial Paper Sales amended Regulation O to implement The Board issued a policy statement the reporting requirements of Titles on the sale of bank holding company VIII and IX of the Financial Institucommercial paper that expressed contions Regulatory and Interest Rate cern that individuals may purchase Control Act of 1978 (FIRA). These such paper with the misunderstanding titles require public disclosure of that it is an insured deposit or an loans made by an insured bank and obligation of a subsidiary bank. To its correspondent banks to executive avoid this possibility, commercial officers and principal shareholders of paper obligations of holding comthe bank. Moreover, these officers panies must state on their face (1) that and shareholders must report to the they are not insured by the Federal bank's board of directors any loans Deposit Insurance Corporation, and that they received from correspond- (2) that they are not obligations of a ent banks. bank. In early 1980, field examiners Examiners now review the marketbegan checking for compliance with this act.4 ing practices of the holding company to assure the suitable separation of Applications by State Member Banks commercial paper sales from the The Board's authority over state retail deposit-taking function; they member banks covers the authoriza- also check for the required information of new branches, investments in tion on the face of the commercial bank premises that exceed 100 per- paper obligation. 4. Under section 22(g) of the Federal loans to executive officers during the quarter. Reserve Act, state member banks must include As required, these data for 1980 are summarwith their quarterly report of condition a list of ized below. Interest rates Period Number Amount (dollars) charged (percent) January 1—March 31 981 5,634,884 4-20 April 1—June 30 897 5,641,287 4-24 July 1—September 30 1,151 8,367,239 5-19 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 Banking Supervision and Regulation Stock Repurchases by Securities Regulation Bank Holding Companies Under the Securities Exchange Act of A stock repurchase occurs when a 1934, the Board is responsible for bank holding company purchases its regulating the use of credit for purown shares from existing sharechasing or carrying securities. The holders. Oftentimes such purchases Congress assigned this task to the are financed through borrowings, so Board in order to restrain the type of that the net effect of the transaction is credit-financed speculation that conto increase bank holding company tributed to the stock market crash of debt at the very time that its equity is 1929. decreased. Since relatively large In fulfilling its responsibility under repurchases may adversely affect the the law, the Board imposes limitafinancial condition of a bank holding tions on the amount of credit that company and its bank subsidiary, the might be provided by securities Board, by regulation, requires holdbrokers and dealers (Regulation T), ing companies to provide advance by banks (Regulation U), and by notice of repurchases that retire 10 other lenders (Regulation G). Regulapercent or more of their consolidated tion X extends these credit limitaequity capital. tions, or margin requirements, to cer- The Federal Reserve reviewed tain borrowers and certain credit exabout 100 such notifications during tensions, such as credit obtained from 1980, most of which were subject to foreign lenders by U.S. citizens. Reserve Bank action on the Board's These regulations apply to stocks behalf. and bonds traded on national securi- Management Interlocks ties exchanges, as well as to certain The Board amended Regulation L to over-the-counter (OTC) stocks and carry out the Depository Institutions bonds that the Board designates as Management Interlocks Act (Title II having characteristics similar to those of the FIRA). The purpose of the In- of stock listed on the national exterlocks Act and of Regulation L is to changes. The Board published revised foster competition by generally pro- lists of OTC stocks subject to its hibiting the managing officials of margin regulations on April 4 and state member banks and bank hold- October 3, 1980. The October 3 list ing companies from serving in a man- contained the names of 1,305 stocks. agement capacity at another deposi- The Board's Division of Banking tory institution if the two organiza- Supervision and Regulation monitors tions are large or are located in the the market activity of all OTC stocks same local area. to determine the stocks that should be Field examiners check for com- placed on this list. pliance with the new law, and Federal The SEC, the National Association Reserve staff process applications for of Securities Dealers, and the napermission to enter into management tional securities exchanges examine interlocks under special circum- brokers and dealers for compliance stances. with Regulation T. The three bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 233 supervisory agencies examine banks Federal Reserve Membership for compliance with Regulation U, At the end of 1980, 5,422 banks were with the Board being responsible for members of the Federal Reserve state member banks that extend Sytem, a net decrease of 3 from the stock-secured credit for the purpose previous year. Member banks operof buying margin stock. ated 24,379 branches on December The Board, the National Credit 31, 1980, a net increase of 836 for the Union Administration, and the Farm year. Credit Administration examine other Member banks accounted for 37 lenders under their respective percent of all commercial banks in jurisdictions for compliance with the United States, and for 64 percent Regulation G. At the end of 1980, of commercial banking offices. Comthere were 512 such lenders, 270 of plete figures on changes in the which were subject to the Board's number of banks and banking offices supervision. During the year, Federal by charter class are provided in table Reserve examiners inspected 154 18 in the Statistical Tables section of lenders who were subject to Regulathis REPORT. tion G for adherence to its margin requirements. Regulatory Improvement Project On March 6, 1980, the Board approved several technical changes to Under the Board's Regulatory Im- Regulation T to reduce the ad- provement Project, existing regulaministrative burden placed on tions and reporting requirements are securities brokers and dealers and reviewed on a regular basis, and their self-regulatory organizations. eliminated or reduced when consist- On June 12, the Board amended ent with the law and the public in- Regulation T to facilitate the ac- terest.5 Examples of simplifying or tivities of stock specialists and option cost-reducing actions that were dismarketmakers, who are obligated to cussed earlier include changes in promote fair and orderly markets in Regulation F (investor disclosure by their specialty securities. On June 25, state member banks), Regulation H the,Board adopted an interpretation (transfer agents), Regulation K (interof Regulation G that allows greater national banking), Regulation T employee participation in corporate (margin credit by brokers and dealstock-option plans. On August 7, the ers), and Regulation Y (delegation of Board amended Regulation T to per- holding company applications). mit securities brokers and dealers to extend credit on fully paid-for mutual shares, thereby reducing significantly the inequity that existed between broker-dealers and other lenders, 5. See the "Regulatory Improvement Prowho already were permitted to extend ject" section of this REPORT for further inforsuch credit. mation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Regulatory Improvement Project During 1980, the Regulatory Im- together in a single publication all provement Project, which was cre- Board regulations, interpretations, ated in 1978 as a temporary task and rulings. This service will provide force, was made a permanent part of the public with a comprehensive and the Board's organizational structure authoritative source of information. under the Office of the Secretary. The project's mandate is to improve the Accomplishments in 1980 Board's regulations and rulemaking procedures, and it plays a crucial role The Depository Institutions Deregin coordinating the zero-based re- ulation and Monetary Control Act of views of all the regulations. These 1980 (Public Law 96-221), of which analyses ensure, among other things, the Financial Regulation Simplificathat "the need for and purpose of tion Act is Title VIII, required the such regulation is established clearly Federal Reserve to conduct an extenand that meaningful alternatives" are sive analysis and reevaluation of considered. Minimizing compliance several of its major regulations. In costs, paperwork, and other burdens, compliance with Title I, the Monetary as well as simplifying and clarifying Control Act, the Board revised its the regulatory language, also are an regulations on reserve requirements essential part of the review process. (Regulation D) and access to the Fed- In addition, the project this past eral Reserve discount window (Reguyear was assigned the task of coor- lation A) to reflect their applicability dinating the ongoing process of to all depository institutions. amending and interpreting the regula- In revising Regulation D on reserve tions, in compliance with the Finan- requirements, the Board undertook cial Regulation Simplification Act several steps "to avoid the imposition and the Regulatory Flexibility Act. In of unnecessary burdens on reporting implementing these new statutes, the institutions and the duplication of Federal Reserve, through the Federal other reporting requirements," as re- Financial Institutions Examination quired by the statute. A special com- Council, expanded the scope of its ac- mittee on reports was established to tivities with the other financial regu- develop procedures to minimize the latory agencies, in order to avoid con- number of items that depository inflicts, duplication, and inconsisten- stitutions would have to report on cies among the various regulations. regularly, while, at the same time, A major task of the project is im- maintaining sufficient information to proving the Board's Rules of Pro- achieve the major objective of encedure so as to enhance public par- hanced control of the money supply. ticipation and comment. A part of It was decided to require depository this effort is the broadening of access institutions with deposits or assets of to regulatory materials with a newly less than $15 million to report only on created Federal Reserve Regulatory a quarterly basis (while still maintain- Service, which is designed to bring ing reserves). Such a procedure Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Improvement Project 235 should not compromise the accuracy credit. An improvement in comof the macroeconomic data needed to pliance, as well as a reduction in the guide open market operations. To cost of credit, will benefit all conminimize further the burden on small sumers. institutions, and to provide time for In the area of electronic fund the Board to explore the kinds of per- transfers, governed by Regulation E, manent relief that might be available, the Board gave its permission for a the Board postponed implementing telephone-notification system for the requirement of maintaining and preauthorized deposits, instead of the reporting reserves for institutions of costly and sometimes unreliable mailless than $2 million. notification system, and "grand- Regulation D also was redrafted to fathered" certain nonconforming incorporate the relevant interpreta- automated-teller machines to spare tions pertaining to deposits and institutions the expense of installing reserves that had been issued in the new machines before the old ones bepast. The Federal Reserve System in- came obsolete. itiated a series of meetings through- Concurrently with the analytic out the country to explain the regula- review, some of the Board's regulation to the affected institutions. tions were completely redrafted for Similar efforts were made with simplicity and clarity. For example, respect to Regulation A. To facilitate major efforts were directed to simplian understanding of requirements for fying as well as clarifying the langaining access to the discount win- guage of Regulation Z. A recent comdow, an explanatory pamphlet was plete revision of subparts A and B of written to assist small financial in- Regulation J (Collection of Checks stitutions with limited legal resources. and Other Items and Wire Transfers In implementing the Truth in Lend- of Funds), which had contained some ing Simplification and Reform Act sentences 150 words long, elicited (Title VI of the Depository Institu- favorable comments on the increased tions Deregulation and Monetary conceptual and syntactical clarity of Control Act), Regulation Z was com- the regulation and the better underpletely redrafted and reorganized to standing of its requirements by bankincorporate relevant interpretations ers, lawyers, and other users. in the regulation and in a new accompanying commentary. The revised Work in Progress regulation contains a number of provisions that minimize the regulatory Regulations that are currently under burden. For example, the amount of review include Regulation C (Home detailed information a creditor must Mortgage Disclosure), Regulation Y disclose has been reduced substantial- (Bank Holding Companies and ly. In addition, as the statute re- Change in Bank Control), and Reguquires, the Federal Reserve developed lations G, T, U, and X (margin credit model forms to assist creditors and to requirements for banks, brokers, enhance compliance. The forms dealers, and borrowers). Staff work should reduce the legal and mana- on the analysis and simplification of gerial expenses of the creditors and these regulations is near completion, minimize their litigation costs, and and action by the Board is expected thus should help reduce the cost of sometime in the second half of 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Federal Reserve Banks Developments in during the year, a result of several ac- Payments Mechanism tions taken to curtail it. The amount of float fell from a daily average high The volume of payments by checks in 1979 of $6.7 billion to an average and through automated clearing- of $4.2 billion in 1980. Among the achouses (ACHs) continued to increase tions that contributed to this reducduring 1980. Check volume expanded tion were improvements to the Fedby a fairly typical 4 percent to 16 eral Reserve's interdistrict and inbillion items cleared by Federal tradistrict transportation systems. A Reserve Banks, whereas ACH volume new system was designed and imaccelerated by increasing 29 percent plemented to utilize more efficient to 227 million payments cleared in and reliable transportation methods. 1980. The rapid expansion of trans- During 1980, plans were developed fers cleared through ACHs is at- to implement the Monetary Control tributable to improvements in clear- Act of 1980, which calls for the pricing schedules, increased awareness of ing of System payment services as the service by corporations and in- well as the elimination or the pricing dividuals, recognition of the efficien- of Federal Reserve check float. Imcy of ACHs, and an apparent in- plementation of these plans is crease in the willingness of the public scheduled to begin in January 1981. to accept payments that are deposited In addition, work has begun on the directly to their bank accounts. In ad- installation of the new Federal dition, the direct deposit program for Reserve communications system, federal recurring payments improved which will aid in the transfer of significantly, and the continued pro- payments, especially as more largemotion of the program resulted in an dollar items are converted from paper increase in the volume of regular to electronic transfers. government payments as well. Major steps to modernize the A proposal to extend the operating Federal Reserve communications hours for the transfer and settlement system were taken in 1980, closely of funds transmitted over the adhering to a previously established System's wire network was adopted timetable. The new system was dein late 1980 to accommodate the in- signed to take account of anticipated creased traffic and to establish increases in the volume of electronic uniform deadlines. This change will payments, extension of access to be implemented in May 1981 and will nonmember financial institutions, anboth provide equal access to the ticipated improvements in the pay- System's wire network for all finan- ments mechanism, and the effects of cial institutions and facilitate same- pricing of services. Unlike the cenday settlement of a larger number of tralized system currently in use, the financial transactions. new one will be decentralized, thus Federal Reserve check float, an extending its versatility and reliability. area of ongoing analysis, declined Implementation will begin with a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 237 pilot test in 1981; completion is ex- Current earnings of $12,802 milpected in about 1983. lion in 1980 were 24.2 percent higher than those in 1979. The principal Examination changes were increases of $2,407 million on U.S. government obliga- The Board's Division of Federal tions, $55 million on foreign curren- Reserve Bank Operations examined cies, and $35 million on loans. the 12 Federal Reserve Banks and Current expenses were $791 miltheir 25 branches during 1980, as relion, or 14.1 percent more than in quired by section 21 of the Federal 1979. Assessments for expenditures Reserve Act. of the Board of Governors amounted In conjunction with the examinato $62 million. tion of the Federal Reserve Bank of The profit and loss account showed New York, the Board's examiners a net deduction of $115 million, audited the accounts and holdings primarily because of net losses of related to the Federal Reserve System $199 million on sales of U.S. govern- Open Market Account and the forment obligations, net profits of $96 eign currency operations conducted million on foreign exchange operaby that Bank in accordance with tions, and a one-time deduction of policies formulated by the Federal $8.5 million due to a change in the Open Market Committee, and furrate of depreciation on computers. nished copies of these reports to Also included were payments of the Committee. The procedures that $634,950 to the Federal Home Loan were followed by the Board's ex- Banks and $51,697 to the National aminers were surveyed and appraised Credit Union Administration for by a private firm of certified public work performed for the Federal Reaccountants, pursuant to the policy serve System under the credit reof having such reviews made annualstraint program. ly. Statutory dividends to member banks totaled $70 million, $3 million Earnings and Expenses more than in 1979. This rise reflected The accompanying table summarizes an increase in the capital and surplus the earnings, expenses, and distribu- of member banks and a consequent tion of net earnings of the Federal increase in the paid-in capital stock of Reserve Banks for 1980 and 1979. the Federal Reserve Banks. Earnings, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1980 and 1979 Thousands of dollars Item 1980 1979 Current earnings 12,802,319 10,310,148 Current expenses 791,157 693,559 Current net earnings 12,011,162 9,616,589 Net deduction from current net earnings 115,386 151,148 Assessments for expenditures of Board of Governors 62,231 50,530 Net earnings before payments to U.S. Treasury 11,833,545 9,414,911 Dividends paid 70,354 67,194 Payments to U.S. Treasury (interest on Federal Reserve notes). 11,706,370 9,278,576 Transferred to surplus 56,821 69,141 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Federal Reserve Banks Payments to the Treasury as in- Tables section of this REPORT. A terest on Federal Reserve notes to- detailed statement of assessments and taled $11,706 million for the year, expenditures of the Board of Govercompared with $9,279 million in nors appears in "Financial State- 1979. This amount consists of all net ments," pages 240-44. earnings after dividends and the amount necessary to bring surplus to the level of paid-in capital. Holdings of Loans and Securities The accompanying table shows Federal Reserve Bank Premises holdings, earnings, and average in- During 1980, the Miami Branch oc- terest rates on loans and securities of cupied its new quarters; and the the Federal Reserve Banks during the Board of Governors authorized con- past three years. struction of a new building for the Average daily holdings of loans Federal Reserve Bank of San Fran- and securities during 1980 amounted cisco. to $129,750 million, an increase of Table 8, in the Statistical Tables $10,616 million over 1979. Holdings section of this REPORT, shows the cost of U.S. government securities and of and book values of bank premises loans increased $10,632 million and owned and occupied by the Federal $82 million respectively, and accept- Reserve Banks, and of real estate ac- ances decreased $98 million. quired for banking-house purposes. The average rates of interest on A detailed statement of the earn- holdings increased from 8.57 to 9.73 ings and expenses of each Federal percent on U.S. government securi- Reserve Bank during 1980 is shown in ties, from 10.54 to 12.39 percent on table 6, and a condensed historical loans, and from 10.86 to 13.43 perstatement in table 7, in the Statistical cent on acceptances. Loans and Securities of Federal Reserve Banks, 1978-80 U.S. gov- Accept- Item and year Total ernment Loans ances securities ' Millions of dollars Average daily holdings 2 1978 115,291 114,210 876 205 1979 119,134 117,564 1,338 232 1980 . . . 129,750 128,196 1,420 134 Earnings 1978 8,449 8,367 66 16 1979 10,237 10,071 141 25 1980 12,673 12,479 176 18 Percent Average rate of interest 1978 7.33 7.33 7.58 7.85 1979 8.59 8.57 10.54 10.86 1980 9.77 9.73 12.39 13.43 1. Includes federal agency obligations. 2. Based on holdings at opening of business. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 239 Loan Guarantees for three guaranteed loans, totaling Defense Production $1,542,333, were outstanding. Of that amount, $472,465 was guar- Under the Defense Production Act of anteed. 1950, the Departments of the Army, Navy, and Air Force; the Defense Volume and Cost of Operations Logistics Agency of the Department of Defense; the Departments of Com- Table 9 in the Statistical Tables secmerce, Interior, Agriculture, and tion of this REPORT shows the volume Energy; the General Services Ad- of operations in the principal departministration; the National Aero- ments of the Federal Reserve Banks nautics and Space Administration; for 1977-80, and table 10 shows the and the Nuclear Regulatory Commis- cost of the larger operations of the sion are authorized to guarantee Reserve Banks. loans for defense production that are The number of checks handled rose made by commercial banks and other by 4 percent to 16.5 billion. Transfers private financing institutions. The of funds through the Federal Reserve Federal Reserve Banks act as fiscal Banks increased by 23 percent to 43 agents of the guaranteeing agencies million transfers, or $78.6 trillion in under the Board's Regulation V. The value. The number of pieces of paper maximum rate of interest that a money received and counted totaled financing institution may charge for a 9.4 billion, an increase of 6.7 percent V-loan is the rate that institution cur- over 1979, and amounted to $104.3 rently charges its most creditworthy billion. Issues, redemptions, and exbusiness customers for loans of com- changes of U.S. government securparable maturity (unless the govern- ities amounted to $10.3 trillion, an inmental guarantor decides that a par- crease of 25 percent. The number of ticular loan bearing a higher rate of food stamps redeemed increased by interest is necessary for national 47 percent to 2.5 billion and totaled defense purposes). $9.3 billion, an increase of 19 per- As of December 31, 1980, only cent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 Board of Governors Financial Statements The accounts of the Board for the by Arthur Andersen & Co., indeyears 1980 and 1979 were examined pendent public accountants. AUDITORS' REPORT Board of Governors of the Federal Reserve System Washington, D.C. We have examined the balance sheets of the Board of Governors of the Federal Reserve System as of December 31, 1980 and 1979, and the related statements of assessments and expenditures and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the financial statements referred to above present fairly the financial position of the Board of Governors of the Federal Reserve System as of December 31, 1980 and 1979, and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Arthur Andersen & Co. Washington, D.C, February 18, 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Statements 241 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS December 31 ASSETS 1980 1979 OPERATING FUND Cash $ 911,190 $ 1,771,762 Receivables and advances 1,339,004 486,531 Stockroom and cafeteria inventories at lower of cost (first-in, first-out) or market 155,456 126,984 Deferred publication costs (Note 3) 285,132 99,886 Total operating fund 2,690,782 2,485,163 PROPERTY FUND, at cost (Notes 1 and 4) Land and improvements 1,297,829 1,297,829 Buildings 60,337,691 60,162,893 Furniture and equipment 7,734,515 7,319,583 Computer equipment 5,892,842 3,616,332 Total property fund 75,262,877 72,396,637 $ 77,953,659 $74,881,800 LIABILITIES AND FUND BALANCES OPERATING FUND Liabilities Accounts payable $ 2,280,725 $ 1,845,996 Accrued payroll and related taxes 740,093 1,825,760 3,020,818 3,671,756 Commitments and contingencies (Notes 1, 2, and 4) Fund balance (Note 1) Balance, beginning of year (1,186,593) 877,644 Assessments over (under) expenditures 856,557 (2,064,237) Balance, end of year (330,036) (1,186,593) Total operating fund 2,690,782 2,485,163 PROPERTY FUND (Note 1) Fund balance Balance, beginning of year 72,396,637 70,753,283 Additions—at cost 6,560,478 1,842,978 Disposals—at cost (3,694,238) (199,624) Total property fund 75,262,877 72,396,637 $ 77,953,659 $74,881,800 The accompanying notes are an integral part of these balance sheets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF ASSESSMENTS AND EXPENDITURES Year ended December 31 1980 1979 ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS (Note 1) For Board expenses and property additions $ 62,230,800 $ 50,529,700 For expenditures made on behalf of the Federal Reserve Banks for printing, issuance, and redemption of Federal Reserve notes 71,440,704 71,600,273 Total assessments 133,671,504 122,129,973 EXPENDITURES (Note 1) Board expenses Salaries 37,069,785 33,572,060 Retirement and insurance contributions (Note 2) 9,835,780 8,038,006 Travel 1,585,661 1,300,277 Professional fees 675,718 509,283 Contractual services 746,497 649,130 Printing and binding 1,651,924 1,420,993 Equipment, office space, and other rentals (Note 4) 791,098 1,199,560 Telephone and telegraph 685,918 658,307 Postage 641,658 619,523 Stationery, office, and other supplies 509,892 487,532 Heat, light, and power 966,949 925,294 Cafeteria operations, net 391,384 351,132 Repairs and maintenance 489,082 507,779 Books and subscriptions 162,870 145,794 Miscellaneous 443,494 419,377 56,647,710 50,804,047 Board property additions, net of recoveries on disposals of $1,833,945 in 1980 and $53,088 in 1979(Note 1) 4,726,533 1,789,890 61,374,243 52,593,937 Expenditures for printing, issuance, and redemption of Federal Reserve 71,600,273 notes on behalf of the Federal Reserve Banks (Note 1) 71,440,704 124,194,210 Total expenditures 132,814,947 $ (2,064,237) ASSESSMENTS OVER (UNDER) EXPENDITURES $ 856,557 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Statements 243 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CHANGES IN FINANCIAL POSITION Year ended December 31 1980 1979 SOURCES OF FUNDS Assessments levied for Board expenses and property additions & 62,230,800 $ 50,529,700 Assessments levied for expenditures made on behalf of the Federal Reserve Banks 71,440,704 71,600,273 Recoveries from disposals of property 1,833,945 53,088 Total sources 135,505,449 122,183,061 APPLICATIONS OF FUNDS Board expenses 56,647,710 50,804,047 Expenditures for printing, issuance, and redemption of Federal Reserve notes on behalf of the Federal Reserve Banks 71,440,704 71,600,273 Additions to property Land and improvements 470 Buildings 199,512 939,757 Furniture and equipment 483,309 762,751 Computer equipment 5,877,657 140,000 6,560,478 1,842,978 Decrease in liabilities 650,938 763,548 Increase in receivables, inventories, and deferred costs 1,066,191 197,763 Total applications 136,366,021 125,208,609 DECREASE IN CASH (860,572) (3,025,548) CASH BALANCE, beginning of year 1,771,762 4,797,310 CASH BALANCE, end of year i 911,190 $ 1,771,762 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 Financial Statements NOTES TO FINANCIAL STATEMENTS Additionally, employees of the Board participate in the Federal Reserve System's Thrift Plan. Under this YEARS ENDED DECEMBER 31, 1980 AND 1979 Plan, the Board adds a fixed percentage to allowable employee savings. (1) SIGNIFICANT ACCOUNTING POLICIES Board contributions to all retirement plans totaled approximately $9,110,000 in 1980 and $7,404,000 in In preparing its financial statements, the Board has 1979. applied accounting principles which, in its opinion, As of January 1, 1980 (date of most recent actuarial best reflect its financial position and results of opera- review), the accumulated plan benefits for the Federal tions. These accounting principles include certain Reserve Board Plan were as follows: principles which are generally accepted for organizations in the private sector and also certain principles As of which are generally accepted for governmental units. January 1, 1980 A summary of significant accounting policies is shown Actuarial present value of below. accumulated plan benefits Accounting for Assessments, Board Expenses, and Vested $43,991,227 Property A ddit ions—Assessments made by the Board Nonvested 3,161,989 on the Federal Reserve Banks for Board expenses and additions to property are calculated based upon ex- $47,153,216 pected cash needs and are accrued when assessed. Board expenses and property additions are recorded The assumed rate of return used in determining the on the accrual basis of accounting. present value of accumulated plan benefits was 8 per- Accounting for Assessments and Expenditures cent. Made on Behalf of the Federal Reserve Banks— As of January 1, 1980, net assets available for Assessments and expenditures made on behalf of the benefits exceeded the actuarial present value of ac- Federal Reserve Banks for the printing, issuance, and cumulated plan benefits. redemption of Federal Reserve notes are recorded on the cash basis. This treatment produces results which are not materially different from those which would have been produced using the accrual basis of accoun- (3) FEDERAL RESERVE REGULATORY SERVICE ting. The Board plans to begin publication of the Federal Accounting for Property—The Board does not Reserve Regulatory Service in 1981. This monthly charge depreciation as an operating expense. Property looseleaf service will contain Board regulations, interadditions are charged to expense in the Operating pretations, staff rulings, and other regulatory Fund in the year of acquisition; recoveries on the materials. The service will be distributed without disposal of property are recorded as a reduction of ex- charge throughout the Federal Reserve System and to pense in the Operating Fund in the year of disposal. federal depository libraries, and will also be sold to When property is acquired or sold, the property ac- depository institutions, legal firms, and others. Costs counts in the Property Fund are increased or reduced incurred for the development of the service of at cost, with a corresponding increase or decrease in $185,246 in 1980 and $99,886 in 1979 have been dethe Property Fund balance. ferred and will be amortized against future subscrip- Accounting for Employee Annual Leave—The tion revenues beginning in 1981. Board does not accrue for salary expense related to employee annual leave that has been earned and would be paid if not taken prior to termination of employ- (4) COMMITMENTS AND CONTINGENCIES ment. As of December 31, 1980, vested employee an- The Board leases office and computer equipment nual leave is approximately $2,489,000. and office and storage space under leases which may generally be terminated within one year. At Decem- (2) RETIREMENT PLANS ber 31, 1980, fixed future rental commitments are ap- There are two major retirement programs for proximately $884,000 for 1981. employees of the Board. Approximately 86 percent of The Board has been named as a defendant in litigathe employees are covered by the Federal Reserve tion involving challenges to, or appeals from, actions Board Plan. All new members of the staff who do not or proposed actions of the Board pursuant to statucome directly from a position in the government are tory requirement or authorization. Such lawsuits gencovered by this Plan. The second Plan, the Civil Ser- erally seek injunctive or declaratory relief against the vice Retirement Plan, covers all new employees who Board rather than monetary awards. It is the opinion come directly from Federal government service. Em- of Board counsel that lawsuits involving monetary ployee contributions are the same percentage of salary awards do not represent a material liability to the under both Plans, and benefits are similar, being Board. based upon the Civil Service Plan. The Board does not maintain insurance against loss Under the Civil Service Plan, Board contributions of its buildings and furniture and equipment from fire match employee payroll deductions. Under the Fed- or other casualties. Coverage for other customarily ineral Reserve Board Plan, the Board funds currently all sured risks, such as workers' compensation insurance normal costs and all past service costs, as actuarially and comprehensive general liability insurance, is cardetermined. ried by the Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 Tables 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1980 Thousands of dollars ASSETS Gold certificate account 11,160,104 Special drawing rights certificate account 2,518,000 Coin 394,198 Loans and securities To depository institutions 1,809,852 Acceptances held under repurchase agreements 776,489 Federal agency obligations Bought outright. .^ 8,739,259 Held under repurchase agreements 525,050 U.S. government securities Bought outright Bills 43,687,650 Notes 58,718,310 Bonds 16,892,536 Total bought outright 119,298,496 Held under repurchase agreement 2,029,250 Total U.S. government securities 121,327,746 Total loans and securities 133,178,396 Cash items in process of collection Transititems 12,497,582 Other cash items 3,005,108 Total cash items in process of collection 15,502,690 Bank premises Land 87,768 Buildings (including vaults) 338,351 Building machinery and equipment 118,701 Construction account 63,308 Total bank premises 520,360 Less depreciation allowance 153,127 367,233 Bank premises, net 455,001 Other assets Furniture and equipment 158,055 Less depreciation 48,732 Total furniture and equipment, net 109,323 Denominated in foreign currencies ' 5,103,256 Interest accrued 2,062,123 Premium on securities 270,362 Overdrafts 123,812 Prepaid expenses 53,996 Suspense account 454,364 Real estate acquired for banking-house purposes 14,798 Allother 86,911 Total other assets 8,278,945 TOTAL ASSETS 171,487,334 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 LIABILITIES Federal Reserve notes Outstanding (issued to Fe'deral Reserve Banks) 140,184,518 Less held by Federal Reserve Banks 15,941,812 Total Federal Reserve notes, net 124,242,706 Deposits Depository institutions 27,457,943 U.S. Treasury—General account 3,062,267 Foreign—Official accounts 411,441 Other deposits Officers' and certified checks 41,225 International organizations 191,828 Allother 2 383,066 Total other deposits 616,119 Deferred availability cash items 11,032,882 Other liabilities Exchange-translation account - 113,617 Unearned discount 761 Discount on securities 2,193,523 Sundry items payable 26,282 Suspense account 147,436 All other 5,127 Total other liabilities 2,259,512 TOTAL LIABILITIES 169,082,870 CAPITAL ACCOUNTS Capital paid in 1,202,232 Surplus 1,202,232 Other capital accounts 3 TOTAL LIABILITIES AND CAPITAL ACCOUNTS 171,487,334 1. Includes $108.5 million in U.S. government 3. During the year, this item includes the net earnsecurities held under repurchase agreement against ings, expenses, profit and loss items, and accrued receipt of foreign currencies and $2,993.6 million in dividends, which are closed out on Dec. 31; see table foreign currencies warehoused for the U.S. Treasury. 7 in the Statistical Tables section of this REPORT. 2. In closing out the other capital accounts at yearend, the Reserve Bank earnings that are payable to the NOTE. Amounts in boldface type indicate items in Treasury for December are included in this account the Board's weekly statement of condition of the pending payment. Federal Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

2. Statement of Condition of Each Federal Reserve Bank, December 31, 1980 and 1979 Millions of dollars Total Boston New York Philadelphia Cleveland Richmond Item 1980 1979 1980 1979 1980 1979 1980 1979 1980 1979 1980 1979 ASSETS Gold certificate account 11,161 11,112 577 992 3,013 2,841 560 924 847 646 961 1,293 Special drawing rights certificate account 2,518 1,800 128 93 665 459 121 91 201 149 229 161 Coin 397 403 27 25 24 21 19 21 49 42 42 45 Loans Secured by U.S. government and agency obligations . 1,594 428 106 31 663 54 37 16 70 55 189 61 Other 215 1,026 0 6 0 457 17 0 132 0 0 104 Acceptances held under repurchase agreement 776 704 0 0 776 704 0 0 0 0 0 0 Federal agency obligations Bought outright 8,739 8,216 399 397 2,272 2,025 379 393 660 660 718 673 Held under repurchase agreement 525 493 0 0 525 493 0 0 0 0 0 0 U.S. government securities Bought outright ' 119,299 116,291 5,450 5,625 31,010 28,664 5,179 5,560 9,013 9,343 9,799 9,524 Held under repurchase agreement 2,029 1,167 0 0 2,029 1,167 0 0 0 0 0 0 Total loans and securities 133,177 128,325 5,955 6,059 37,275 33,564 5,612 5,969 9,875 10,058 10,706 10,362 Cash items in process of collection 15,504 15,694 403 457 2,351 2,090 425 440 479 662 3,035 2,822 Bank premises 457 408 100 103 20 14 53 54 24 23 89 83 Other assets Denominated in foreign currencies 2 5,104 2,483 145 77 1,374 646 195 102 414 211 255 132 AH other 3,177 2,722 122 164 751 575 151 160 294 160 252 202 Interdistrict Settlement Account 0 0 -82 -871 + 2,859 + 1,266 -837 -739 -322 -628 + 219 -362 TOTAL ASSETS 171,495 162,947 7,375 7,099 48,332 41,476 6,299 7,022 11,861 11,323 15,788 14,738 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

LIABILITIES Federal Reserve notes 124,241 113,355 6,191 5,767 35,601 29,935 5,276 5,457 9,463 9,027 10,786 10,304 Deposits Reserve accounts 3 27,456 29,792 743 661 6,521 7,321 576 825 1,529 1,101 1,637 1,308 U.S. Treasury—General account 3,062 4,075 0 258 3,062 1,252 0 249 0 358 0 316 Foreign—Official accounts 411 429 10 9 145 207 14 12 30 26 18 16 All other 617 1,412 11 42 437 719 8 45 16 73 24 74 Total deposits 31,546 35,708 764 970 10,165 9,499 598 1,131 1,575 1,558 1,679 1,714 Deferred-availability cash items 11,037 8,927 257 152 1,384 711 237 239 437 376 2,989 2,431 2,265 2,667 97 144 570 751 96 105 196 172 210 173 Other liabilities and accrued dividends 4 169,089 160,657 7,309 7,033 47,720 40,896 6,207 6,932 11,671 11,133 15,664 14,622 TOTAL LIABILITIES CAPITAL ACCOUNTS 1,203 1,145 33 33 306 290 46 45 95 95 62 58 Capital paid in 1,203 1,145 33 33 306 290 46 45 95 95 62 58 Surplus 0 0 0 0 0 0 0 0 0 0 0 0 Other capital accounts TOTAL LIABILITIES AND CAPITAL ACCOUNTS 171,495 162,947 7,375 7,099 48,332 41,476 6,299 7,022 11,861 11,323 15,788 14,738 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes Issued to Federal Reserve Bank by Federal Reserve Agent and outstanding 140,184 125,301 7,007 6,405 38,710 32,636 6,515 6,142 10,225 9,615 12,006 11,022 Less held by issuing Bank, and forwarded for redemption 5 15,943 11,946 816 638 3,109 2,701 1,239 685 762 588 1,220 718 Federal Reserve notes, net 6 124,241 113,355 6,191 5,767 35,601 29,935 5,276 5,457 9,463 9,027 10,786 10,304 Collateral held by Federal Reserve for notes issued to Bank Gold certificate account 11,161 11,112 577 992 3,013 2,841 560 924 847 646 961 1,293 Special drawing rights certificate account 2,518 1,800 128 93 665 459 121 91 201 149 229 161 Other eligible assets 0 894 0 31 0 318 0 14 0 54 0 131 U.S. government and agency securities 110,562 111,495 5,486 5,289 31,923 29,018 4,595 5,113 8,415 8,766 9,596 9,437 TOTAL COLLATERAL 124,241 125,301 6,191 6,405 35,601 32,636 5,276 6,142 9,463 9,615 10,786 11,022 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

2. Statement of Condition of Each Federal Reserve Bank, December 31, 1980 and 1979—Continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 1980 1979 1980 1979 1980 i 1979 1980 1979 1980 1979 1980 1979 1980 1979 ASSETS Gold certificate account 465 525 1,722 1,591 465 474 225 232 501 473 572 451 1,253 670 Special drawing rights certificate account .... 79 64 411 300 106 79 42 32 111 75 132 86 293 211 Coin 38 39 23 31 24 33 12 17 44 49 30 29 65 51 Loans Secured by U.S. government and agency obligations 81 11 183 73 51 14 25 21 88 28 46 27 55 37 0 111 3 78 0 47 9 10 50 22 107 3 84 Other 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Acceptances held under repurchase agreement Federal agency obligations 317 340 1,373 1,304 351 349 156 183 409 363 519 448 1,186 1,081 Bought outright 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Held under repurchase agreement U.S. government securities Bought outright ' 4,323 4,819 18,746 18,454 4,794 4,948 2,131 2,585 5,591 5,134 7,080 6,336 16,183 15,299 Held under repurchase agreement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total loans and securities 4,721 5,281 20,305 19,909 5,196 5,358 2,321 2,799 6,138 5,547 7,646 6,918 17,427 16,501 Cash items in process of collection 2,041 1,563 1,730 2,114 656 690 699 994 1,521 1,511 1,370 1,519 794 832 Bank premises 35 31 16 16 14 13 28 28 22 20 13 12 43 11 Other assets Denominated in foreign currencies 2 379 186 729 375 150 77 160 79 215 104 294 144 794 350 All other 157 151 417 395 102 95 84 80 126 135 157 137 564 468 Interdistrict Settlement Account 392 -446 -967 -769 -391 -346 -448 -765 -71 + 366 + 401 + 329 + 31 + 2,965 TOTAL ASSETS 7,523 7,394 24,386 23,962 6,322 6,473 3,123 3,496 8,607 8,280 10,615 9,625 21,264 22,059 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

LIABILITIES Federal Reserve notes 3,670 3,550 19,437 18,505 4,835 4,748 1,807 1,909 5,758 5,000 7,198 5,959 14,219 13,194 Deposits Reserve accounts 3 1,852 2,151 3,495 3,689 742 840 655 675 1,350 1,459 2,312 2,471 6,044 7,291 U.S. Treasury—General account 0 230 0 284 0 225 0 175 0 306 0 85 0 337 Foreign 27 23 52 45 11 9 11 10 15 13 21 17 57 42 All other 8 33 39 150 9 40 5 22 12 42 19 51 29 121 Total deposits .. 1,887 2,437 3,586 4,168 762 1,114 671 882 1,377 1,820 2,352 2,624 6,130 7,791 O D t e h f e e r r r l e i d ab -a il v i a ti i e l s a b a i n li d ty a c c c a r s u h e d it e d m iv s idends 4 1,6 1 6 1 7 9 1,1 9 3 8 5 3 6 3 7 7 2 3 5 6 9 3 0 5 8 6 4 9 45 8 7 4 5 4 2 0 9 5 6 7 1 2 1,2 9 6 9 9 1,2 9 6 8 4 7 1 9 2 0 7 7 1 9 1 8 0 2 2 9 3 0 7 5 2 0 0 8 2 TOTAL LIABILITIES 7,343 7,220 24,032 23,626 6,250 6,403 3,047 3,424 8,503 8,182 10,467 9,491 20,876 21,695 CAPITAL ACCOUNTS Capital paid in 90 87 177 168 36 35 38 36 52 49 74 67 194 182 Surplus 90 87 177 168 36 35 38 36 52 49 74 67 194 182 Other capital accounts ... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 TOTAL LIABILITIES AND CAPITAL ACCOUNTS 7,523 7,394 24,386 23,962 6,322 6,473 3,123 3,496 8,607 8,280 10,615 9,625 21,264 22,059 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes Issued to Federal Reserve Bank by Federal Reserve Agent and outstanding 5,678 5,242 21,021 19,535 5,606 5,289 2,265 2,530 6,750 5,803 8,216 6,551 16,185 14,531 Less held by issuing Bank, and forwarded for redemption5 2,008 1,692 1,584 1,030 771 541 458 621 992 803 1,018 592 1,966 1,337 Federal Reserve notes, net ( 3,670 3,550 19,437 18,505 4,835 4,748 1,807 1,909 5,758 5,000 7,198 5,959 14,219 13,194 Collateral held by Federal Reserve Agent for notes issued to Bank Gold certificate account 465 525 1,722 1,591 465 474 225 232 501 473 572 451 1,253 670 Special drawing rights certificate account ... 79 64 411 300 106 79 42 32 111 75 132 86 293 211 Other eligible assets 0 9 0 89 0 51 0 24 0 42 0 94 0 37 U.S. government and agency securities 3,126 4,644 17,304 17,555 4,264 4,685 1,540 2,242 5,146 5,213 6,494 5,920 12,673 13,613 TOTAL COLLATERAL 3,670 5,242 19,437 19,535 4,835 5,289 1,807 2,530 5,758 5,803 7,198 6,551 14,219 14,531 1. Includes securities loaned—fully guaranteed by U.S. government securities pledged 4. Includes exchange-translation account reflecting the monthly revaluation at market with Federal Reserve Banks—and excludes (if any) securities sold and scheduled to be exchange rates of foreign exchange commitments. bought back under matched sale-purchase transactions. 5. Beginning September 1980, Federal Reserve notes held by the Reserve Banks are ex- 2. Includes U.S. government securities held under repurchase agreement against empt from the collateral requirement. receipt of foreign currencies and foreign currencies warehoused for the U.S. Treasury. 6. Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve Assets shown in this line are revalued monthly at market exchange rates. Banks other than the issuing Bank. 3. Includes reserves of member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Tables 3. Federal Reserve Bank Holdings of U.S. Government and Federal Agency Securities, December 31, 1978-80 Millions of dollars Coupon December 31 Increase or decrease (-) Description (percent) 1980 1979 1978 1980 1979 U.S. government securities—Total. 121,328 117,458 110,562 3,870 6,896 Within 90 days 28,279 26,841 24,097 1,438 2,744 91 days to 1 year 30,187 37,230 29,465 -7,043 7,765 1-5 years 34,505 27,864 31,608 6,641 -3,744 5-10 years 13,354 12,774 14,717 580 -1,943 Over 10 years 15,002 12,748 10,675 2,254 2,073 Held outright ' Treasury bills—Total 43,688 45,244 42,159 -1,556 3,085 Within 3 months 22,929 23,093 20,661 -164 2,432 3-6 months 14,564 10,706 14,911 3,858 -4,205 After 6 months 6,195 11,445 6,586 -5,250 4,859 Treasury notes—Total 58,718 56,494 54,855 2,224 1,639 Dec. 31, 1978—H 8 V* 244 -244 U 5'/4 643 -643 Jan. 31,1979—L 151 -151 Feb. 15, 1979—H 7 1,731 -1,731 Feb. 28, 1979—M 57/S 368 -368 Mar. 31,1979—N 6 640 -640 Apr. 30, 1979—P 159 -159 May 15, 1979—D / 550 -550 May 31, 1979—Q 6'/* 239 -239 June 30, 1979—E 157 -157 R 291 -291 July31,1979-S 6/4 159 -159 Aug. 15, 1979—A 6/4 669 -669 J 67/8 880 -880 Aug. 31,1979—T 65/» 440 -440 Sept. 30, 1979—F 8/2 230 -230 U 333 -333 Oct. 31,1979—V 7/4 455 -455 Nov. 15, 1979—B 890 -890 K 6/4 250 -250 C 7 366 -366 N De o c v . . 3 3 1 0 , , 1 1 9 9 7 7 9 9 — — G W 7 7 » /2 >* 4 1 7 3 5 7 - - 1 47 3 5 7 X 568 -568 Jan. 31,1980—K 7/2 403 365 -403 38 Feb. 15, 1980—G 6/2 1,512 1,461 -1,512 51 Feb. 29, 1980—L 7 5/8 399 334 -399 65 Mar. 31, 1980—C 7/2 809 724 -809 85 Apr. 30, 1980—N 7 3/4 457 437 -457 20 May 15, 1980—A 67/8 5,273 5,272 -5,273 May 31, 1980— P 8 177 177 -177 0 June 30,1980—D / 322 294 -322 28 Q 8/4 859 858 -859 1 July 31, 1980—R 8/2 714 699 -714 15 A A Se u u p g g t . . . 3 1 3 1 5 0 , , , 1 1 1 9 9 9 8 8 8 0 0 0 — — — S B H T E 6 9 63 7 / / / 4 8 2, 4 6 7 4 1 6 2 8 3 5 1 5 8 5 3 2, 4 6 6 4 1 1 8 5 3 5 6 6 7 5 3 -2 - - - - , 7 4 1 6 4 6 2 5 8 3 1 5 3 8 5 4 3 3 0 0 5 9 1 O N c o t v . . 3 1 1 5 ,1 , 9 1 8 98 0 0 — — U J 8 8 ^ 7/ / 8 8 7 3 0 5 0 4 6 3 9 0 3 9 - - 7 3 0 5 0 4 4 7 5 Nov. 30, 1980—V 7'/8 307 250 -307 57 Dec. 31, 1980—F 9 57/ / 4 8 33 33 -33 0 W 97/8 538 0 -538 538 Jan. 31,1981—P 93/4 461 383 0 78 383 Feb. 15, 1981—A 7 374 351 351 23 0 C 7 3/8 1,101 1,074 1,007 27 67 Feb. 28, 1981— Q 93/4 426 397 0 29 397 Mar. 31, 1981—H 67/8 226 218 203 8 15 R 95/8 733 698 0 35 698 Apr. 30, 1981—S 93/4 261 159 0 102 159 May 15, 1981—D 7 3/8 191 185 182 6 3 M 7/2 1,071 1,041 1,034 30 7 May 31, 1981— T 93/4 411 313 0 98 313 June 30, 1981—J 63/4 80 80 70 0 10 U 9'/8 332 306 0 26 306 July 31, 1981—V 9 3/8 351 311 0 40 311 Digitized for FRAAugS. E1R5, 1981—F 7 5/8 364 343 297 21 46 http://fraser.stlouisfed.org/ N 8 3/8 1,364 1,301 1,297 63 4 Federal Reserve Bank of St. Louis

Tables 253 Coupon December 31 Increase or decrease (-) Description (percent) 1980 1979 1978 1980 1979 U.S. government securities—Cont Treasury notes—Cont. Aug. 31, 1981—W 95/8 571 563 0 563 Sept. 30, 1981—K 63/4 181 131 72 50 59 X 10 V* 408 405 0 3 405 Oct. 31, 1981—Y 125/8 596 527 0 69 527 Nov. 15, 1981—B 73/4 1,600 1,600 1,597 0 3 G 7 119 116 113 3 3 Nov. 30, 1981—Z 12'/s 649 594 0 55 594 Dec. 31, 1981—L 7!/4 177 167 124 10 43 AB 11 3/8 577 571 0 6 571 Jan. 31, 1982—N 11 Vi 462 0 0 462 0 Feb. 15, 1982—D 6'/8 59 59 56 0 3 Feb. 28, 1982—P 137/s 545 0 0 545 0 Mar. 31, 1982—G 77/8 245 245 235 0 10 Q 15 632 0 0 632 0 Apr. 30, 1982—R IP/8 496 0 0 496 0 May 15, 1982—A 8 1,447 1,447 1,444 0 3 E 7 53 53 30 0 23 K 914 1,019 1,018 1,018 1 0 May 31, 1982—S 93/8 359 0 0 359 0 June 30, 1982—H 814 119 115 93 4 22 T 8 > 705 0 0 705 0 July 31, 1982—U 87/8 1,000 0 0 1,000 0 Aug. 15, 1982—B 8</8 1,162 1,162 1,161 0 1 M 9 1,074 1,068 0 6 1,068 Aug. 31, 1982—V 11 Vs 570 0 0 570 0 Sept. 30, 1982—J 83/8 76 64 62 12 2 W H7/8 550 0 0 550 0 Oct. 31, 1982—X 12 Vs 420 0 0 420 0 Nov. 15, 1982—C V/s 770 770 754 0 16 F 7'/8 239 227 209 12 18 Nov. 30, 1982—Y 137/8 364 0 0 364 0 Dec. 31, 1982—L 93/8 459 459 0 0 459 Z 15 Vs 350 0 0 350 0 Feb. 15, 1983—A 8 2,144 2,138 2,136 6 2 Mar. 31, 1983—D 914 12 9 0 3 9 May 15, 1983—C 7> 113 95 89 18 6 G IP/8 851 837 0 14 837 June 30, 1983—E 87/8 426 408 0 18 408 Aug. 15, 1983—K 914 3,189 0 0 3,189 0 J Il7/s 1,079 0 0 1,079 0 Sept. 30, 1983—F 93/4 284 284 0 0 284 Nov. 15, 1983—B 7 101 101 95 0 6 L 9> 1,935 0 0 1,935 0 Dec. 31, 1983—H 10 Vi 221 156 0 65 156 Feb. 15, 1984—A IVA 3,913 3,913 3,900 0 13 Mar. 31,1984—D 1414 531 0 0 531 0 May 15, 1984—C 9'/4 69 69 0 0 69 G 1314 500 0 0 500 0 June 30, 1984—E 87/s 505 0 0 505 0 Aug. 15, 1984—B 7'/4 385 385 372 0 13 Sept. 30, 1984—F 339 0 0 339 0 Dec. 31, 1984—H 14 252 0 0 252 0 Feb. 15, 1985—A 8 1,448 1,448 1,448 0 0 May 15, 1985—C 10 3/8 38 38 0 0 38 D 14 3/8 260 0 0 260 0 Aug. 15, 1985—B 8>/4 1,624 1,624 1,618 0 6 E 95/8 79 0 0 79 0 May 15, 1986—A 77/8 1,158 1,137 1,086 21 51 Aug. 15, 1986—B 8 1,987 1,987 1,978 0 9 Feb. 15, 1987—B 9 1,659 1,657 0 2 1,657 May 15, 1987—C 12 498 0 0 498 0 Nov. 15, 1987—A 75/8 616 616 616 0 0 May 15, 1988—A 8'/4 1,754 1,751 1,744 3 7 Nov. 15, 1988—B 83/4 1,139 1,130 1,087 9 43 May 15, 1989—A 9'/4 459 451 0 8 451 Nov. 15, 1989—B 103/4 1,942 422 0 1,520 422 Aug. 15, 1990—A 103/4 1,186 0 0 1,186 0 Digitized for FRNAovS.E 1R5, 1990—B 13 220 0 0 220 0 http://fraser.stlouisfed.org/ For notes see end of table. Federal Reserve Bank of St. Louis

254 Tables 3. Federal Reserve Bank Holdings of U.S. Government and Federal Agency Securities, December 31, 1978-80—Continued Millions of dollars Coupon December 31 Increase or decrease (-) (per- Description cent) 1980 1979 1978 1980 1979 U.S. government securities—Cont. Treasury bonds—Total 16,893 14,553 12,465 2,340 2,088 1975-85—May 414 156 156 156 0 0 1978-83—June VA 87 87 87 0 0 1980—Feb 4 0 266 266 -266 0 Nov VA 0 74 74 -74 0 1981—Aug 7 124 123 123 0 1982—Feb 63/s 386 386 371 0 15 1984—Aug 63/8 355 355 355 0 0 1985-May VA 47 47 47 0 0 1986—Nov 310 310 310 0 0 6»/8 1987-92—Aug 509 509 509 0 0 4'/4 1988-93—Feb 4 24 24 24 0 0 Aug 384 384 380 0 4 IVi 1989-94—May 77 77 77 0 0 1990—Feb 4'/8 84 84 84 0 0 May 3'/2 342 342 342 0 0 1992—Aug 8'/4 92 92 91 0 1 714 1993—Feb 63/4 70 70 70 0 0 77/s 136 136 127 0 9 Aug. ... 131 118 61 13 57 Nov. ... 159 144 121 15 23 1993-98—May . 7 157 157 157 0 0 1994-99—May . 8'/2 1,004 1,004 999 0 5 1994_Feb 9 84 60 0 24 60 Aug. ... 83/4 42 32 0 10 32 Nov. ... 10 Vs 34 0 0 34 0 1995—Feb 2 2 2 0 0 28 0 0 28 0 May. /lO3/8 7 0 0 7 0 \l25/8 282 0 0 282 0 1995-2000-Feb 585 566 562 19 4 Aug 2,053 2,042 2,004 11 38 1996-2001—Aug 8 489 488 480 1 8 1998—Nov 3/2 31 31 31 0 0 2000-05—May 8/4 1,493 1,493 1,493 0 0 2002-07—Feb 1,389 1,389 1,389 0 0 Nov 265 265 265 0 0 2003-08-Aug 749 747 747 2 0 Nov VA 1,534 1,534 661 0 873 2004-09—May 633 633 0 0 633 Nov 103/s 820 326 0 494 326 2005-10—Feb IP/4 512 0 0 512 0 May 10 1,070 0 0 1,070 0 Nov 123/4 159 0 0 159 0 Held under RPs 2,029 1,168 1,084 861 84 Federal agency obligations Held outright—Total 8,739 8,216 7,896 523 320 Banks for Cooperatives 35 35 85 0 -50 Export-Import Bank 16 16 69 0 -53 Federal Farm Credit Banks 1,459 951 68 508 883 Federal Home Loan Banks 2,426 2,271 2,189 155 82 Federal Intermediate Credit Banks . 75 97 466 -22 -369 Federal Land Banks 988 1,163 1,377 -175 -214 Farmers Home Administration 187 196 196 -9 0 Federal National Mortgage Association 3,305 3,237 3,196 68 41 Government National Mortgage Association—PCs 83 83 83 0 0 U.S. Postal Service 37 37 37 0 0 Washington Metropolitan Area Transit Authority 117 117 117 0 0 General Services Administration ... 14 14 14 0 0 Held under RPs 525 494 133 31 361 Digitized fo1r. FERxcAluSdEesR securities sold under matched sale- NOTE. Details may not add to totals because of purchase agreements, and securities held under repur- rounding. http://fraser.stlouisfed.org/ chase agreements. Federal Reserve Bank of St. Louis

Tables 255 Federal Reserve Bank Holdings of Special Short-Term Treasury Certificates Purchased Directly from the United States, 1972-80 Millions of dollars Date j Amount Date Amount Date Amount Date Amount 1972 1973 1975 1977 Sept. 12 38 Sept. 15 319 Mar. 15 820 Sept. 30 2,500 16' 319 16 ' 820 Oct. 1 2,500 1973 17 832 2 ' 2,500 Aug. 15 351 1974 3 ' 2,500 Sept. 7 73 Nov. 6 131 Aug. 5 656 8 73 6 965 1979 9 ' 73 1975 7 474 Mar. 31 2,600 10 42 Mar. 11 626 11 204 11 485 12 1,043 12 543 Apr. 1 ' 2,600 12 169 13 315 13 399 2 1,283 14 319 14 820 15 481 3 376 1. Sunday or holiday. discount rate of the Federal Reserve Bank of New NOTE. Under authority of section 14(b) of the York. For data for earlier years, beginning with 1942, Federal Reserve Act. see previous ANNUAL REPORT. NO holdings in 1980 Throughout the period shown the interest rate paid nor on dates not shown. on such securities was lA percent below the prevailing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Tables Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. government securities Outright transactions (excluding matched sale-purchase transactions) Treasury bills Gross purchases 0 Gross sales 1,722 Exchange 0 Redemptions 790 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 383 Exchange -403 Redemptions 0 I to 5 years Gross purchases 0 Gross sales 0 Maturity shift -383 Exchange 403 5 to 10 years Gross purchases Gross sales Maturity shift Exchange Over 10 years Gross purchases Gross sales Maturity shift Exchange All maturities Gross purchases Gross sales Redemptions Matched sale-purchase transactions Gross sales Gross purchases Repurchase agreements Gross purchases Gross sales Net change in U.S. government securities.. Federal agency obligations Outright transactions Gross purchases Gross sales Redemptions Repurchase agreements Gross purchases Gross sales Net change in federal agency obligations .. Bankers acceptances Outright transactions, net Repurchase agreements, net Net change in bankers acceptances Total net change in System Open Market Account oooo oooo 187 1,370 2,428 1,590 0 108 0 0 0 400 0 0 0 292 109 0 0 0 1,822 921 179 -2,177 -809 -459 0 0 0 0 355 373 0 0 0 -374 -921 -179 1,377 809 459 0 107 62 0 0 0 -1,364 0 0 450 0 0 0 81 64 0 0 0 -84 0 0 350 0 0 0 187 2,206 3,036 1,722 1,590 0 108 790 400 0 0 53,025 54,541 55,658 57,316 55,557 54,584 54,636 57,479 5,704 5,407 6,682 3,029 6,872 4,787 6,379 3,952 -1,148 -1,140 1,486 2,168 668 0 2 3,049 2,403 1,883 483 3,543 2,372 1,834 563 -494 45 586 0 0 0 0 -704 205 -171 -34 -704 205 -34 -171 2,345 -903 1,497 2,582 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 257 May June July Aug. Sept. Oct. Nov. Dec. Total 838 322 0 0 200 991 0 1,331 7,668 232 0 2,264 47 237 531 600 0 7,331 0 0 0 0 0 0 0 0 0 0 0 950 0 0 700 500 49 3,389 155 121 0 137 0 0 0 100 912 0 0 0 0 0 0 0 0 0 1,670 412 311 2,423 589 596 2,368 754 12,427 -5,276 -1,479 -788 -3,134 -1,459 -420 -879 -967 -18,251 0 0 0 0 0 0 0 0 0 405 465 0 541 0 0 0 0 2,138 0 0 0 0 0 0 0 0 0 -1,302 -412 -311 -720 -589 -596 -2,368 -754 -8,909 3,000 1,479 788 1,750 1,459 420 500 967 13,412 133 164 0 236 0 0 0 0 703 0 0 0 0 0 0 0 0 0 -25 0 0 -1,703 0 0 0 0 -3,092 1,300 0 0 1,000 0 0 220 0 2,970 216 129 0 320 0 0 0 0 811 0 0 0 0 0 0 0 0 0 -342 0 0 0 0 0 0 0 -426 976 0 0 384 0 0 159 0 1,869 1,747 1,200 0 1,234 200 991 0 1,431 12,232 232 0 2,264 47 237 531 600 0 7,331 0 0 950 0 0 700 500 49 3,389 49,934 50,590 48,370 72,315 55,766 55,787 40,944 79,754 674,000 50,965 52,076 46,023 71,645 56,207 56,462 41,129 78,734 675,496 7,717 12,810 10,719 2,783 3,203 20,145 24,169 11,534 113,902 4,811 15,258 10,110 3,016 2,743 19,808 23,924 11,381 113,040 5,452 238 -4,952 284 863 771 -670 516 3,869 0 0 0 0 0 0 0 2 2 1,611 3,035 1,737 1,258 3,351 1,242 oo* 0 0 0 0 668 0 0 0 0 0 91 21 0 22 145 1,082 977 5,922 4,825 1,889 28,895 1,132 1,188 5,734 4,880 1,767 28,863 353 -318 492 -50 -302 167 -55 99 555 0 0 0 0 0 0 0 0 0 366 7 -64 -33 222 67 -43 253 73 366 -64 -33 222 67 -43 253 73 6,171 -73 -4,523 202 784 1,005 -768 868 4,497 Digitized fo*r FLResAs SthEanR $ 500,000. them. Details may not add to totals because of roundhttp://fraserN.sOtTloE.u isSfaeleds.,o rrge/d emptions and negative figures ing. Federal Rreedsuecerv eS yBstaemnk hoof ldSitn.g Ls;o ualisl other figures increase

258 Tables 6. Earnings and Expenses of Federal Reserve Banks, 1980 Dollars Item Total Boston New York Philadelphia Cleveland CURRENT EARNINGS Loans 175,835,241 11,139,456 19,440,276 31,248,389 10,369,402 Acceptances 18,214,755 18,214,755 U.S. government securities 12,478,609,389 576,017,695 3,260,843,560 554,382,814 953,866,750 Foreign currencies.. 123,354,719 3,487,982 34,073,256 4,689,169 9,974,390 All other 6,305,232 200,091 3,321,053 191,051 259,345 TOTAL 12,802,319,336 590,845,224 3,335,892,900 590,511,423 974,469,887 CURRENT EXPENSES Salaries 385,640,414 25,301,019 86,062,107 18,792,631 23,159,590 Retirement and other benefits 110,792,473 7,554,588 24,353,744 6,295,654 6,963,759 Fees 6,586,411 288,692 2,123,210 265,401 353,605 Travel 12,702,997 670,728 2,080,450 401,782 908,627 Postage 14,422,139 641,192 2,207,436 593,033 891,334 Other shipping expenses 76,076,259 4,348,228 10,054,223 3,266,678 5,603,200 Communications... 13,823,022 819,875 3,013,580 647,729 793,501 Materials and supplies 33,737,841 2,331,977 6,415,326 1,635,949 1,988,271 Bank premises Taxes on real estate 15,102,618 2,922,503 2,524,679 1,225,982 903,700 Depreciation 9,760,793 1,874,955 244,797 1,461,057 670,076 Utilities 16,351,188 1,845,108 3,591,791 1,651,807 997,768 Rent 10,077,225 405,611 6,336,999 24,400 141,319 Other building expenses .... 7,162,771 479,951 790,023 760,558 281,210 Furniture and equipment Rentals 41,079,873 1,595,798 7,395,275 1,070,464 3,107,261 Depreciation .... 19,387,239 1,534,408 3,228,062 1,524,508 1,356,580 Cost of Federal Reserve currency . 73,124,423 3,778,604 14,844,238 3,361,052 4,895,982 All other 24,813,621 1,992,513 5,002,306 1,318,631 1,659,698 Contra—Expense ' . -2,145,520 -149,758 -1,504 -152,159 TOTAL 2 ... 865,969,678 58,235,992 180,268,246 44,295,812 54,523,322 Reimbursements and recoveries 74,812,417 7,561,496 16,670,575 4,100,917 5,754,554 Net expenses 791,157,261 50,674,496 163,597,671 40,194,895 48,768,768 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 259 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 17,374,400 13,702,974 27,056,315 6,852,559 5,049,341 8,398,459 12,247,609 12,956,061 1,016,533,101 468,479,938 1,952,245,414 506,659,174 237,724,958 570,198,456 716,797,93 1,664,859,598 6,128,922 9,126,749 17,548,677 3,605,830 3,843,798 5,162,833 7,082,79*I 18,630,315 253,335 436,372 568,053 190,912 294,692 201,257 208,71'I 180,357 1,040,289,758 491,746,033 1,997,418,459 517,308,475 246,912,789 583,961,005 736,337,052 1,696,626,331 29,827,709 33,987,415 48,589,427 19,758,996 16,668,502 25,080,619 20,605,461 37,806,938 8,034,429 9,490,398 14,362,834 5,865,030 4,224,663 7,269,543 5,283,737 11,094,094 451,717 311,584 460,164 492,289 406,800 360,847 334,662 737,440 1,041,490 1,279,782 1,648,821 629,220 659,834 1,104,674 808,531 1,469,058 1,132,571 1,171,737 1,525,752 1,120,328 921,460 1,721,673 787,029 1,708,594 8,747,939 7,691,493 10,797,986 4,542,386 2,915,567 4,862,494 4,977,877 8,268,188 1,059,833 1,462,549 1,561,741 535,369 651,392 916,951 984,312 1,376,190 3,073,162 3,152,089 4,379,240 1,902,314 1,186,339 2,404,304 2,154,696 3,114,174 1,203,532 742,221 2,058,707 386,358 1,602,655 470,276 508,049 553,956 2,166,106 469,077 500,701 359,991 831,581 540,090 187,832 454,530 1,687,297 1,282,017 1,415,824 820,941 522,102 820,339 804,916 911,278 827,767 437,958 906,911 151,013 61,501 32,338 28,811 722,597 739,608 435,295 1,443,511 489,469 498,620 283,261 652,877 308,388 4,823,665 4,237,755 6,761,526 2,535,762 1,128,425 3,088,142 1,998,582 3,337,218 1,255,120 1,338,247 1,174,918 1,146,798 744,222 1,638,700 1,340,071 3,105,605 8,191,403 6,631,342 8,549,266 2,879,262 1,347,936 3,952,861 5,143,576 9,548,901 1,797,747 2,254,720 1,582,742 1,195,216 1,226,870 1,568,760 2,295,958 2,918,460 - 194,432 - 244,947 -323,156 - 140,022 -57,212 -484,139 -155,735 -242,456 73,340,554 2 76,130,732 107,396,915 44,670,720 35,541,257 55,631,733 48,741,242 87,193,153 5,431,132 5,958,351 8,529,467 3,612,000 2,368,433 4,502,415 2,838,362 7,484,715 67,909,422 70,172,381 98,867,448 41,058,720 33,172,824 51,129,318 45,902,880 79,708,438 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 Tables 6. Earnings and Expenses of Federal Reserve Banks, 1980—Continued Dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net earnings 12,011,162,076 540,170,728 3,172,295,229 550,316,528 925,701,119 Additions to current net earnings Profit on foreign currency transactions 3 96,118,696 2,787,442 24,318,030 3,748,629 7,977,852 All other 4,502,792 22,958 209,126 9,319 16,870 Total additions .... 100,621,488 2,810,400 24,527,156 3,757,948 7,994,722 Deductions from current net earnings Losses on sales of U.S. government securities 199,348,220 9,403,767 50,330,254 9,141,236 15,589,711 All other 16,659,123 316,466 1,315,286 413,798 1,522,934 Total deductions 216,007,343 9,720,233 51,645,540 9,555,034 17,112,645 Net deductions from current net earnings 115,385,855 6,909,833 27,118,384 5,797,086 9,117,923 Assessment for expenditures of Board of Governors 4 62,230,800 1,775,100 15,742,400 2,428,200 5,119,700 Net earnings before payments to U.S. Treasury 11,833,545,421 531,485,795 3,129,434,445 542,091,242 911,463,496 Dividends paid 70,354,516 1,979,868 17,866,143 2,649,084 5,666,776 Payments to U.S. Treasury (interest on Federal Reserve notes) .. 11,706,369,955 529,189,477 3,095,446,252 538,877,458 905,500,670 Transferred to surplus 56,820,950 316,450 16,122,050 564,700 296,050 Surplus, January 1 .. 1,145,411,250 32,797,800 289,884,750 45,389,450 94,893,900 Surplus, December 31 1,202,232,200 33,114,250 306,006,800 45,954,150 95,189,950 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 261 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 972,380,336 421,573,652 1,898,551,011 476,249,755 213,739,966 532,831,687 690,434,172 1,616,917,893 4,902,053 7,305,021 14,033,330 2,883,561 3,075,798 4,133,104 5,671,003 15,282,873 25,204 45,108 158,504 10,611 31,692 108,080 41,993 3,823,327 4,927,257 7,350,129 14,191,834 2,894,172 3,107,490 4,241,184 5,712,996 19,106,200 16,347,840 7,798,479 31,496,833 8,272,097 4,043,489 9,041,188 11,293,644 26,589,682 565,653 589,747 1,764,860 2,215,644 430,413 746,878 1,677,656 5,099,788 16,913,493 8,388,226 33,261,693 10,487,741 4,473,902 9,788,066 12,971,300 31,689,470 11,986,236 1,038,097 19,069,859 7,593,569 1,366,412 5,546,882 7,258,304 12,583,270 3,188,100 4,723,800 9,153,900 1,878,300 1,975,200 2,666,400 3,699,800 9,879,900 957,206,000 415,811,755 1,870,327,252 466,777,886 210,398,354 524,618,405 679,476,068 1,594,454,723 3,666,118 5,355,123 10,341,003 2,112,599 2,244,182 3,013,706 4,268,321 11,191,593 950,087,482 407,036,932 1,851,065,549 463,536,637 206,336,172 518,866,449 669,089,897 1,571,336,980 3,452,400 3,419,700 8,920,700 1,128,650 1,818,000 2,738,250 6,117,850 11,926,150 58,232,800 86,658,250 167,898,000 34,597,200 36,256,150 49,055,200 67,409,750 182,338,000 61,685,200 90,077,950 176,818,700 35,725,850 38,074,150 51,793,450 73,527,600 194,264,150 1. This item includes expenses for labor and 3. Includes unrealized gains and losses. materials temporarily capitalized and charged to ac- 4. For additional details, see the last three pages of tivities when the products are consumed. the section "Board of Governors, Income and Ex- 2. The total expense for Richmond has been ad- penses." justed to exclude $2,526,109, which was allocated to NOTE. Details may not add to totals because of the expenses of other Federal Reserve Banks for rounding. operation of the Federal Reserve Communications System. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

7. Earnings and Expenses of Federal Reserve Banks, 1914-80 Dollars Assessments Payments to U.S. Treasury Period, or Federal Current Current Net additions for expen- Dividends Transferred Transferred Reserve Bank earnings expenses or ditures of paid Franchise Under Interest on to surplus to surplus deductions (-) Board of tax section 13b Federal Reserve (section 13b) (section 7) Governors notes All Banks 1914-15 2,173,252 2,018,282 5,875 302,304 217,463 1916 ... 5,217,998 2,081,722 -193,001 192,277 1,742,775 1917 ... 16,128,339 4,921,932 -1,386,545 237,795 6,804,186 1,134,234 1,134,234 1918 ... 67,584,417 10,576,892 -3,908,574 382,641 5,540,684 48,334,341 1919 ... 102,380,583 18,744,815 -4,673,446 594,818 5,011,832 2,703,894 70,651,778 1920 ... 181,296,711 27,548,505 -3,743,907 709,525 5,654,018 60,724,742 82,916,014 1921 ... 122,865,866 33,722,409 -6,314,796 741,436 6,119,673 59,974,466 15,993,086 1922 ... 50,498,699 28,836,504 -4,441,914 722,545 6,307,035 10,850,605 -659,904 1923 ... 50,708,566 29,061,539 -8,233,107 702,634 6,552,717 3,613,056 2,545,513 1924 ... 38,340,449 27,767,886 -6,191,143 663,240 6,682,496 113,646 -3,077,962 1925 ... 41,800,706 26,818,664 -4,823,477 709,499 6,915,958 59,300 2,473,808 1926 ... 47,599,595 26,628,458 -3,637,668 721,724 7,329,169 818,150 8,464,426 1927 ... 43,024,484 26,739,327 -2,457,792 779,116 7,754,539 249,591 5,044,119 1928 ... 64,052,860 26,207,133 -5,026,029 697,677 8,458,463 2,584,659 21,078,899 1929 ... 70,955,496 28,909,469 -4,861,642 781,644 9,583,911 22,535,597 4,283,231 *193O ... 36,424,044 27,533,141 -93,136 809,585 10,268,598 -2,297,724 1931 ... 29,701,279 26,322,110 311,451 718,554 10,029,760 17,308 -7,057,694 1932 ... 50,018,817 25,562,571 -1,413,192 728,810 9,282,244 11,020,582 1933 ... 49,487,318 28,422,677 -12,307,074 800,160 8,874,262 2,011,418 -916,855 1934 ... 48,902,813 27,869,374 -4,430,008 1,372,022 8,781,661 -60,323 6,510,071 1935 ... 42,751,959 30,171,545 -1,736,758 1,405,898 8,504,974 297,667 27,695 607,422 1936 ... 37,900,639 28,194,457 485,817 1,679,566 7,829,581 227,448 102,880 352,524 1937 ... 41,233,135 27,052,234 -1,631,274 1,748,380 7,940,966 176,625 67,304 2,616,352 1938 ... 36,261,428 27,186,684 2,232,134 ,724,924 8,019,137 119,524 -419,140 1,862,433 1939 ... 38,500,665 27,025,391 2,389,555 ,621,464 8,110,462 24,579 -425,653 4,533,977 1940 ... 43,537,805 27,461,466 11,487,697 ,704,011 8,214,971 82,152 -54,456 17,617,358 1941 ... 41,380,095 31,123,609 720,636 ,839,541 8,429,936 141,465 -4,333 570,513 1942 ... 52,662,704 36,877,718 -1,568,208 ,746,326 8,669,076 197,672 49,602 3,554,101 1943 ... 69,305,715 41,129,934 23,768,282 2,415,630 8,911,342 244,726 135,003 40,237,362 1944 ... 104,391,829 46,879,564 3,221,880 2,296,357 9,500,126 326,717 201,150 48,409,795 1945 ... 142,209,546 46,376,762 -830,007 2,340,509 10,182,851 247,659 262,133 81,969,625 1946 ... 150,385,033 54,975,323 -625,991 2,259,784 10,962,160 67,054 27,708 81,467,013 1947 ... 158,655,566 62,753,308 1,973,001 2,639,667 11,523,047 35,605 75,223,818 86,772 8,366,350 1948 ... 304,160,818 69,466,518 -34,317,947 3,243,670 11,919,809 166,690,356 18,522,518 1949 ... 316,536,930 74,235,176 -12,122,274 3,242,500 12,329,373 193,145,837 21,461,770 1950 ... 275,838,994 77,138,071 36,294,117 3,433,700 13,082,992 196,628,858 21,849,490 1951 ... 394,656,072 91,373,589 -2,127,889 4,095,497 13,864,750 254,873,588 28,320,759 1952 ... 456,060,260 100,572,489 1,583,988 4,121,602 14,681,788 291,934,634 46,333,735 1953 ... 513,037,237 109,415,220 -1,058,993 4,099,800 15,558,377 342,567,985 40,336,862 Digitized fo19r 5F4R .A.S.ER 438,486,040 105,558,331 -133,641 4,174,600 16,442,236 276,289,457 35,887,775 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

1955 412,487,931 105,865,923 -265,456 4,194,100 17,711,937 251,740,721 32,709,794 1956 595,649,092 115,842,696 -23,436 5,339,800 18,904,897 401,555,581 53,982,682 1957 763,347,530 124,306,103 -7,140,914 7,507,900 20,080,527 542,708,405 61,603,682 1958 742,068,150 131,804,455 124,175 5,917,200 21,197,452 524,058,650 59,214,569 1959 886,226,116 138,232,106 98,247,253 6,470,600 22,721,687 910,649,768 -93,600,791 1960 1,103,385,257 147,348,575 13,874,702 6,533,700 23,948,225 896,816,359 42,613,100 1961 941,648,170 155,009,475 3,481,628 6,265,100 25,569,541 687,393,382 70,892,300 1962 1,048,508,335 169,481,234 -55,779 6,654,900 27,412,241 799,365,981 45,538,200 1963 1,151,120,060 179,700,557 614,835 7,572,800 28,912,019 879,685,219 55,864,300 1964 1,343,747,303 188,740,689 725,948 8,655,200 30,781,548 1,582,118,614 -465,822,800 1965 1,559,484,027 195,713,790 1,021,614 8,576,396 32,351,602 1,296,810,053 27,053,800 1966 1,908,499,896 198,379,526 996,230 9,021,600 33,696,336 1,649,455,164 18,943,500 1967 2,190,403,752 209,351,250 2,093,876 10,769,596 35,027,312 1,907,498,270 29,851,200 1968 2,764,445,943 228,152,172 8,519,996 14,198,198 36,959,336 2,463,628,983 30,027,250 1969 3,373,360,559 259,953,236 -557,553 15,020,084 39,236,599 3,019,160,638 39,432,450 1970 3,877,218,444 300,145,586 11,441,829 21,227,800 41,136,551 3,493,570,636 32,579,700 1971 3,723,369,921 344,550,798 94,266,075 32,634,002 43,488,074 3,356,559,873 40,403,250 1972 3,792,334,523 379,371,852 -49,615,790 35,234,499 46,183,719 3,231,267,663 50,661,000 1973 5,016,769,328 450,705,676 -80,653,488 44,411,700 49,139,682 4,340,680,482 51,178,300 1974 6,280,090,965 506,424,874 -78,487,237 41,116,600 52,579,643 5,549,999,411 51,483,200 1975 6,257,936,784 551,488,714 -202,369,615 33,577,201 54,609,555 5,382,064,098 33,827,600 1976 6,623,220,383 606,948,264 7,310,500 41,827,700 57,351,487 5,870,463,382 53,940,050 1977 6,891,317,498 623,859,582 - 177,033,463 47,366,100 60,182,278 5,937,148,425 45,727,650 1978 8,455,390,401 652,617,206 -633,123,486 53,321,700 63,280,312 7,005,779,497 47,268,200 1979 10,310,148,406 693,559,531 -151,148,220 50,529,700 67,193,615 9,278,576,140 69,141,200 1980 12,802,319,335 791,157,259 -115,385,855 62,230,800 70,354,516 11,706,369,955 56,820,950 TOTAL, 1914-80 99,591,612,871 10,019,971,928-1,302,956,629 651,376,408 1,372,600,088 149,138,300 2,188,893 84,762,479,882 -3,657 1,330,904,399 Aggregate for each Federal Reserve Bank, 1914-80 Boston 4,821,372,804 684,255,253 -50,136,582 27,758,586 65,594,198 7,111,395 280,843 3,942,891,461 135,411 43,209,075 New York 25,528,575,661 2,114,262,707 -332,864,511 173,560,486 387,566,424 68,006,262 369,116 22,109,116,197 -433,413 343,263,371 Philadelphia 5,230,362,529 544,031,459 -55,187,279 33,862,218 80,663,494 5,558,901 722,406 4,449,761,739 290,661 60,284,372 Cleveland 7,904,022,417 732,016,989 -111,560,848 57,475,990 125,462,096 4,842,447 82,930 6,764,167,279 -9,906 108,423,743 Richmond 7,471,337,266 794,747,418 -78,129,914 33,883,276 67,565,028 6,200,189 172,493 6,423,145,457 -71,517 67,565,008 Atlanta 4,921,774,051 798,038,573 -86,103,227 43,483,160 81,348,221 8,950,561 79,264 3,808,421,064 5,491 95,344,490 Chicago 15,793,606,416 1,328,885,491 -209,211,130 96,459,872 192,627,677 25,313,526 151,045 13,748,798,539 11,682 192,147,454 St. Louis 3,906,987,994 560,795,360 -48,593,068 21,736,172 46,099,722 2,755,629 7,464 3,186,181,616 -26,515 40,845,478 Minneapolis 2,153,477,875 394,571,869 -32,223,773 17,077,915 34,378,908 5,202,900 55,615 1,632,950,658 64,874 41,951,363 Kansas City 4,105,087,191 602,130,861 -53,581,621 26,931,509 55,428,200 6,939,100 64,213 3,304,086,961 -8,674 55,933,400 Dallas 4,721,163,319 513,886,290 -74,200,981 35,241,373 70,626,127 560,049 102,083 3,948,686,001 55,337 77,805,078 San Francisco ... 13,028,845,348 952,349,658 -171,163,696 83,905,851 165,239,993 7,697,341 101,421 11,444,272,910 -17,089 204,131,567 TOTAL 99,591,612,871 10,019,971,928-1,302,956,629 651,376,408 1,372,600,088 149,138,300 2,188,893 84,762,479,882 -3,657 1,330,904,399 ' 1. The $1,330,904,399 transferred to surplus was reduced by direct charges of from reserves for contingencies (1945), leaving a balance of $1,202,232,198 on Dec. 31, $500,000 for charge-off on Bank premises (1927), $139,299,557 for contributions to 1980. capital of the Federal Deposit Insurance Corporation (1934), and $3,657 net upon Digitized for FRASER elimination of sec. 13b surplus (1958); and was increased by $11,131,013 transferred NOTE. Details may not add to totals because of rounding. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 Tables Dollars Cost Federal Net Other Reserve Buildings Building ma- book real Bank Land (including chinery and Total '' value estate 3 or branch vaults^ ' equipment Boston.. 21,635,346 78,715,046 5,425,128 105,775,520 99,547,675 Annex 27,840 89,202 44,538 161,580 134,907 New York 3,436,277 20,313,125 12,415,981 36,165,383 16,475,954 9,134,390 Annex .. 477,862 1,136,219 745,855 2,359,936 680,556 Buffalo ... 673,076 2,828,712 1,626,091 5,127,879 2,608,640 Philadelphia . 1,876,601 51,803,403 5,119,481 58,799,485 52,815,268 Cleveland . 1,074,281 5,946,303 4,097,395 11,117,979 2,803,988 1,224,363 Cincinnati. 1,997,249 13,541,025 7,521,727 23,060,001 16,558,460 Pittsburgh. 1,658,376 4,640,384 3,058,355 9,357,115 4,631,702 Richmond.. 3,912,575 55,384,403 14,314,312 73,611,290 69,409,742 Annex ... 522,733 3,725,466 3,616,991 7,865,190 4,724,151 Baltimore .. 4,618,738 9,598,916 1,203,478 15,421,132 13,176,753 Charlotte... 347,071 1,069,026 875,432 2,291,529 1,236,926 1,675,944 Atlanta 1,202,255 6,130,454 3,558,581 10,891,290 5,724,884 Birmingham 1,788,628 2,073,598 1,019,618 4,881,844 3,105,759 503,252 Jacksonville 164,004 1,706,794 784,732 2,655,530 952,918 944,254 Annex • 107,925 76,236 15,842 200,003 158,876 Miami 1,667,108 16,520,939 1,016 18,189,063 18,194,907 Nashville 592,343 1,474,678 1,175,891 3,242,912 1,522,890 New Orleans 3,080,344 2,754,272 1,469,911 7,304,527 5,159,232 283,753 Chicago. 4,511,942 15,291,192 11,331,231 31,134,365 13,620,684 Annex , 50,000 302,248 93,916 446,164 385,311 Detroit.. 797,734 2,974,336 1,965,587 5,737,657 2,462,526 St. Louis .. 700,378 4,255,733 3,316,660 8,272,771 2,784,294 Little Rock 1,051,214 2,257,261 1,018,004 4,326,479 2,969,566 Louisville . 700,075 2,900,582 1,159,753 4,760,410 2,490,004 Memphis .. 1,135,623 4,517,077 2,126,755 7,779,455 5,739,654 Minneapolis 1,394,384 27,735,548 7,763,560 36,893,492 27,726,210 Helena 65,680 101,000 61,907 228,587 90,315 139,735 Kansas City 1,338,736 11,876,441 4,337,977 17,553,154 10,097,500 434,135 Denver 2,997,746 3,209,227 2,351,642 8,558,615 5,711,432 Oklahoma City. 646,386 2,428,278 1,702,342 4,777,006 3,657,965 Omaha 1,030,226 1,749,968 817,214 3,597,408 2,114,312 457,973 Dallas 3,687,482 5,070,507 3,570,804 12,328,793 7,124,381 El Paso 262,477 798,892 393,301 1,454,670 827,546 Houston 1,959,770 1,408,574 735,552 4,103,896 3,286,725 San Antonio . 448,596 1,808,303 570,847 2,827,746 1,780,141 San Francisco. 12,274,532 22,619,721 2,174,233 37,068,486 32,138,384 Annex 247,201 131,114 62,078 440,393 350,400 Los Angeles .. 644,238 4,809,559 2,390,534 7,844,331 4,096,500 Portland 207,381 1,798,391 649,432 2,655,204 1,997,387 Salt Lake City. 480,222 2,001,299 824,151 3,305,672 2,101,049 Seattle 274,772 2,085,175 1,193,580 3,553,527 1,824,158 TOTAL.. 87,767,427 401,658,627 118,701,415 608,127,469 455,000,632 14,797,799 1. Includes expenditures for construction at some poses, and Bank premises formerly occupied and beoffices pending allocation to appropriate accounts. ing held pending sale. 2. Excludes charge-offs of $17,698,968 before 1952. NOTE. Details may not add to totals because of 3. Includes acquisitions for banking-house pur- rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 265 9. Volume of Operations in Principal Departments of Federal Reserve Banks, 1977-80 Operation 1980 1979 1978 1977 Millions of pieces ' Loans o (2) O O Currency received and counted 9,432 8,839 8,537 8,186 Currency verified and destroyed 3,197 2,969 2,621 2,609 Coin received and counted 17,700 18,756 18,654 r 16,563 Checks handled U.S. government checks 705 718 721 740 Postal money orders 117 117 125 139 All other 15,716 15,067 14,107 13,312 Issues, redemptions, and exchanges of U.S. government securities 301 335 281 286 Transfers of funds 43 35 29 25 Food stamps redeemed 2,541 1,730 1,906 1,901 Amounts (millions of dollars) Loans 267,957 220,628 138,928 77,511 Currency received and counted 104,333 93,119 81,175 75,933 Currency verified and destroyed 20,183 22,638 16,443 14,952 Coin received and counted 2,703 2,765 2,495 2,239 Checks handled U.S. government checks 598,569 511,044 439,907 416,386 Postal money orders 6,164 6,323 5,534 5,661 Allother 8,038,026 8,514,670 7,111,254 5,499,856 Issues, redemptions, and exchanges of U.S. government securities 10,252,027 8,186,706r 8,036,749 8,835,730 Transfers of funds 78,594,862 64,231,109 50,482,656 43,165,467 Food stamps redeemed 9,268 7,779 7,251 7,422 r Revised. 2. Number handled (in thousands): 1980, 25; 1. Packaged items handled as a single item are 1979, 38; 1978, 31; 1977,12. counted as one piece. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Tables 10. Principal Operations of Federal Reserve Banks—Expense, Ratio of Expense for Each Operation to Total Expenses, and Average Number of Employees, 1977-80 Expenses in thousands of dollars; number of employees in thousands; ratios in percent Operation and item 1980 1979 1978 1977 Check clearing operations ' Expense 322,912 279,094 259,983 246,981 Ratio to total expenses 37.3 36.6 36.4 36.2 Average number of employees . 6.5 6.3 6.3 6.5 Currency function Expense 193,123 180,974 187,864 182,875 Ratio to total expenses 22.3 23.7 26.3 26.8 Average number of employees . 1.8 1.9 2.0 2.2 Fiscal agency operations Expense 92,348 83,521 76,837 73,002 Ratio to total expenses 10.7 11.0 10.7 10.7 Average number of employees . 1.9 1.9 1.9 2.0 Bank supervision Expense 85,913 67,752 58,303 52,702 Ratio to total expenses 9.9 8.9 8.2 7.7 Average number of employees , 1.6 1.4 1.3 1.3 Other operations 2 Expense 171,674 150,878 131,713 126,318 Ratio to total expenses 19.8 19.8 18.4 18.6 Average number of employees . 1.9 2.2 2.2 2.2 General administration and support 3 Average number of employees 9.9 9.4 9.8 10.1 TOTAL EXPENSES. 865,970 762,219 714,700 681,878 Less reimbursements . 74,812 68,786 62,084 58,018 Net expenses 791,157 693,433 652,616 623,860 1. Includes automated clearinghouse and noncash 3. General administration and support costs are alcollections. located to each operation. 2. Includes mainly economic research and statistics, foreign operations, and lending and credit. 11. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1980 President Other officers Employees Total B Fe a d n e k r a ( l i n R cl e u s d er in v g e Annual Annual Number Annual Annual branches) salary Num- salaries Full- Part- salaries Num- salaries (dollars) ber (dollars) time time (dollars) ber (dollars) Boston 96,660 48 1,950,600 1,359 200 23,647,868 1,608 25,695,068 New York 125,000 132 6,395,700 4,185 94 76,756,025 4,412 83,276,725 Philadelphia 78,500 39 1,552,400 1,061 104 17,101,600 1,205 18,732,500 Cleveland 87,000 36 1,396,500 1,439 70 21,095,555 1,546 22,579,055 Richmond 78,000 65 2,528,350 1,952 107 28,515,984 2,125 31,122,334 Atlanta 95,000 68 2,606,925 2,292 30 30,788,141 2,391 33,490,066 Chicago 102,000 72 2,864,500 2,941 185 43,990,195 3,199 46,956,695 St. Louis 81,000 43 1,743,030 1,274 93 18,240,478 1,411 20,064,508 Minneapolis 80,000 38 1,497,900 973 3 14,179,425 1,015 15,757,325 Kansas City 68,000 52 1,926,500 1,566 80 22,415,059 1,699 24,409,559 Dallas 73,600 35 1,340,100 1,343 26 18,386,321 1,405 19,800,021 San Francisco 105,000 76 3,004,975 2,032 83 33,151,806 2,192 36,261,781 TOTAL.... 1,069,700 704 28.807.480 22,417 1,075 348,268,457 24.208 378,145,637 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 267 12. Federal Reserve Bank Interest Rates, December 31, 1980 Percent per annum Loans to depository institutions Loans to all others Federal Reserve Bank adju S st h m o e r n t- t t e c rm redit ' Seasonal E cr x e t d e i n t de F d c S r p e e d c it ial credit 2 unde o r f la s s e t c . p 1 a 3 ra 3 graph Boston 13 14 16 New York Philadelphia .. Cleveland Richmond .... Atlanta Chicago St. Louis Minneapolis... Kansas City ... Dallas San Francisco . 13 14 1. Rate applied to discounts of eligible paper and tional circumstances or practices involve only a paradvances secured to the satisfaction of the Federal ticular depository institution as described in section Reserve Bank. A 3 percent surcharge was in effect at 201.3(b)(2) of Regulation A. year-end for short-term adjustment credit borrowings 3. This rate applies to advances to individuals, partby institutions with deposits of $500 million or more nerships, or corporations that are secured by direct who had borrowed in successive weeks or in more than obligations of, or obligations fully guaranteed as to four weeks in a calendar quarter. principal and interest by, the U.S. government or any 2. This rate is applicable to advances when excep- of its agencies. 13. Member Bank Reserve Requirements Percent of deposits Through July 13, 1966 Net demand deposits2 Effective date ' Time deposits Central reserve Reserve city Country (all classes city banks banks banks of banks) 1917—June 21 13 10 7 3 1936—Aug. 16 19 Vi 15 IO/2 4/2 1937—Mar. 1 22 3/4 17/2 12/4 5/4 May 1 26 20 14 6 1938—Apr. 16 223/4 17/2 12 5 1941—Nov. 1 26 20 14 6 1942—Aug. 20 24 Sept. 14 22 Oct. 3 20 1948—Feb. 27 22 June 11 24 Sept. 24, 16 .... 26 22 16 7/2 1949—May 5,1 24 21 15 7 June 30, July 1 . 20 14 6 Aug. 1 13 11,16 .... 23/2 ' V9/2' 12 18 23 19 25 22 Vi I8/2 Sept. 1 22 18 1951—Jan. 11,16 23 19 13 25, Feb. 1 . 24 20 14 1953—July 9,1 22 19 13 1954—June 24, 16 21 July 29, Aug. 1 . 20 18 12 1958—Feb. 27, Mar. 1 . 191/2 17/2 II/2 Mar. 20, Apr. 1 . 19 17 11 Apr. 17 181/2 24 18 I6/2 1960—Sept. 1 17 Vi Nov. 24 Dec. 1 I6/2 1962—July 28 Digitized for FRAOScEt.R 2 5, Nov. 1 . http://fraseFr.osrt lnooutiessf esede. oenrgd / of table. Federal Reserve Bank of St. Louis

Tables 268 13*. Member Bank Reserve Requirements—Continued Percent of deposits July 14, 1966, through Nov. 8, 1972 (deposit intervals in millions of dollars) Net demand Time deposits 4 deposits 2 (all classes of banks) Reserve Country Other Effective date ' city banks banks Sav- time ings Over Over Over 0-5 0-5 0-5 5 5 5 1966—July 14 21 16>/2 5 12 5 45 45 5 Sept. 8, 15 6 1967—Mar 2 31/2 31/2 16 3 3 1968—Jan. 11, 18 16'/2 17 12 121/2 1969—Apr 17 17 17'/2 12'/2 13 1970—Oct 1 5 Nov. 9, 1972,through) Nov. 12, 1980 (deposit intervals irl millions of dollars) Net demanddeposits 2'6 Time and savings deposits 4 Time 7 0-5, by Over 5, by Effective date 10- 100- Over Sav- maturity! maturity 0-2 2-10 100 400 400 ings 180 180 30- days 4 yrs. 30- days 4 yrs. 179 to or 179 to or days 4 yrs. more days 4 yrs. more 1972—Nov. 9 8 10 12 16'/2 8 17'/2 35 35 55 16 13 1973—July 19 "\S'" 1974—Dec 12 17/2 6 3 1975_Feb. 13 .. IVi 10 12 13 16'/? Oct. 30 3 I9 3 1 9 1976—Jan. 8 3 21/2 ' 2»/2 9 Dec 30 1 914 IP/4 123/4 16'/4 Beginning Nov. 13, 1980 Depository institution requirements after implementation of the Type of deposit, and Monetry Control Act l0 deposit interval Percent Effective date Net transaction accounts l $O-$25 million 3 11/13/80 Over $25 million 12 11/13/80 Nonpersonal time deposits '2 By original maturity Less than 4 years 11/13/80 4 years or more 11/13/80 Eurocurrency liabilities All types 11/13/80 1. Reserves required during the period from incep- All required reserves were held on deposit with tion of the Federal Reserve System until June 20, Federal Reserve Banks from June 21, 1917, until late 1917, were not strictly comparable with later re- 1959. Since then, member banks were allowed to quirements; they were based on aggregate amounts of count vault cash as reserves, as follows: country deposits, and reserve balances with the Reserve Banks banks—in excess of 4 and 2 Vi percent of net demand were increased in stages. deposits effective Dec. 1, 1959, and Aug. 25, 1960, When two dates are shown, the first applies to the respectively; central reserve city and reserve city change at central reserve or reserve city banks and the banks—in excess of 2 and 1 percent effective Dec. 3, second to the change at country banks. 1959, and Sept. 1, 1960, respectively. All institutions 2. Demand deposits subject to reserve requirements, were allowed to count all vault cash as reserves effecbeginning Aug. 23, 1935, were total demand deposits tive Nov. 24, 1960. minus cash items in process of collection and demand In graduated requirement schedules, each deposit balances due from domestic banks (also minus war interval applies to that part of the deposits of each Digitized forlo FanR AanSdE SRe ries E bond accounts during the period bank. http://fraserA.sptrlo. u1i3s, fe19d4.o3-rJgu/n e 30, 1947). Beginning Oct. 16, 1969, Regulation M required Federal Reserve Bank of St. Louis

Tables 269 13.—Continued reserves against (a) net balances due from domestic tions of these types aggregating less than $10 million. offices to their foreign branches and (b) foreign- Including the basic requirement (5 percent during the branch loans to U.S. residents; Regulation D imposed entire period), requirements were as follows: 8 percent a similar requirement against (c) borrowings from for (a) and (b) from June 21 through Oct. 3, 1973, and foreign banks by domestic offices of a member bank. for (c) from July 12 through Oct. 3, 1973; 11 percent Limited reserve-free base amounts were originally per- from Oct. 4 through Dec. 26, 1973; and 8 percent mitted under Regulation M but were eliminated for (b) from Dec. 27, 1973, through Sept. 18, 1974. Beginning effective June 21, 1973, and were lowered in steps for Sept. 19, the 8 percent requirement applied only to (a) and (c) until eliminated effective Mar. 14, 1974. those obligations in (a), (b), and (c) with initial Beginning June 21, 1973, loans aggregating $100,000 maturities of less than 120 days, and effective Dec. 12, or less to any U.S. resident were excluded from com- 1974, the remaining marginal reserve was removed on putations, as were total loans of a bank to U.S. this type of obligation issued to mature in less than 4 residents if not exceeding $1 million. The applicable months. For details, see "Record of Policy Actions of reserve percentage, which was originally 10 percent, the Board of Governors" in 1973 and 1974 ANNUAL was increased to 20 percent on Jan. 7, 1971; reduced REPORTS. to 8 percent on June 21, 1973, to 4 percent on May 22, Effective with the reserve maintenance period 1975, and to zero on Aug. 24, 1978. Effective Dec. 1, beginning Oct. 25, 1979, a marginal reserve require- 1977, the reserve required against deposits that foreign ment of 8 percent was added to managed liabilities in branches of U.S. banks use for lending to U.S. excess of a base amount. This marginal requirement residents was reduced to 1 percent, and on Aug. 24, was increased to 10 percent beginning Apr. 3, 1980, 1978, it was reduced to zero. For details see Regula- was decreased to 5 percent beginning June 12, 1980, tions D and M as described in "Record of Policy Ac- and was reduced to zero beginning July 24, 1980. tions of the Board of Governors," in previous AN- Managed liabilities are defined as large time deposits, NUAL REPORTS. Eurodollar borrowings, repurchase agreements 3. Authority of the Board of Governors to classify against U.S. government and federal agency securior reclassify cities as central reserve cities was ter- ties, federal funds borrowings from nonmember inminated effective July 28, 1962. stitutions, and certain other obligations. In general, 4. Time deposits such as Christmas and vacation club the base for the marginal reserve requirement was accounts became subject to the same requirements as originally the greater of (a) $100 million or (b) the savings deposits, effective Jan. 5, 1967. Negotiable average amount of the managed liabilities held by a order of withdrawal (NOW) accounts were defined in member bank, Edge corporation, or family of U.S. the Board's Regulation Q as savings deposits begin- branches and agencies of a foreign bank for the two ning Jan. 1, 1974. Effective with the reserve computa- statement weeks ending Sept. 26, 1979. For the comtion period beginning Nov. 16, 1978, domestic putation period beginning Mar. 20, 1980, the base was deposits of Edge corporations were subject to the lowered by (a) 7 percent or (b) the decrease in an insame reserve requirements as deposits of member stitution's U.S. office gross loans to foreigners and banks. gross balances due from foreign offices of other in- 5. This rate had been established in the earlier struc- stitutions between the base period (Sept. 13-26, 1979) ture. It remained the same in the new structure and the week ending Mar. 12, 1980, whichever was established this date. greater. For the computation period beginning May 6. Effective Nov. 9, 1972, a new criterion was 29, 1980, the base was increased by IVi percent above adopted to designate reserve cities, and on the same the base used to calculate the marginal reserve in the date requirements for reserves against net demand statement week of May 14-21, 1980. In addition, deposits of member banks were restructured to pro- beginning Mar. 19, 1980, the base was reduced to the vide that each member bank maintain reserves related extent that foreign loans and balances declined. to the size of its net demand deposits. The new 8. The 16 Vi percent requirement applied only for one reserve city designations were as follows: A bank hav- week and solely to former reserve city banks. For ing net demand deposits of more than $400 million other banks, the 13 percent requirement was conwas considered to have the character of business of a tinued in this deposit interval. reserve city bank, and the presence of the head office 9. The average of reserves on savings and other time of such a bank constituted designation of that place as deposits had to be at least 3 percent, the legal a reserve city. Cities in which there were Federal minimum at that time. Reserve Banks or branches were also reserve cities. 10. For existing nonmember banks and thrift institu- Any bank, wherever located, having net demand tions, there is a phase-in period ending Sept. 3, 1987. deposits of $400 million or less was considered to have For existing member banks the phase-in period is the character of business of banks outside of reserve about three years, depending on whether their new cities and was permitted to maintain reserves at ratios reserve requirements are greater or less than the old reset for banks not in reserve cities. quirements. For existing agencies and branches of 7. Beginning Nov. 2, 1978, a supplementary reserve foreign banks, the phase-in ends Aug. 12, 1982. All requirement of 2 percent was added to the existing re- new institutions will have a two-year phase-in beginquirements for time deposits of $100,000 or more and ning with the date that they open for business. for certain other liabilities. This supplementary re- 11. Transaction accounts include all deposits on quirement was eliminated with the maintenance period which the account holder is permitted to make beginning July 24, 1980. withdrawals by negotiable or transferable instruments, From June 21, 1973, through Dec. 11, 1974, mem- payment orders of withdrawal, telephone and preber banks, except as noted below, were subject to a authorized transfers (in excess of three per month), for marginal reserve requirement against increases in the the purpose of making payments to the third persons aggregate of the following types of obligations: (a) or others. outstanding time deposits of $100,000 or more, (b) 12. In general, nonpersonal time deposits are time outstanding funds obtained by the bank through is- deposits, including savings deposits, that are not suance by a bank's affiliate of obligations subject to transaction accounts and in which the beneficial inthe existing reserve requirements on time deposits, and terest is held by a depositor that is not a natural per- (c) beginning July 12, 1973, funds from sales of son. Also included are certain transferable time finance bills. For the period June 21 through Aug. 29, deposits held by natural persons, and certain obliga- 1973, (a) included only single-maturity time deposits. tions issued to depository institution offices located Digitized for T F he R r A eq S u E ire R m ent applied to balances above a specified outside the United States. For details, see section base, but was not applicable to banks having obliga- 204.2 of Regulation D. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Tables 14. Maximum Interest Rates Payable on Time and Savings Deposits Percent per annum Nov. 1, 1933—July 19, 1966 Effective date Type of deposit Nov. 1, Feb. 1, Jan. 1, Jan. 1, Jan. 1 July 17, Nov. 24, Dec. 6, 1933 1935 1936 1957 1962 1963 1964 1965 Savings 12 months or more .. 4 4 \ Less than 12 months . 3 2/2 2/2 3 3/2 V/iJ 4 4 Postal savings ' Ot L 1 h 2 e e s r m s t o t i h m n a t e n h 2 s 1 o 2 r m m o o n r t e h s .. . 3 2/2 2/2 3 4 3/2 4 3 /2/ \ 4 4 12 months or more .. 4 1 6-12 months 3 2/2 2/2 3 3/2 Y 4 4/2I 90 days to 6 months.. 3 2/2 2 2/2 2/2 J 5 Less than 90 days 3 2/2 1 1 ] 1 4 f (30-89 days) July 20, 1966—June 30, 1973 Effective date Type of deposit July 20, Sept. 26, Apr. 19 Jan. 21, 1966 1966 1968 1970 Savings 4 4 4 4/2 Other time 2 Multiple maturity 3 30-89 days 4 4 4 4/2 90 days to 1 year 5 1-2 years L 5 5 5 5/2 2 years or more j 53/4 Single-maturity * Less than $100,000 30 days to 1 year 5 1-2 years >• 5/2 5 5/2 2 years or more 53/4 $100,000 or more 30-59 days 5 (4) 60-89 days 53/4 (4) 90-179days y 5/2 5/2 6 (4) 180 days to 1 year .... I (4) \ f\V J year or more J J (4) 1. Closing date for the Postal Savings System was New York State on Nov. 10, 1978, and in New Jersey Mar. 28, 1966. on Dec. 28, 1979. Similar institutions in all states were 2. For exceptions with respect to foreign time authorized to issue NOW accounts on Dec. 31, 1980. deposits, see ANNUAL REPORT for 1962, p. 129; 1965, 6. Effective Oct. 30, 1980, the minimum maturity or p. 233; 1968, p. 69. notice period for time deposits was decreased from 30 3. Multiple-maturity time deposits include deposits days to 14 days for commercial banks. that are automatically renewable at maturity without 7. Effective Aug. 1, 1979. action by the depositor and deposits that are payable 8. Until July 1, 1979, minimum denomination was after written notice of withdrawal. $1,000 except for deposits representing funds con- 4. The limit on rates on single-maturity time deposits tributed to an individual retirement account (IRA) or of $100,000 or more has been suspended. The max- a Keogh (H.R. 10) plan established pursuant to the Inimum rates that became effective Jan. 21, 1970, and ternal Revenue Code. The $1,000 minimum requirethe dates when they were suspended are as follows: ment was removed for such accounts in December 30-59 days 6/4 percent) r ,4 1Q7ft 1975 and November 1976 respectively. 60-89 days 6/2 percent J June M» 197° 9. Between July 1, and Oct. 31, 1973, there was no 90-179 days 6VA percent) ceiling for certificates maturing in four years or more 180 days to 1 year 7 percent V May 16, 1973 with minimum denominations of $1,000; however, the 1 year or more 7 Vi percent j amount of such certificates that an institution could Rates on multiple-maturity time cfeposits in denom- issue was limited to 5 percent of its total time and savinations of $100,000 or more were suspended July 16, ings deposits. Sales in excess of that amount, as well as 1973, when the distinction between single- and certificates of less than $1,000, were limited to the 6/2 multiple-maturity deposits was eliminated. percent ceiling on time deposits maturing in 2/2 years 5. For authorized states only, federally insured com- or more. mercial banks, savings and loan associations, Effective Nov. 1, 1973, ceilings were reimposed on cooperative banks, and mutual savings banks in certificates maturing in four years or more with mini- Massachusetts and New Hampshire were first per- mun denomination of $ 1,000. There is no limitation on mitted to offer negotiable order of withdrawal (NOW) the amount of these certificates that banks can issue. accounts on Jan. 1, 1974. Authorization to issue 10. Before Nov. 27, 1974, no distinction was made NOW accounts was extended to similar institutions between the time deposits of governmental units and throughout New England on Feb. 27, 1976, and in of other holders insofar as Regulation Q ceilings on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 271 14.--Continued Beginning July 1, 1973 Effective date Type of deposit July 1, Nov. 1, Nov. 23, Dec. 23, July 6, June 1, July 1, Mar. 14, Dec. 31, 1973 1973 1974 1974 1977 1978 1979 1980 1980 Savings 5 5 5 5 5 5 5'/4 514 514 Negotiable order of withdrawal accounts 5 5 5 5 5 5 5 514 Other time (multipleand singlematurity) 2'3 Less than $100,000 14-89days6 .... 5 5 5 5 5 5 51/4 7 5 V* 514 90 days to 1 year 5'/2 5!/2 5Vl 51/2 51/2 51/2 51/2 53/4 53/4 1-2 Vi years 6 6 6 6 6 6 6 6 6 2 Vi -4 years 6l/2 6V2 " 61/2 61/2 61/2 61/2 61/2 61/2 6«/2 4-6 years 8 9 714 7 VA 1 VA 7»/4 714 7>/4 6-8 years 8 C) 714 714 IVI IVI IVA 73/4 71/2 IVi 8 years or more 7 IVA 73/4 IVA, Governmental units 0°) C°) IVi IVA IVA 8 8 8 8 Individual retirement accounts and Keogh (H.R. 10) plans '' IVA 8 8 8 8 Money market certificates 12 (>3) (13) Small saver certifcates 14 C5) C5) Variable ceiling—4 years or more (16) $100,000 or more.. (4) (4) (4) (4) O (4) (4) rates payable were concerned. Effective Nov. 27, Committee established a minimum ceiling rate of 914 1974, governmental units were permitted to hold sav- percent for commercial banks and 9Vi percent for ings deposits and could receive interest rates on time thrift institutions. The most recent rates and effective deposits with denominations of less than $100,000, re- dates are published monthly in the Federal Reserve gardless of maturity, as high as the maximum rate Bulletin, p. A9. permitted on such deposits at any federally insured 16. Effective July 1, 1979, member banks were depository institution. Effective June 1, 1978, the authorized to offer variable-ceiling accounts with no maximum rate on such governmental-unit time de- required minimum denomination and with maturities posits was set as high as the maximum permitted on of four years or more. The maximum rate for member such deposits maturing in more than 6 months (26 banks was 114 percentage points below the average weeks) at any federally insured commercial bank, yield on four-year U.S. Treasury securities. Authorizamutual savings bank, or savings and loan association. tion to issue such instruments was terminated on Jan. 11. Three-year minimum maturity. 1, 1980. 12. Nonnegotiable time deposits of $10,000 or more NOTE. Before Mar. 31, 1980, the maximum rates with maturities of 26 weeks. that could be paid by federally insured commercial 13. Effective June 1, 1978, commercial banks, banks, mutual savings banks, and savings and loan mutual savings banks, and savings and loan associa- associations were established by the Board of Govertions were authorized to offer money market cer- nors of the Federal Reserve System, the Board of tificates at a rate of interest tied to the discount yield Directors of the Federal Deposit Insurance Corporaor the most recently insured six-month U.S. Treasury tion, and the Federal Home Loan Bank Board under bills. The most recent rates and effective dates are the provisions of 12 CFR 217, 329, and 526, respecpublished monthly in the Federal Reserve Bulletin, p. tively. Title II of the Depository Institutions Deregula- A9. tion and Monetary Control Act of 1980 (P.L. 96-221) 14. Nonnegotiable time deposits with maturities of transferred the authority of the agencies to establish 2 Vi years or more. maximum rates of interest payable on deposits to the 15. Effective Jan. 1,1980, federally insured commer- Depository Institutions Deregulation Committee. The cial banks, mutual savings banks, and savings and maximum rates on time deposits in denominations of loan associations were authorized to offer small saver $100,000 or more with maturities of 30-89 days were certificates at a maximum rate of interest tied to the suspended in June 1970; such deposits maturing in 90 average 21/2 year yield for U.S. Treasury securities as days or more were suspended in May 1973. For infordetermined monthly by the U.S. Treasury. Effective mation regarding previous interest rate ceilings on all Feb. 27, 1980, an interest rate limit of 12 percent (for types of accounts, see earlier issues of the Federal thrift institutions) and 113/4 percent (for commercial Reserve Bulletin, the Federal Home Loan Bank banks) was placed on these instruments. Effective Board Journal, and the Annual Report of the Federal June 2, 1980, the Depository Institutions Deregulation Deposit Insurance Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 Tables 15. Margin Requirements Percent of market value For credit extended under Regulation T (brokers and dealers), U (banks), G (others than brokers, dealers, or banks), and X (borrowers) Effective date Margin Convertible Short sales, Writing options, stocks bonds T only T only2 1934—Oct. 1 25—45 O 1936—Feb. 1 25-55 O Apr. 1 55 O 1937—Nov. 1 40 50 1945—Feb. 5 50 50 July 5 75 75 1946—Jan. 21 100 100 1947—Feb. 1 75 75 1949—Mar. 3 50 50 1951—Jan. 17 75 75 1953-Feb. 20 50 50 1955_jan.4 60 60 Apr. 23 70 70 1958—Jan. 16 50 50 Aug. 5 70 70 Oct. 16 90 90 1960-July28 70 70 1962—July 10 50 50 1963—Nov. 6 70 70 1968—Mar. 11 70 50 70 June 8 80 60 80 1970—May 6 65 50 65 1971—Dec. 6 55 50 55 1972—Nov. 24 65 50 65 1974—Jan. 3 50 50 50 1977—Jan. 1 50 50 50 30 1. Regulations T, U, G, and X, adopted by the scribed by the Board. Regulation T was adopted effec- Board of Governors pursuant to the Securities Ex- tive Oct. 15, 1934; Regulation U, effective May 1, change Act of 1934, limit the amount of credit to pur- 1936; Regulation G, effective Mar. 11, 1968; and chase and carry "margin securities" and "margin Regulation X, effective Nov. 1, 1971. stock" (as defined in the regulations) when such credit 2. The margin is expressed as a percent of the curis collateralized by securities. Margin requirements are rent market value of the stock underlying the option. the difference between the market value (100 percent) 3. The requirement was the margin "customarily and the maximum loan value of collateral as pre- required" by the brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 273 16. Principal Assets and Liabilities, and Number of Insured Commercial Banks, by Class of Bank, December 31, 1979 and 1978 ' Asset and liability items shown in millions of dollars Insured commercial banks Insured Item Member banks nonmember Total banks Total National State December 31, 1979 Loans and investments, total .. 1,126,776 816,872 633,358 183,514 309,903 Loans Gross 851,362 631,520 490,267 141,253 219,842 Net 822,085 610,824 473,717 137,107 211,261 Investments 275,414 185,353 143,091 42,262 90,061 U.S. Treasury securities .. 87,695 58,063 44,125 13,938 29,632 Other 2 187,719 127,290 98,966 28,324 60,429 Cash assets, total 190,283 159,290 106,748 52,542 30,994 Deposits, total 1,085,739 781,939 594,962 186,977 303,800 Interbank 67,058 64,331 33,640 30,691 2,727 Other demand 371,032 273,072 207,086 65,986 97,959 Other time 647,649 444,535 354,236 90,299 203,114 Total equity capital 96,962 70,815 54,290 16,525 26,146 Number of banks 14,351 5,424 4,447 977 8,927 December 31, 1978 Loans and investments, total .. 1,012,788 737,762 572,022 165,740 275,027 Loans Gross 751,737 560,305 435,316 124,989 191,432 Net 726,4% 542,493 421,026 121,467 184,003 Investments 261,052 177,456 136,705 40,751 83,595 U.S. Treasury securities .. 89,136 60,114 45,282 14,832 29,020 Other2 171,916 117,342 91,423 25,919 54,574 Cash, assets, total 176,937 149,992 102,612 47,380 26,945 Deposits, total 1,009,089 739,175 560,967 178,208 269,914 Interbank 62,991 60,461 31,685 28,776 2,529 Other demand 346,162 255,285 195,344 59,941 90,877 Other time 599,936 423,427 333,937 89,490 176,508 Total equity capital 87,216 64,447 49,196 15,251 22,769 Number of banks 14,378 5,563 4,563 1,000 8,815 1. All insured commercial banks in the United NOTE. Details may not add to totals because of States. rounding. 2. Includes trading accounts for banks with assets of less than $100 million. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Tables 17. Member Bank Reserves, Federal Reserve Bank Credit, and Related Items—Year-End 1918-80, and Month-End 1980 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. government cial Treasecurities Other draw- sury Fed- Gold ing cur- Held All eral stock 4 rights rency under Loans Float other : Re- Total certif- out- Bought repur- serve icate stand- Total out chase assets 3 ac- ing 5 right agree- counts ment 239 239 0 1,766 199 294 0 2,498 2,873 1,795 300 300 0 2,215 201 575 0 3,292 2,707 1,707 287 287 0 2,687 119 262 3,355 2,639 1,709 234 234 0 1,144 40 146 ,563 3,373 1,842 436 436 0 618 78 273 ,405 3,642 1,958 134 80 4 723 27 355 ,238 3,957 2,009 540 536 4 320 52 390 ,302 4,212 2,025 375 367 643 63 378 ,459 4,112 1,977 315 312 3 637 45 384 ,381 4,205 1,991 617 560 57 582 63 393 ,655 4,092 2,006 228 197 31 1,056 24 500 ,809 3,854 2,012 511 488 23 632 34 405 ,583 3,997 2,022 729 686 43 251 21 372 ,373 4,306 2,027 817 775 42 638 20 378 ,853 4,173 2,035 1,855 1,851 4 235 14 41 2,145 4,226 2,204 2,437 2,435 2 98 15 137 2,688 4,036 2,303 2,430 2,430 0 7 5 21 2,463 8,238 2,511 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 2,184 2,184 0 3 80 0 2,274 21,995 3,087 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 24,262 24,262 0 249 578 2 0 15,091 20,065 4,339 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 24,932 24,888 44 143 1 0 25,885 21,713 4,985 24,785 24,391 394 108 1,585 29 26,507 21,690 5,008 24,915 24,610 305 50 1,665 70 26,699 21,949 5,066 24,238 23,719 519 55 1,424 66 25,784 22,781 5,146 26,347 26,252 95 64 1,296 49 27,755 20,534 5,234 26,648 26,607 41 458 1,590 75 28,771 19,456 5,311 27,384 26,984 400 33 1,847 74 29,338 17,767 5,398 28,881 30,478 159 130 2,300 51 31,362 16,889 5,585 30,820 28,722 342 38 2,903 110 33,871 15,978 5,567 33,593 33,582 11 63 2,600 162 36,418 15,513 5,578 37,044 36,506 538 186 2,606 94 39,930 15,388 5,405 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 275 17.—Continued Factors absorbing reserve funds Deposits, other Cur- Trea- than member bank Other Other Member bank re i n n cy c s a u s r h y Fede i r C a S l vi R T e w s o e , r v r e r i Banks R Fe e d se e r r v a e l R Fe e d se e r r v a e l reserves cir- hold- ac- liacula- ings 6 counts 3 bilities tion ca a p n it d al3 With Cur- Trea- For- Federal rency Re- Exsury eign Other Reserve and quired 8 cess 8 Banks coin 7 4,951 288 51 96 25 118 0 1,636 0 1,585 51 5,091 385 31 73 28 208 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 1,781 0 0 0 4,403 214 96 12 15 285 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 1,934 0 0 0 4,757 213 38 4 19 275 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 2,194 0 2,250 -56 4,716 208 18 5 21 301 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 11,653 6,444 5,209 8,732 2,213 368 1,133 599 284 0 14,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 13,117 0 11,129 1,988 20,449 2,303 579 1,360 356 339 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 706 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 17,387 2,823 20,114 96 35,338 380 597 247 393 1,007 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 18,086 4,151 21,663 574 DigitizedF ofor rn FotResA sSeeE lRas t two pages of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 Tables 17. Member Bank Reserves, Federal Reserve Bank Credit, and Related Items—Year-End 1918-80, and Month-End 1980—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. government cial Treasecurities9 Other draw- sury Period Fed- Gold ing cur- Held All eral stock 4 rights rency under Loans Float ' other 2 Re- Total certif- out- Bought repur- serve icate stand- Total out chase assets 3 ac- ing 5 right 10 agree- counts ment 1965 40,768 40,478 290 137 2,248 187 0 43,340 13,733 0 5,575 1966 44,316 43,655 661 173 2,495 193 0 47,17'1 13,159 0 6,317 1967 49,150 48,980 170 141 2,576 164 0 52,03 11,982 0 6,784 1968 52,937 52,937 0 186 3,443 58 0 56,62^I 10,367 0 6,795 1969 57,154 57,154 '0 0 183 3,440 64 2,743 63,584 10,367 0 6,852 1970 62,142 62,142 0 335 4,261 57 1,123 67,91*$ 10,732 400 7,149 1971 70,804 69,481 1,323 39 4,343 261 1,068 76,51*5 10,132 400 7,710 1972 71,230 71,119 111 1,981 3,974 106 1,260 78,55 10,410 400 8,313 1973 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 85,714 84,760 954 299 2,001 999 3,195 92,20*] 11,652 400 9,253 1975 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 104,093 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980p 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1980 Jan. .. 124,527 124,527 0 828 4,610 0 5,237 135,202 11,172 2,968 13,169 Feb. .. 123,418 122,766 652 3,364 3,154 205 4,414 134,555 11,172 2,968 13,259 Mar. .. 124,948 123,945 1,003 2,502 3,682 171 5,010 136,313 11,172 2,968 13,352 Apr. .. 127,702 127,702 0 4,770 3,072 0 5,563 141,107 11,172 2,968 13,410 May .. 133,507 130,248 3,259 602 2,475 366 5,155 142,105 11,172 2,968 13,530 June .. 133,427 132,933 494 215 4,167 373 5,559 143,741 11,172 3,018 13,523 July... 128,967 127,370 1,597 562 2,808 310 5,669 138,316 11,172 3,118 13,570 Aug. .. 129,203 127,887 1,316 1,515 3,468 277 5,328 139,791 11,172 3,268 13,614 Sept... 129,764 128,200 1,564 982 3,192 499 5,574 140,011 11,168 3,268 13,663 Oct. . 130,702 128,613 2,089 1,567 2,194 566 6,160 141,189 11,163 3,268 13,716 Nov. . 129,977 127,697 2,280 2,284 6,792 523 6,539 146,115 11,162 3,368 13,779 Dec. p 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1. Beginning with 1960, figures reflect a minor 6. This category consists of the coin and paper curchange in concept; see Federal Reserve Bulletin, vol. rency held by the Treasury, as well as any gold in ex- 47 (Feb. 1961), p. 164. cess of the gold certificates issued to the Reserve Bank. 2. Data consist principally of acceptances and, until 7. Between Dec. 1, 1959, and Nov. 23, 1960, part of Aug. 21, 1959, industrial loans, authority for which the amount was allowed as reserves; thereafter all was expired on that date. allowed. 3. Before Apr. 16, 1969, this category includes the 8. These figures are estimated through 1958. Before total of Federal Reserve Bank capital paid in, surplus, 1929, they were available only on call dates (in 1920 other capital accounts, and other liabilities and ac- and 1922, the call dates were Dec. 29). Beginning Sept. crued dividends less the sum of bank premises and 12, 1968, the amount is based on close-of-business other assets, and was reported as ''Other Federal figures for the reserve period 2 weeks previous to the Reserve accounts"; thereafter, "Other Federal report date. Reserve assets" and "Other Federal Reserve liabilities 9. Beginning Dec. 1, 1966, these securities include and capital" are shown separately. federal agency obligations held under repurchase 4. Before Jan. 30, 1934, data include gold held in agreements and beginning Sept. 29, 1971, federal Federal Reserve Banks and in circulation. agency issues bought outright. 5. These figures include currency and coin (other 10. Includes, beginning 1969, securities loaned— than gold) issued directly by the Treasury. The largest fully guaranteed by U.S. government securities pledged components are fractional and dollar coins. For with Federal Reserve Banks—and excludes (if any) details see the regular table, "Currency and Coin in securities sold and scheduled to be bought back under Circulation," in the Treasury Bulletin. matched sale-purchase transactions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 277 17.—Continued Factors absorbing reserve funds Deposits, other than member bank Member bank Cur- Trea- reserves, with Other Other reserves " rency sury Federal Reserve Banks Federal Federal in cash Reserve Reserve cir- hold- ac- liacula- ings 6 counts 3 bilities tion and With Cur- Trea- For- capital 3 Federal rency Re- Exsury eign Other Reserve and quired * cess 8' Banks coin 7 42,056 760 668 150 355 211 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 653 -773 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 1,919 22,085 5,187 28,173 -901 57,093 431 1,156 148 ,233 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 2,143 25,647 6,216 32,044 98 I2 72,497 317 2,542 251 ,419 1J 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 3,113 418 ,275 13 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 ,090 0 2,968 26,052 8,036 35,197 -1,103 ' 93,717 460 10,393 352 ,357 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 ,187 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 ,256 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 ,412 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 4,671 27,456 13,654 40,558 675 121,157 472 2,931 440 339 0 5,682 31,492 11,731 43,224 214 121,436 525 2,417 450 350 0 4,668 32,108 10,883 42,467 737 122,943 586 2,334 468 313 0 4,886 32,270 10,751 43,556 1,871 123,963 584 4,561 648 553 0 5,066 33,282 11,285 45,034 -250 125,694 554 4,523 380 1,160 0 5,083 32,382 11,114 43,766 -63 127,097 529 3,199 691 1,332 0 5,003 33,612 11,257 43,778 1,285 128,337 489 3,954 436 500 0 4,540 27,920 11,543 39,759 -113 129,667 467 2,742 336 383 0 4,570 29,680 11,592 40,601 860 129,917 466 4,102 460 363 0 4,659 28,146 12,011 41,884 -1,551 131,075 460 1,864 368 338 0 4,713 30,518 12,028 42,032 673 134,104 449 2,435 368 478 0 5,061 31,528 13,153 39,910 4,899 136,829 441 3,062 411 617 0 4,671 27,456 13,654 40,558 675 11. Beginning November 1979, includes reserves of ber institutions in the Federal Reserve System's promember banks, Edge Act corporations, and U.S. gram of credit restraint. agencies and branches of foreign banks. Beginning As of Dec. 12, 1974, the amount of voluntary Nov. 13, 1980, includes reserves of all depository in- nonmember bank and foreign-agency and branch stitutions. deposits at Federal Reserve Banks that are associated 12. Beginning with the week ending Nov. 15, 1972, with marginal reserves are no longer reported. Howfigures include $450 million of reserve deficiencies on ever, two amounts are reported: (1) deposits volwhich Federal Reserve Banks are allowed to waive untarily held as reserves by agencies and branches of penalties for a transition period in connection with foreign banks operating in the United States, and (2) bank adaptation to Regulation J as amended, effective Eurodollar liabilities. Nov. 9, 1972. Allowable deficiencies (beginning with 14. Beginning with the week ending Nov. 19, 1975, first statement week of quarter) included are (in figures are adjusted to include waivers of penalties for millions): 1973—Ql, $279; Q2, $172; Q3, $112; Q4, reserve deficiencies, in accordance with change in $84; and 1974—Ql, $67, and Q2, $58. The transition Board policy that became effective Nov. 19, 1975. period ended after the second quarter of 1974. NOTE. For a description of figures and discussion of 13. Beginning July 1973, this item includes certain their significance, see "Member Bank Reserves and deposits of domestic nonmember banks and foreign- Related Items," Section 10 of Banking and Monetary owned banking institutions held with member banks Statistics, 1941-1970 (Board of Governors of the and redeposited in full with Federal Reserve Banks in Federal Reserve System, Sept. 1, 1976), pp. 507-23. connection with voluntary participation by nonmem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Tables 18. Changes in Number of Banking Offices in the United States, 1980 Commercial banks (including stock savings banks and nondeposit trust companies) Mutual savings Type of office All and change banks Member Nonmember banks Total Na- Non- Non- Total tional State Insured insured Insured insured Banks, Dec. 31, 1979 15,171 14,708 5,425 4,448 977 8,926 357 324 139 Changes during 1980 New banks 267 266 90 62 28 116 60 1 Voluntary liquidations .. -3 -3 -1 -1 -2 Banks converted into branches. -118 -117 -54 -38 -16 -63 -1 Other -18 -18 -6 -6 -10 -2 Interclass changes Nonmember to national ... -4 Nonmember to state member ... 16 16 -16 State member to national ... -2 State member to nonmember -11 -11 11 National to nonmember ... -41 -41 41 National to state member ... -5 Noninsured to insured Noninsured to insured mutual .... -1 Insured mutual to federal mutual -3 -3 Net change. 125 128 -3 -23 20 74 57 -1 Dec. 31,1980 15,296 14,836 5,422 4,425 997 9,000 414 ' 323 137 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 279 18, -Continued Commercial banks (including stock savings banks and nondeposit trust companies) Mutual Type of office All savings and change banks Member Nonmember banks Total Na- Non- Non- Total tional State Insured insured Insured insured Branches and additional offices, Dec. 31,1979 2.. 39,277 36,403 23,543 18,674 4,869 12,809 51 2,515 359 Changes during 1980 De novo 2,397 2,099 1,143 946 197 956 271 27 Banks converted .. 116 113 69 52 17 44 2 Discontinued -287 -267 -194 -148 -46 -73 -19 -1 Sale of branch .... -11 6 -17 11 Interclass changes Nonmember to national ... 66 66 -66 Nonmember to state member ... 75 75 -75 State member to national ... 322 -322 State member to nonmember -53 -53 53 National to state member ... -57 57 National to nonmember ... -262 -262 262 Noninsured to insured mutual .... 5 -5 Insured mutual to federal mutual .... -30 -30 Facilities reclassified as branches... 6 6 Other -4 -3 -3 15 -18 -1 Net change. 2,200 1,950 836 946 -110 229 21 Dec. 31,1980 2. 41,477 38,353 24,379 19,620 4,759 13,923 51 2,744 380 Banking facilities, Dec. 31,1979 \. 166 166 143 130 13 23 Changes during 1980 Established 1 1 1 1 Discontinued -5 -5 -3 -1 _ 2 Facilities reclassified as branches -6 -6 -6 -6 Net change ... -10 -10 -8 -6 -2 Dec. 31,1980 3 156 156 135 124 11 21 1. As of Dec. 31, 1980, 14 state member noninsured 3. Data include facilities provided at military and trust companies are included. other government establishments through ar- 2. Figures exclude banking facilities. rangements made by the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Tables 19. Number of Par Banking Offices, December 3L Par Total Member Nonmember Area Branches Branches Branches Banks and Banks and Banks and offices offices offices 1Federal Reserve District Boston 348 2,228 169 1,104 179 1,124 New York 482 4,945 226 1,044 256 901 Philadelphia 353 2,458 213 1,385 140 1,073 Cleveland 656 3,311 374 2,566 282 745 Richmond 717 5,023 376 3,079 341 1,944 Atlanta 1,823 4,423 563 2,269 1,260 2,154 Chicago 2,790 4,477 903 2,647 1,887 1,830 St Louis 1,448 2,028 387 900 1,061 1,128 Minneapolis 1,428 783 507 430 921 353 Kansas City 2,331 1,233 818 731 1,513 502 Dallas 1,636 548 737 205 899 343 San Francisco 640 7,312 149 5,203 491 2,109 TOTAL 14,652 38,769 5,422 24,563 9,230 14,206 State Alabama 318 631 123 407 195 214 Alaska 12 113 5 79 7 34 Arizona 24 537 3 355 21 182 Arkansas 260 415 72 205 188 210 California 283 4,280 56 3,214 227 1,066 2 Colorado 323 111 178 72 145 39 Connecticut 64 603 21 293 43 310 Delaware 18 148 6 6 12 142 District of Columbia 18 151 16 149 2 2 Florida 555 1,188 236 593 319 595 Georgia 435 869 72 484 363 385 Hawaii 9 162 2 10 7 152 Idaho 26 247 11 195 15 52 Illinois 1,286 537 466 288 820 249 Indiana 406 1,130 160 591 246 539 Iowa 656 572 138 197 518 375 Kansas 620 272 170 141 450 131 Kentucky 345 760 87 375 258 385 Louisiana 269 804 59 354 210 450 Maine 41 309 17 152 24 157 Maryland 102 942 36 481 66 461 Massachusetts 143 954 77 497 66 457 Michigan 376 2,158 206 1,588 170 570 Minnesota 761 273 237 143 524 130 Mississippi . ... 177 698 42 290 135 408 Missouri 725 439 146 116 579 323 Montana 163 36 99 26 64 10 Nebraska 457 284 126 212 331 72 Nevada 9 143 4 119 5 24 New Hampshire 74 158 40 100 34 58 New Jersey 169 1,588 105 1,197 64 391 New Mexico 89 244 46 136 43 108 New York 326 3,426 156 3,097 170 329 2 North Carolina 79 1,741 25 843 54 898 North Dakota 176 128 42 50 134 78 Ohio 385 2,237 256 1,940 129 297 Oklahoma 500 255 204 184 296 71 Oregon 88 586 16 357 72 229 Pennsylvania 363 2,560 221 1,473 142 1,087 Rhode Island 16 232 5 119 11 113 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 281 \Jdi Bank HI * < >;'• •« i ^ Par Total Member Nonmember Area Branches Branches Branches Banks and Banks and Banks and offices offices offices State—Continued South Carolina 85 729 25 384 60 345 South Dakota 152 166 60 122 92 44 Tennessee 351 1,031 78 462 273 569 Texas 1,472 261 684 79 788 182 Utah 76 286 28 226 48 60 Vermont 28 167 13 45 15 122 Virginia 229 1,409 154 1,193 75 216 Washington 109 942 24 643 85 299 West Virginia 235 64 138 36 97 28 Wisconsin 635 525 159 191 476 334 Wyoming 102 3 72 1 30 2 Other area American Samoa 3 1 1 1 1 Guam 3 3 15 ... 5 3 10 Puerto Rico 4 22 236 25 22 211 Virgin Islands 4 6 23 23 6 1. There were no nonpar banking offices as of Dec. Virgin Islands are branches of banks located in Califor- 31, 1980. nia, New York, and Pennsylvania. Certain branches of 2. Includes 1 Los Angeles branch and 17 New York Canadian banks (1 in Puerto Rico and 5 in the Virgin City branches of 3 insured nonmember Puerto Rican Islands) are included above as nonmember banks; and banks. nonmember branches in Puerto Rico include 8 other 3. American Samoa and Guam assigned to the San branches of Canadian banks. Francisco District for check-clearing and collection pur- NOTE. Comprises all commercial banking offices on poses. All member banks in Guam are branches of which checks are drawn, including 156 banking fa- California and New York banks. cilities. Number of banks and branches differs from that 4. Puerto Rico and the Virgin Islands assigned to the in table 18 because this table includes banks in Guam, New York District for check-clearing and collection pur- Puerto Rico, and the Virgin Islands but excludes banks poses. All member branches in Puerto Rico and the and trust companies on which no checks are drawn. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 Tables 20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1980 Barclays Bank of New York, New York, to acquire certain assets and assume certain liabilities of 31 branches of Bankers Trust Company, New York, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2-1-80) Barclays Bank of New York (Applicant), with assets of $589 million, is a subsidiary of Barclays Bank International, Limited, London, England. Applicant proposes to acquire 31 branches of Bankers Trust Company (Bank). Depositls at these branches amount to $371 million. The instant proposal represents part of a plan by Bank to sell the bulk of its retail branches. In considering the competitive aspects of the case, the relevant market is the New York metropolitan banking market. All of Applicant's 33 offices are in this market, as well as all but 6 of the 31 branches to be acquired. However, because Applicant's offices and the branches to be acquired operate primarily in separate parts of the New York metropolitan market, the proposal would not eliminate a significant amount of competition. The proposed acquisition would produce positive public benefits. According to the application, Bank has already effectively withdrawn from retail banking in the New York metropolitan market. It has opened no retail banking offices since 1974, and has closed 16 offices since 1977. In 1979, the branches of Bank made no home mortgage loans, and extended less than $9 million in consumer installment loans. Furthermore, in most cases, Bank's current levels of interest paid on savings deposits and charged on consumer loans are not fully competitive with those of other banks in the same market. Finally, according to the application, there is a possibility that if the branches are not sold, Bank may ultimately close some of them. Applicant, on the other hand, has indicated its intention to revitalize these branches by providing a wide range of retail banking services at competitive rates, by making capital investments at the branches, and by extending banking hours where appropriate. The banking factors are consistent with approval. The Central Trust Company, Reynoldsburg, Ohio, to merge with The Farmers and Citizens Bank, Lancaster, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) BASIS FOR APPROVAL BY THE SECRETARY, BOARD OF GOVERNORS (6-10-80) The Central Trust Company (Applicant), with assets of $151 million, proposes to merge The Farmers and Citizens Bank (Bank), with assets of $64 million. Applicant is a subsidiary of The Central Bancorporation, Inc., Cincinnati (Bancorporation), which ranks eighth among Ohio's commercial banking organizations, with 4.1 percent of the deposits. In considering the competitive aspects of this case, the relevant market is the Columbus banking market, where Bancorporation holds 2.1 percent of area deposits and ranks fifth among 25 commercial banking organizations. If the instant merger is consummated, Bancorporation would hold 3.5 percent of area deposits and would continue to rank fifth in the Columbus market. The nearest offices of the participating banks are about seven miles apart, with no offices of other banks in the intervening area. The instant proposal would have a slightly adverse effect on competition. The proposed merger would produce positive public benefits. Following the merger, drive-in facilities would be built at Bank's Carroll and Rushville branches; a more constructive and aggressive lending policy would be implemented at Bank's offices; and certain services, not now available, would be furnished to customers of such offices by subsidiaries of Bancorporation. Convenience and need considerations, including those relating to the Community Reinvestment Act, are sufficient to outweigh the slightly adverse competitive effects that would result from the proposed merger. The financial condition of the participating banks is considered generally satisfactory. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 283 Manufacturers Hanover Trust Company, New York, New York, to acquire certain assets and assume certain liabilities of eight branches of Bankers Trust Company, New York, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (8-8-80) The proposed transaction would have no substantial competitive impact. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (8-5-80) Manufacturers Hanover Trust Company (Applicant), with assets aggregating $47 billion, proposes to acquire certain assets and assume certain liabilities of eight branches of Bankers Trust Company (BTC). Deposits at the branches amount to $72 million. Applicant, the second largest commercial bank in the state of New York, is a subsidiary of Manufacturers Hanover Corporation (MHC), which controls 13.6 percent of the deposits held by commercial banking offices situated in the state. The instant proposal represents part of a plan of BTC to sell most of its retail branches. Applicant ranks first among one hundred seven commercial banking organizations in the relevant New York metropolitan banking market, with 15.2 percent of the area deposits, while the branches of BTC hold 0.06 percent of the market deposits. This market is relatively unconcentrated, with the four largest commercial banking organizations controlling 54.1 percent of the deposits. The proposed merger would eliminate some direct competition between the subject banks; however, because of the larger number of competitors in close proximity to each of the offices involved in this proposal, the amount of competition that would be eliminated is not regarded as significant. Overall, competitive and convenience and need considerations, including Community Reinvestment Act factors, are consistent with approval. The financial condition of MHC and Applicant is considered to be generally satisfactory. Bank of New York, New York, New York, to merge with Empire National Bank, Middletown, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (8-12-80) Bank of New York (Applicant), with assets of $10 billion, proposes to merge Empire National Bank (Bank), with assets of $498 million. Applicant is the ninth largest commercial banking organization in the state of New York, with 3.1 percent of the state's total commercial bank deposits. The proposed merger would not alter Applicant's rank in the state. Bank operates forty-one offices in three separate market areas: metropolitan New York, Mid- Hudson, and Middletown. The effect of the proposal on existing competition in the New York unconcentrated metropolitan market would be minimal in view of the nature of the market, the relatively small market share that Applicant would hold following consummation of the proposal, and Applicant's commitment to divest four offices in that market. Applicant's rank as the eighth largest among commercial banking organizations would remain unchanged. The effect of the proposal on existing competition in the Mid-Hudson market would also be insignificant and would be mitigated by the divestiture of Applicant's two offices in that market. The only market in which competition is an issue in this application is the Middletown market, where both Applicant and Bank currently compete. Bank, with market deposits of $164.7 million, ranks first with a 25.3 percent share of the commercial bank deposits. Applicant operates five offices and ranks fourth. Although Bank is the leading competitor, its competitive influence has been declining in recent years because of financial and managerial conditions. Its market share has declined from approximately 32 percent in 1973 to 25.3 percent in 1979. Moreover, Applicant has agreed to divest two of its offices in this market, with deposits of $15.1 million, thereby reducing its rank from fourth to sixth largest. The Middletown market, which was not highly concentrated in the past, has become even less so since the relatively recent entry of six of the nation's fourteen largest banks, including five large New York City banks. In this case, the Board has also considered the presence of savings and loan associations and mutual savings banks in the market. While continuing to view commercial banking as the relevant line of commerce in determining the competitive effects of a proposal, the Board has stated that it may be appropriate in particular cases and in specific areas to take into consideration direct competition from thrift institutions when evaluating various competitive influences. In view of the ab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 Tables 20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1980—Continued solute size and significant deposit-taking role of thrift institutions in the Middletown market, as well as their increasing powers, the Board believes that their influence further diminishes the adverse competitive effects of the proposed merger. Accordingly, the Board concludes that the competitive effects of the proposal are seriously adverse, but that denial of the proposal is not warranted in light of the considerations discussed below. Bank has experienced financial and managerial problems in recent years that have reduced its effectiveness as a competitor. The financial and managerial resources and prospects of the organization that would result from the proposed merger, would have a positive impact on the operations of Bank without diminishing the prospects of Applicant. The financial and managerial resources and prospects of Applicant are satisfactory and, as a result of this proposal, Bank's customers will be served by a stronger banking organization. In terms of convenience and needs, Applicant proposes to expand and improve the services offered at Bank's banking offices by increasing the effective interest rate paid on passbook savings and by offering additional services, including commercial and corporate trust services, cash management, cash disbursement, and economic forecasting services. Applicant also proposes to offer lease financing, FHA construction credit, and individual FHA and VA loans. In light of the above, considerations so favor approval as to outweigh the serious adverse competitive effects associated with this proposal. The Connecticut Bank and Trust Company, Hartford, Connecticut, to merge with The Danbury Bank and Trust Company, Danbury, Connecticut SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9-12-80) The Connecticut Bank and Trust Company (Applicant), with assets of $3 billion, proposes to merge The Danbury Bank and Trust Company (Bank), with assets of $30 million. Applicant is the sole banking subsidiary of CBT Corporation, Hartford, Connecticut, which is the largest commercial banking organization in the state, with 17.6 percent of the deposits. If the proposed merger takes place, CBT Corporation would hold 17.9 percent of the deposits held by commercial banking offices in Connecticut. Proponents' closest offices are 2.3 miles apart, with offices of other banks situated in the intervening area. The relevant market in the instant proposal is the Danbury banking market, where Applicant, with 1.7 percent of the area deposits, ranks eighth among eleven commercial banking organizations. If the proposed merger is consummated, the resulting institution would rank fifth in the Danbury market, with 9.3 percent of the area deposits. Home office protection would be removed from Danbury after this merger. Although affiliation would eliminate existing competition, it would also immediately open the city of Danbury to branching by other commercial banks and would allow Applicant, the largest commercial bank in the state, to operate in the core of this banking market. After the merger, ten commercial banking organizations and numerous thrift institutions would still remain in the Danbury market, providing adequate banking alternatives for businesses and consumers. The banking factors are consistent with approval. Security Savings Bank, Marshalltown, Iowa, to merge with State Bank, Gladbrook, Iowa SUMMARY REPORT BY THE ATTORNEY GENERAL (8-29-80) The proposed transaction would not have an adverse effect on competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9-30-80) Security Savings Bank (Applicant), with assets of $99 million, proposes to merge State Bank, with assets of $2 million. Applicant's offices are in the Marshalltown banking market, whereas the sole Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 285 :o office of State Bank is in the adjacent Tama County banking market, where it is the smallest of eight banks, with 1.6 percent of the deposits. Thus there is no effective competition existing between proponents. Further, the Tama County banking market does not appear overly attractive for de novo entry. The financial condition of each of the banks is satisfactory, as would be that of the resulting bank. Applicant proposes to raise interest rates on time and savings deposits at the office now operated by State Bank from 2 percent to the maximum rate allowed by law, and to offer certificates of deposit. Further, Applicant intends to extend the hours that the Gladbrook office is open to the public. Convenience and need factors lend weight to approval. The Central Trust Company, Reynoldsburg, Ohio, to merge with The Millersport Bank Co., Millersport, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) BASIS FOR APPROVAL BY THE SECRETARY, BOARD OF GOVERNORS (10-17-80) The Central Trust Company (Applicant), with assets of $166 million, proposes to acquire The Millersport Bank Co. (Bank), with assets of $8 million. Applicant, a subsidiary of Central Bancorporation, Cincinnati, Ohio (Bancorporation), operates 21 offices, 15 in the Columbus banking market and 6 in the Zanesville market. The sole office of Millersport Bank is in the Columbus banking market, 13 miles from the nearest office of Applicant. Bancorporation's only commercial banking subsidiary in the Columbus banking market is Applicant. Bancorporation ranks fifth among 24 banking organizations in the Columbus market, with 3.3 percent of the total area deposits. If the instant proposal were consummated, the resulting bank would rank fifth in the market, with 3.5 percent of the deposits. The proposed acquisition would have no significant effect on competition. The instant proposal would improve the level of services at the office now operated by Bank. Equipment leasing, international banking services, commercial construction lending, and trust services would be made available through the Millersport office of the resulting bank. Bank's condition is considered reasonably satisfactory; Bancorporation's, sound; and Applicant's, satisfactory. The proposed acquisition would not alter this situation. First Virginia Bank-South Central, Brookneal, Virginia, to merge with The Farmers and Merchants Bank, Inc., of Amherst, Amherst, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (10-17-80) The proposed transaction would not have a significantly adverse effect upon competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11-10-80) First Virginia Bank-South Central (Applicant), a subsidiary of First Virginia Banks, Inc., Falls Church, Virginia (FVB), has assets of $7 million and proposes to merge The Farmers and Merchants Bank, Inc., of Amherst (Bank), with assets of $11 million. Bank's sole branch is at Madison Heights. The nearest offices of proponents are 37 road miles apart. While Applicant does not now operate a branch, it has received permission to establish a branch in Campbell County, in the Timbrook Square shopping center, 13 miles from the nearest office of Bank. FVB is not now represented in the Lynchburg banking market, where Bank ranks sixth among seven banking organizations, with 2.2 percent of the area deposits. In Virginia, FVB ranks seventh among commercial banking organizations, with approximately 7 percent of the deposits. Banking factors are consistent with approval. Convenience and need factors lend weight to approval, for FVB could provide additional services at the offices now operated by Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 Tables 20. Mergers, Consolidations, Aequis«iioj., >A Liabilities Approved by the Board )f (H>V Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding Company The following transactions involve banks that are subsidiaries of the same bank holding company. In such cases, the Summary Report by the Attorney General indicates that because the banks are wholly owned subsidiaries of the same bank holding company, their proposed merger is essentially a corporate reorganization and therefore would have no effect on competition. The Board of Governors or the Federal Reserve Bank, whichever approved the application, determined that the competitive effects of the proposed transaction, the financial and managerial resources, and the prospects of the banks concerned, as well as the convenience and needs of the community to be served were consistent with approval. Date of Assets Name of bank, type of transaction, (millions approval by and other banks involved ' of dollars) Board or Reserve Bank AmeriTrust Company, Cleveland, Ohio 4,697 2-21-80 Merger AmeriTrust Company of Franklin County, Columbus, Ohio 25 AmeriTrust Company of Lorain County, Lorain, Ohio 53 AmeriTrust Company of Lake County, Painesville, Ohio 135 Long Island Trust Company, Garden City, New York 918 8-1-80 Merger Long Island Bank, Hicksville, New York 173 Bank of Virginia, Richmond, Virginia 2,318 9-24-80 Merger Bank of Virginia-Central Valley, Verona, Virginia 10 AmeriTrust Company, Cleveland, Ohio 4,697 10-3-80 Merger AmeriTrust Company of Cincinnati, Cincinnati, Ohio (2) AmeriTrust Company of Portage County, Kent, Ohio 61 AmeriTrust Company of Medina County, Medina, Ohio 28 1. Each proposed transaction was to be effective under the charter of the first-named bank. The table is in chronological order of approval. 2. Opened for business on Mar. 26, 1980. Mergers Approved Involving a Nonoperating Institution with an Existing Bank The following transactions have no significant effect on competition; they merely facilitate the acquisition of the voting shares of a bank (or banks) by a bank holding company. In such cases, the Summary Report by the Attorney General indicates that the transaction would merely combine an existing bank with a nonoperating institution; in consequence, and without regard to the acquisition of the surviving bank by the holding company, it would have no effect on competition. The Board or Federal Reserve Bank, whichever approved the application, determined that the proposal would, in itself, have no adverse competitive effects, and that the financial and convenience and need factors were consistent with approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 287 Date of Assets Name of bank, type of transaction, approval by (millions of and other banks involved ' Board or dollars) Reserve Bank Bank of Virginia-Wise, St. Paul, Virginia 2-5-80 Mergers The Southwest Bank of Virginia, St. Paul, Virginia . 11 Bank of Virginia, Richmond, Virginia 2,002 Bank of Frederick County, Stephens City, Virginia 2-25-80 Merger First Virginia Bank of Frederick County, Stephens City, Virginia 12 HSB Bank, Hillsdale, Michigan 3-25-80 Merger Hillsdale State Savings Bank, Hillsdale, Michigan 61 Soulard Bank & Trust Company, St. Louis, Missouri 4-18-80 Merger Manufacturers Bank & Trust Company, St. Louis, Missouri 172 SM Bank, Springfield, Illinois 6-9-80 Merger Springfield Marine Bank, Springfield, Illinois 457 The Dime Bank of Northwest Ohio, Continental, Ohio. 6-19-80 Merger The Dime Bank of Continental, Continental, Ohio 16 The Dime Bank of Huntsville, Huntsville, Ohio 12 The Dime Bank of McClure, McClure, Ohio 13 Ohio Citizens Bank, Toledo, Ohio 6-30-80 Merger The Ohio Citizens Trust Company, Toledo, Ohio 560 Graham Drive State Bank, Tomball, Texas .. 7-30-80 Merger Guaranty Bond State Bank, Tomball, Texas . 56 Shelbank, Alabaster, Alabama 8-29-80 Merger Citizens Bank and Trust Company, Alabaster, Alabama. Firstate Bank, Abilene, Texas 11-4-80 Merger The First State Bank, Abilene, Texas 333 1. Each proposed transaction was to be effected under the charter of the first-named bank. The table is in chronological order of approval. 2. This is a newly organized bank, not in operation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

289 The Federal Reserve System Boundaries of Federal Reserve Districts and their Branch Territories o HAWAII © Legend Boundaries of Federal Reserve Districts Boundaries of Federal Reserve Branch Territories o Board of Governors of the Federal Reserve System ® Federal Reserve Bank Cities • Federal Reserve Branch Cities • Federal Reserve Bank Facilities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Directories and Meetings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 Directories and Meetings Board of Governors of the Federal Reserve System December 31,1980 Term expires PAUL A. VOLCKER, of New Jersey, Chairman ' January 31, 1992 FREDERICK H. SCHULTZ, of Florida, Vice Chairman ' January 31, 1982 NANCY H. TEETERS, of Indiana January 31, 1984 J. CHARLES PARTEE, of Virginia January 31, 1986 HENRY C. WALLICH, of Connecticut January 31, 1988 EMMETT J. RICE, of New York January 31, 1990 LYLE E. GRAMLEY, of Missouri January 31, 1994 OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY JOSEPH R. COYNE, Asst. to the Board THEODORE E. ALLISON, Secretary DONALD J. WINN, Asst. to the Board BARBARA R. LOWREY, Asst. Secretary FRANK O'BRIEN, JR., Special Asst. to the JAMES MCAFEE, Asst. Secretary Board JEFFERSON A. WALKER, Asst. Secretary 2 JOSEPH S. SIMS, Special Asst. to the Board LEGAL DIVISION NEAL L. PETERSEN, General Counsel OFFICE OF STAFF DIRECTOR FOR ROBERT E. MANNION, Deputy General MONETARY AND FINANCIAL Counsel POLICY STEPHEN H. AXILROD, Staff Director CHARLES R. MCNEILL, Asst. to the General Counsel EDWARD C. ETTIN, Deputy Staff Director J. VIRGIL MATTINGLY, JR., Asst. MURRAY ALTMANN, Asst. to the Board General Counsel PETER M. KEIR, Asst. to the Board GILBERT T. SCHWARTZ, Asst. General STANLEY J. SIGEL, Asst. to the Board Counsel NORMAND R. V. BERNARD, Special Asst. to the Board DIVISION OF RESEARCH AND STATISTICS OFFICE OF STAFF DIRECTOR FOR JAMES L. KICHLINE, Director MANAGEMENT JOSEPH S. ZEISEL, Deputy Director JOHN M. DENKLER, Staff Director MICHAEL J. PRELL, ASSOC. Director EDWARD T. MULRENIN, Asst. Staff ROBERT A. EISENBEIS, Senior Deputy Director Assoc. Director JOSEPH W. DANIELS, SR., Director of JOHN J. MINGO, Senior Deputy ASSOC. Equal Employment Opportunity Director 3 ELEANOR J. STOCKWELL, Senior Deputy Assoc. Director OFFICE OF STAFF DIRECTOR JARED J. ENZLER, Deputy ASSOC. Director FOR FEDERAL RESERVE J. CORTLAND G. PERET, Deputy Assoc. BANK ACTIVITIES Director WILLIAM H. WALLACE, Staff Director HELMUT F. WENDEL, Deputy Assoc. HARRY A. GUINTER, Asst. Director for Director Contingency Planning MARTHA BETHEA, Asst. Director ROBERT M. FISHER, Asst. Director FREDERICK M. STRUBLE, Asst. Director STEPHEN P. TAYLOR, Asst. Director LEVON H. GARABEDIAN, Asst. Director (A dministration) 1. The designations as Chairman and Vice Chairman expire on Aug. 6,1983, and July 27,1983, respe- 2. On loan from the Federal Reserve Bank of Richtively, unless the services of these members of the mond. Board shall have terminated sooner. 3. On leave of absence. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 293 DIVISION OF INTERNATIONAL DIVISION OF CONSUMER AND FINANCE COMMUNITY AFFAIRS EDWIN M. TRUMAN, Director JANET O. HART, Director ROBERT F. GEMMILL, ASSOC. Director GRIFFITH L. GARWOOD, Deputy Director GEORGE B. HENRY, ASSOC. Director JERAULD C. KLUCKMAN, ASSOC. Director CHARLES J. SIEGMAN, ASSOC. Director GLENN E. LONEY, Asst. Director SAMUEL PIZER, Staff Adviser DOLORES S. SMITH, Asst. Director JEFFREY R. SHAFER, Deputy Assoc. Director DIVISION OF PERSONNEL DALE W. HENDERSON, Asst. Director DAVID L. SHANNON, Director LARRY J. PROMISEL, Asst. Director JOHN R. WEIS, Asst. Director RALPH W. SMITH, JR., Asst. Director CHARLES W. WOOD, Asst. Director DIVISION OF FEDERAL RESERVE DIVISION OF SUPPORT SERVICES BANK OPERATIONS DONALD E. ANDERSON, Director JAMES R. KUDLINSKI, Director WALTER W. KREIMANN, ASSOC. Director CLYDE H. FARNSWORTH, JR., Deputy ROBERT E. FRAZIER, Asst. Director Director WALTER ALTHAUSEN, Asst. Director CHARLES W. BENNETT, Asst. Director OFFICE OF THE CONTROLLER LORIN S. MEEDER, Asst. Director JOHN KAKALEC, Controller P. D. RING, Asst. Director GEORGE E. LIVINGSTON, Asst. Controller DAVID L. ROBINSON, Asst. Director RAYMOND L. TEED, Asst. Director DIVISION OF DATA PROCESSING CHARLES L. HAMPTON, Director DIVISION OF BANKING BRUCE M. BEARDSLEY, ASSOC. Director SUPERVISION AND REGULATION UYLESS D. BLACK, Asst. Director JOHN E. RYAN, Director GLENN L. CUMMINS, Asst. Director FREDERICK R. DAHL, ASSOC. Director ROBERT J. ZEMEL, Asst. Director WILLIAM TAYLOR, ASSOC. Director WILLIAM W. WILES, ASSOC. Director JACK M. EGERTSON, Asst. Director ROBERT A. JACOBSEN, Asst. Director DON E. KLINE, Asst. Director ROBERT S. PLOTKIN, Asst. Director THOMAS A. SIDMAN, Asst. Director SAMUEL H. TALLEY, Asst. Director LAURA M. HOMER, Securities Credit Officer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 Directories and Meetings Federal Open Market Committee December 31, 1980 Members PAUL A. VOLCKER, Chairman (Board of Governors) ANTHONY M. SOLOMON, Vice Chairman (elected by Federal Reserve Bank of New York) LYLE E. GRAMLEY (Board of Governors) ROGER GUFFEY (elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco) FRANK E. MORRIS (elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond) J. CHARLES PARTEE (Board of Governors) EMMETT J. RICE (Board of Governors) LAWRENCE K. ROOS (elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas) FREDERICK H. SCHULTZ (Board of Governors) NANCY H. TEETERS (Board of Governors) HENRY C. WALLICH (Board of Governors) WILLIS J. WINN (elected by Federal Reserve Banks of Cleveland and Chicago) Officers MURRAY ALTMANN, RICHARD G. DAVIS, Secretary Associate Economist NORMAND R. V. BERNARD, THOMAS DAVIS, Assistant Secretary Associate Economist NEAL L. PETERSEN, ROBERT EISENMENGER, General Counsel Associate Economist JAMES H. OLTMAN, EDWARD C. ETTIN, Deputy General Counsel Associate Economist ROBERT E. MANNION, GEORGE B. HENRY, Assistant General Counsel Associate Economist STEPHEN H. AXILROD, PETER M. KEIR, Economist Associate Economist ALAN R. HOLMES, JAMES L. KICHLINE, Adviser for Market Operations Associate Economist ANATOL BALBACH, EDWIN M. TRUMAN, Associate Economist Associate Economist JOHN DAVIS, JOSEPH S. ZEISEL, Associate Economist Associate Economist PETER D. STERNLIGHT, Manager for Domestic Operations, System Open Market Account SCOTT E. PARDEE, Manager for Foreign Operations, System Open Market Account During 1980, meetings of the Federal of Policy Actions of the Federal Open Open Market Committee were generally Market Committee" in this REPORT.) held at monthly intervals. (See "Record Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 295 December 31, 1980 Members District No. 1—HENRY S. WOODBRIDGE, JR., President, Rhode Island Hospital Trust National Bank, Providence, Rhode Island District No. 2—DONALD C. PLATTEN, Chairman of the Board, Chemical Bank, New York, New York District No. 3—WILLIAM B. EAGLESON, JR., Chairman and President, Girard Bank, Bala Cynwyd, Pennsylvania District No. 4—MERLE E. GILLIAND, Chairman and Chief Executive Officer, Pittsburgh National Bank, Pittsburgh, Pennsylvania District No. 5—J. OWEN COLE, Chairman of the Board, First National Bank of Maryland, Baltimore, Maryland District No. 6—ROBERT STRICKLAND, Chairman, Trust Company of Georgia, Atlanta, Georgia District No. 7—ROBERT M. SURDAM, Chairman, National Bank of Detroit, Detroit, Michigan District No. 8—CLARENCE C. BARKSDALE, Chairman of the Board and Chief Executive Officer, First National Bank in St. Louis, St. Louis, Missouri District No. 9—CLARENCE G. FRAME, President and Chief Executive Officer, First National Bank of St. Paul, St. Paul, Minnesota District No. 10—GORDON E. WELLS, Chairman of the Board, First National Bank of Kansas City, Kansas City, Missouri District No. 11—JAMES D. BERRY, Chairman of the Board and Chief Executive Officer, Republic of Texas Corporation, Dallas, Texas District No. 12—CHAUNCEY E. SCHMIDT, Chairman of the Board, President, and Chief Executive Officer, The Bank of California, N.A., San Francisco, California Officers CLARENCE C. BARKSDALE, President JAMES D. BERRY, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors MERLE E. GILLIAND CHAUNCEY E. SCHMIDT HENRY S. WOODBRIDGE, JR. Meetings of the Federal Advisory of the banking industry, one from each Council were held on February 7-8, Federal Reserve District, is required by March 14, May 1-2, September 4-5, and law to meet in Washington at least four November 6-7, 1980. The Board of times each year, and is authorized by the Governors met with the council on Federal Reserve Act to consult with and February 8, March 14, May 2, September advise the Board on all matters within the 5, and November 7, 1980. The council, jurisdiction of the Board, which is composed of 12 representatives Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 Directories and Meetings Consumer Advisory Council December 31, 1980 WILLIAM D. WARREN, LOS Angeles, California, Chairman MARCIA A. HAKALA, Omaha, Nebraska, Vice Chairman JULIA H. BOYD, THE REV. ROBERT J. MCEWEN, S.J., Alexandria, Virginia Chestnut Hill, Massachusetts ROLAND E. BRANDEL, R. C. MORGAN, San Francisco, California El Paso, Texas ELLEN BROADMAN, MARGARET REILLY-PETRONE, Washington, D.C. Upper Montclair, New Jersey JAMES L. BROWN, RENE REIXACH, Milwaukee, Wisconsin Rochester, New York MARK E. BUDNITZ, FLORENCE M. RICE, Atlanta, Georgia New York, New York ROBERT V. BULLOCK, RALPH J. ROHNER, Frankfort, Kentucky Washington, D.C. RICHARD S. D'AGOSTINO, HENRY B. SCHECHTER, Philadelphia, Pennsylvania Washington, D.C. JOANNE FAULKNER, PETER D. SCHELLIE, New Haven, Connecticut Washington, D.C. E. G. SCHUHART II, VERNARD W. HENLEY, Amarillo, Texas Richmond, Virginia CHARLOTTE H. SCOTT, JUAN J. HINOJOSA, Charlottesville, Virginia McAllen, Texas RICHARD A. VAN WINKLE, SHIRLEY T. HOSOI, Salt Lake City, Utah Los Angeles, California RICHARD D. WAGNER, F. THOMAS JUSTER, Simsbury, Connecticut Ann Arbor, Michigan MARY W. WALKER, RICHARD F. KERR, Monroe, Georgia Cincinnati, Ohio LEONOR K. SULLIVAN-ARCHIBALD, ROBERT J. KLEIN, Chairman Emeritus, New York, New York St. Louis, Missouri HARVEY M. KUHNLEY, posed of creditors, consumers, and Minneapolis, Minnesota others, was established pursuant to the Meetings between the Consumer Ad- Equal Credit Opportunity Act to advise visory Council and members of the Board the Board on consumer-related matters. of Governors were held on January 28-29, April 28-29, July 30-31, and October 30-31, 1980. The council, which is com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 297 jy/ ttruih hes December 31, 1980 Chairmen and Deputy Chairmen of Boards of Directors Federal Reserve Chairman and Deputy Chairman Bank Federal Reserve Agent Boston Robert M. Solow Robert P. Henderson New York Robert H. Knight Boris Yavitz Philadelphia John W. Eckman Werner C. Brown Cleveland Robert E. Kirby J. L. Jackson Richmond Maceo A. Sloan Steven Muller Atlanta William A. Fickling, Jr. John H. Weitnauer, Jr. Chicago John Sagan Stanton R. Cook St. Louis Armand C. Stalnaker William B. Walton Minneapolis Stephen F. Keating William G. Phillips Kansas City Joseph H. Williams Paul H. Henson Dallas Irving A. Mathews Gerald D. Hines San Francisco Cornell C. Maier Caroline L. Ahmanson Conference of Chairmen District. Class C directors are appointed by the Board of Governors of the Federal The chairmen of the Federal Reserve Reserve System. One term in each class of Banks are organized into a Conference of directors expires each year. Directors are Chairmen that meets to consider matters chosen without discrimination as to race, of common interest and to consult with creed, color, sex, or national origin. and advise the Board of Governors. Such The Class A directors are chosen as meetings, attended also by the deputy representatives of member banks and, as a chairmen, were held in Washington on matter of practice, are active officers of June 3-4 and December 4-5, 1980. member banks. Class B and Class C direc- The Executive Committee of the Contors represent the public and are selected ference of Chairmen during 1980 comwith due, but not exclusive, consideration prised John W. Eckman, Chairman, to the interests of agriculture, commerce, Stephen F. Keating, Vice Chairman, and industry, services, labor, and consumers. Robert E. Kirby and Irving A. Mathews, Class B and Class C directors may not be members. officers, directors, or employees of any On December 5, 1980, Mr. Keating was bank, nor may Class C directors be stockelected chairman of the conference and of holders of any bank. Annually, the Board its Executive Committee to serve for the of Governors designates one Class C succeeding year; Cornell C. Maier was director of each Reserve Bank to serve as elected Vice Chairman of the conference chairman of the Bank and one to serve as and a member of the Executive Commitdeputy chairman. tee; and John Sagan was elected as the Branches of Federal Reserve Banks other member of the Executive Commithave either five or seven directors, of tee. whom a majority are appointed by the board of directors of the parent Federal Reserve Bank. The others are appointed by the Board of Governors of the Federal Directors Reserve System. The chairmen of branch Class A and Class B directors are elected boards are selected from among directors by the member banks of a Federal Reserve appointed by the Board of Governors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 Directories and Meetings Term eS\ xV* pW* iWr West sO District 1—BOSTON Dec. 31 Class A Richard D. Hill , . Chairman of the Board, First National Boston Corporation, Boston, Massachusetts 1980 Fred A. White .. President, Dartmouth National Bank of Hanover, Hanover, New Hampshire 1981 H. AlanTimm ..President, Bank of Maine, N.A., Augusta, Maine 1982 Class B WestonP. Figgins ..Chairman of the Board, Wm. Filene's Sons Company, Boston, Massachusetts 1980 Robert D. Kilpatrick . . .President and Chief Executive Officer, Connecticut General Life Insurance Company, Hartford, Connecticut 1981 Carol R. Goldberg Senior Vice President, The Stop & Shop Companies, Inc., Boston, Massachusetts 1982 Class C Robert M. Solow . . Institute Professor, Massachusetts Institute of Technology, Cambridge, Massachusetts 1980 Robert P. Henderson. ..President and Chief Executive Officer, Itek Corp., Lexington, Massachusetts 1981 Thomas I. Atkins General Counsel, National Association for the Advancement of Colored People, New York, New York 1982 District 2—NEW YORK Class A Raymond W. Bauer Chairman and President, United Counties Trust Company, Elizabeth, New Jersey 1980 James Whelden President, Ballston Spa National Bank, Ballston Spa, New York 1981 Gordon T. Wallis Chairman of the Board, Irving Trust Company, New York, New York 1982 Class B William S. Sneath Chairman of the Board, Union Carbide Corporation, New York, New York 1980 Edward L. Hennessey, Jr Chairman of the Board, Allied Chemical Corporation, Morristown, New Jersey 1981 William S. Cook President, Union Pacific Corporation, New York, New York 1982 Class C Robert H. Knight Partner, Shearman and Sterling, Attorneys, New York, New York 1980 GertrudeG. Michelson .Senior Vice President, Macy's New York, New York, New York 1981 Boris Yavitz Dean, Graduate School of Business, Columbia University, New York, New York 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 299 Term expires BUFFALO BRANCH Dec. 31 Appointed by Federal Reserve Bank William S. Gavitt President, The Lyons National Bank, Lyons, New York 1980 Robert J. Donough ....President, Liberty National Bank and Trust Company, Buffalo, New York 1981 M. Jane Dickman Partner, Touche Ross & Co., Buffalo, New York 1982 Arthur M. Richardson. .President and Chief Executive Officer, Security Trust Company, Rochester, New York 1982 Appointed by Board of Governors John R. Burwell President, Rollins Container Corporation, Rochester, New York 1980 George L. Wessel President, Buffalo AFL-CIO Council, Buffalo, New York 1981 Frederick D. Berkeley III Chairman of the Board and President, Graham Manufacturing Company, Inc., Batavia, New York 1982 District 3—PHILADELPHIA Class A John R. Biechler President and Chief Executive Officer, The Commonwealth National Bank, Harrisburg, Pennsylvania 1980 Robert H. Deacon President, The Bank of Mid-Jersey, Bordentown, New Jersey 1981 Donald J. Seebold President, The First National Bank of Danville, Danville, Pennsylvania 1982 Class B Harry A. Jensen President and Chief Executive Officer, Armstrong Cork Company, Lancaster, Pennsylvania 1980 Richard P. Hauser Chairman and Chief Executive Officer, John Wanamaker, Philadelphia, Pennsylvania .... 1981 Eberhard Faber Chairman of the Board and Chief Executive Officer, Eberhard Faber, Inc., Wilkes-Barre, Pennsylvania 1982 Class C Werner C. Brown Director, Hercules Incorporated, Wilmington, Delaware 1980 John W. Eckman Chairman and Chief Executive Officer, Rorer Group, Inc., Fort Washington, Pennsylvania 1981 Jean A. Crockett Chairman, Department of Finance, and Professor of Finance, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania . 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 Directories and Meetings Term expires District 4—CLEVELAND Dec. 31 Class A John A. Gelbach Chairman of the Board, Central National Bank, Cleveland, Ohio 1980 Everett L. Maffett President and Chief Executive Officer, Eaton National Bank & Trust Co., Eaton, Ohio .... 1981 John W. Alford Chairman of the Board and Chief Executive Officer, The Park National Bank, Newark, Ohio 1982 Class B Hays T. Watkins Chairman and President, Chessie System, Cleveland, Ohio 1980 Jeffery A. Robb Managing Partner, Audit Division, Proctor, Robb and Company, Granville, Ohio 1981 JohnW. Kessler President, John W. Kessler Company, Columbus, Ohio 1982 Class C Vacant 1980 J.L.Jackson President, Falcon Coal Company Inc., Lexington, Kentucky 1981 Robert E. Kirby Chairman and Chief Executive Officer, Westinghouse Electric Corporation, Pittsburgh, Pennsylvania 1982 CINCINNATI BRANCH Appointed by Federal Reserve Bank Walter W. Hillenmeyer, Jr Chairman and Chief Executive Officer, First Security National Bank and Trust Company, Lexington, Kentucky 1980 Lawrence C. Hawkins . .Senior Vice President, University of Cincinnati, Cincinnati, Ohio 1981 Elden Houts President, The Citizens Commercial Bank and Trust Company, Celina, Ohio 1981 Oliver W. Birckhead ... Chairman of the Board and Chief Executive Officer, The Central Trust Company, N.A., Cincinnati, Ohio 1982 Appointed by Board of Governors LawrenceH. Rogers II .President and Chief Executive Officer, Omega Communications, Inc., Cincinnati, Ohio 1980 Martin B. Friedman Director, Formica Corporation, Cincinnati, Ohio 1981 Sister Grace Marie Hiltz President, Sisters of Charity Health Care Systems, Inc., Cincinnati, Ohio 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 301 Term expires PITTSBURGH BRANCH Dec. 31 Appointed by Federal Reserve Bank J. David Barnes President, Mellon Bank, N.A., Pittsburgh, Pennsylvania 1980 Thomas V. Mansell .... President and Chief Executive Officer, First National Bank of Western Pennsylvania, New Castle, Pennsylvania 1981 R. BurtGookin Director, H. J. Heinz Co., Pittsburgh, Pennsylvania 1981 William D. McKain President, Wheeling National Bank, Wheeling, West Virginia 1982 Appointed by Board of Governors MiltonG. Hulme, Jr... .President and Chief Executive Officer, Mine Safety Appliances Company, Pittsburgh, Pennsylvania 1980 William H. Knoell President, Cyclops Corporation, Pittsburgh, Pennsylvania 1981 Robert S. Kaplan Dean, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania 1982 District 5—RICHMOND Class A Frederic H. Phillips Senior Vice President, Virginia National Bank, Roanoke, Virginia 1980 Vincent C. Burke, Jr Chairman of the Board and Chief Executive Officer, The Riggs National Bank of Washington, D.C., Washington, D.C 1981 WilliamM. Dickson... .President and Senior Trust Officer, First National Bank in Ronceverte, Ronceverte, West Virginia 1982 Class B Thomas A. Jordan Consultant, Asheboro, North Carolina 1980 Paul G. Miller Chairman of the Board and Chief Executive Officer, Commercial Credit Company, Baltimore, Maryland 1981 James A. Chapman, Jr. .Chairman of the Board and Chief Executive Officer, Inman Mills, Inman, South Carolina... 1982 Class C Steven Muller President, The Johns Hopkins University and Hospital, Baltimore, Maryland 1980 Maceo A. Sloan Executive Vice President and Chief Operating Officer, North Carolina Mutual Life Insurance Company, Durham, North Carolina.... 1981 Paul E. Reichardt Chairman of the Board and Chief Executive Officer, Washington Gas Light Company, Washington, D.C 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 Directories and Meetings Term expires BALTIMORE BRANCH Dec. 31 Appointed by Federal Reserve Bank Joseph M. Gough, Jr. ..President, The First National Bank of St. Mary's, Leonardtown, Maryland 1980 Pearl C. Brackett Assistant/Deputy Manager, Baltimore Regional Chapter of American Red Cross, Baltimore, Maryland 1981 Hugh D. Shires President and Chief Executive Officer, The First National Bank and Trust Company of Western Maryland, Cumberland, Maryland.. 1982 A. R. Reppert President, The Union National Bank of Clarksburg, Clarksburg, West Virginia 1982 Appointed by Board of Governors Catherine Byrne Doehler. Director of Development, Baltimore Regional Chapter of American Red Cross, Baltimore, Maryland 1980 Joseph H. McLain President, Washington College, Chestertown, Maryland 1981 Edward H. Covell Vice President, Country Pride Foods Limited, General Manager, Delmarva Division, Easton, Maryland 1982 CHARLOTTE BRANCH Appointed by Federal Reserve Bank JohnT. Fielder President, J. B. Ivey and Company, Charlotte, North Carolina 1980 Hugh M. Chapman Chairman of the Board, The Citizens & Southern National Bank of South Carolina, Columbia, South Carolina 1981 J. Banks Scarborough . .Chairman and President, Pee Dee State Bank, Timmonsville, South Carolina 1982 W.B.Apple, Jr President, First National Bank of Reidsville, Reidsville, North Carolina 1982 Appointed by Board of Governors Robert E. Elberson President, Chief Executive Officer, and Director, Hanes Corporation, Winston-Salem, North Carolina 1980 Henry Ponder Office of the President, Benedict College, Columbia, South Carolina 1981 Naomi G. Albanese Dean, School of Home Economics, University of North Carolina at Greensboro, Greensboro, North Carolina 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 303 Term expires District 6—ATLANTA Dec. 31 Class A HughM. Willson President, Citizens National Bank, Athens, Tennessee 1980 Guy W. Botts Chairman of the Board, Barnett Banks of Florida, Inc., Jacksonville, Florida 1981 DanB. Andrews President, First National Bank of Dickson, Dickson, Tennessee 1982 Class B Ulysses V. Goodwyn .. .Executive Vice President, Southern Natural Resources, Inc., Birmingham, Alabama 1980 Floyd W. Lewis Chairman of the Board and Chief Executive Officer, Middle South Utilities, Inc., New Orleans, Louisiana 1981 JeanMcArthurDavis ..President, McArthur Dairy, Inc., Miami, Florida 1982 Class C William A. Fickling, Jr. President and Chairman, Charter Medical Corporation, Macon, Georgia 1980 Fred Adams, Jr President, Cal-Maine Foods, Inc., Jackson, Mississippi 1981 JohnH. Weitnauer, Jr. .Chairman and Chief Executive Officer, Richway, Atlanta, Georgia 1982 BIRMINGHAM BRANCH Appointed by Federal Reserve Bank George S. Shirley President, The First National Bank of Tuskaloosa, Tuscaloosa, Alabama 1980 Guy H. Caffey, Jr Chairman and Chief Executive Officer, Southern Bancorporation of Alabama and Birmingham Trust National Bank, Birmingham, Alabama 1981 C. Gordon Jones President and Chief Executive Officer, First National Bank of Decatur, Decatur, Alabama .. 1982 Martha A. Mclnnis .... Executive Vice President, Alabama Environmental Quality Association, Montgomery, Alabama 1982 Appointed by Board of Governors Harold B. Blach, Jr. ... President, Blach's, Inc., Birmingham, Alabama 1980 Louis J. Willie Executive Vice President, Booker T. Washington Insurance Co., Birmingham, Alabama... 1981 William H. Martin III . .President and Chief Executive Officer, Martin Industries, Inc., Florence, Alabama 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 Directories and Meetings Term expires JACKSONVILLE BRANCH Dec. 31 Appointed by Federal Reserve Bank C. DuBose Ausley Chairman of the Board, Capital City First National Bank, Tallahassee, Florida 1980 Robert E. Warfield, Jr. .Chairman and President, The First National Bank and Trust Company, Eustis, Florida ... 1981 W. M. Palmer, Jr Chairman, Florida Crushed Stone Company, Ocala, Florida 1982 Billy J. Walker President, Atlantic Bancorporation, Jacksonville, Florida 1982 Appointed by Board of Governors Joan W. Stein Partner, Regency Square Shopping Center, Jacksonville, Florida 1980 Jerome P. Keuper President, Florida Institute of Technology, Melbourne, Florida 1981 Copeland D. Newbern. .Chairman of the Board, Newbern Groves, Inc., Tampa, Florida 1982 MIAMI BRANCH Appointed by Federal Reserve Bank Tully F. Dunlap Chairman, Florida National Bank, Miami, Florida 1980 Jane C. Cousins President, Cousins Associates, Inc., Miami, Florida 1981 Alfred W. Roepstorff ..President, National Bank of Collier County, Marco Island, Florida 1981 M.G.Sanchez President and Chief Executive Officer, First Bankers Corporation of Florida, Pompano Beach, Florida 1982 Appointed by Board of Governors David G. Robinson President, Edison Community College, Fort Myers, Florida 1980 Roy W. Vandegrift, Jr. .President, Vandegrift-Williams Farms, Inc., Pahokee, Florida 1981 David H. Rush President, ACR Electronics, Inc., Hollywood, Florida 1982 NASHVILLE BRANCH Appointed by Federal Reserve Bank James R. Austin Chairman and Chief Executive Officer, Peoples National Bank, Shelbyville, Tennessee 1980 Ruth W.Ellis President, Mountain Empire Bank, Johnson City, Tennessee 1981 Charles J. Kane Chairman and Chief Executive Officer, Third National Bank in Nashville, Nashville, Tennessee 1982 JohnR. King President, The Mason and Dixon Lines, Inc., Kingsport, Tennessee 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 305 Term expires Appointed by Board of Governors Dec. 31 Robert C. H. Mathews, Jr President, R. C. Mathews, Contractor, Inc., Nashville, Tennessee 1980 John C. Bolinger, Jr Management Consultant, Knoxville, Tennessee. 1981 Cecelia Adkins Executive Director, Sunday School Publishing Board, Nashville, Tennessee 1982 NEW ORLEANS BRANCH Appointed by Federal Reserve Bank WilliamE. Howard, Jr. .Chairman of the Board, Commercial National Bank and Trust Company of Laurel, Laurel, Mississippi 1980 Robert H. Bolton President, Rapides Bank and Trust Company in Alexandria, Alexandria, Louisiana 1981 Patrick A. Delaney President, Whitney National Bank of New Orleans, New Orleans, Louisiana 1982 Ben M. Radcliff President, Ben M. Radcliff Contractor, Inc., Mobile, Alabama 1982 Appointed by Board of Governors George C. Cortright, Jr. Partner, George C. Cortright Company, Rolling Fork, Mississippi 1980 Horatio C. Thompson. .President, Horatio Thompson Investment, Inc., Baton Rouge, Louisiana 1981 LevereC. Montgomery .Chairman, Time Saver Stores, Inc., New Orleans, Louisiana 1982 District 7—CHICAGO Class A John F. Spies President, Iowa Trust and Savings Bank, Emmetsburg, Iowa 1980 Roger E. Anderson Chairman of the Board, Continental Illinois National Bank and Trust Co. of Chicago, Chicago, Illinois 1981 Patrick E. McNarny President, First National Bank of Logansport, Logansport, Indiana 1982 Class B Arthur J. Decio Chairman of the Board and Chief Executive Officer, Skyline Corporation, Elkhart, Indiana 1980 Dennis W. Hunt President, Hunt Truck Lines, Inc., Rockwell City, Iowa 1981 Mary Garst Manager of Cattle Division, Garst Company, Coon Rapids, Iowa 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 Directories and Meetings Term expires Class C Dec. 31 John Sagan Vice President-Treasurer, Ford Motor Company, Dearborn, Michigan 1980 Edward F. Brabec Business Manager, Chicago Journeymen Plumbers, Local Union 130, U.A., Chicago, Illinois 1981 Stanton R. Cook President, Tribune Company, Chicago, Illinois . 1982 DETROIT BRANCH Appointed by Federal Reserve Bank Lawrence A. Johns President, Isabella Bank and Trust, Mount Pleasant, Michigan 1980 Charles R. Montgomery President, Michigan Consolidated Gas Company, Detroit, Michigan 1981 James H. Duncan Chairman and Chief Executive Officer, First American Bank Corporation, Kalamazoo, Michigan 1981 Dean E. Richardson Chairman, Manufacturers National Bank of Detroit, Detroit, Michigan 1982 Appointed by Board of Governors Howard F.Sims President, Sims-Varner Associates, Inc., Detroit, Michigan 1980 Herbert H. Dow Director and Secretary, The Dow Chemical Company, Midland, Michigan 1981 Russell G. Mawby President and Trustee, W. K. Kellogg Foundation, Battle Creek, Michigan 1982 District 8—ST. LOUIS Class A Donald N. Brandin Chairman of the Board and Chief Executive Officer, The Boatmen's National Bank of St. Louis, St. Louis, Missouri 1980 George M. Ryrie President, First National Bank & Trust Co., Alton, Illinois 1981 Donald L. Hunt President, First National Bank of Marissa, Marissa, Illinois 1982 Class B Ralph C. Bain Vice President, Wabash Plastics, Inc., Evansville, Indiana 1980 Tom K. Smith, Jr St. Louis, Missouri 1981 Mary P. Holt President, Clothes Horse, Little Rock, Arkansas 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 307 Term expires Class C Dec. 31 William H. Stroube Associate Dean of Faculty Programs, Department of Agriculture, Western Kentucky University, Bowling Green, Kentucky 1980 William B. Walton Vice Chairman of the Board Emeritus, Holiday Inns, Inc., Memphis, Tennessee 1981 Armand C. Stalnaker.. .Chairman of the Board, General American Life Insurance Co., St. Louis, Missouri 1982 LITTLE ROCK BRANCH Appointed by Federal Reserve Bank Thomas E. Hays, Jr. ... President and Chief Executive Officer, The First National Bank of Hope, Hope, Arkansas 1980 Gordon E. Parker President and Chief Executive Officer, The First National Bank of El Dorado, El Dorado, Arkansas 1981 Shirley J. Pine Speech Communication, University of Arkansas at Little Rock, Little Rock, Arkansas 1981 William H. Bowen President and Chief Executive Officer, The Commercial National Bank of Little Rock, Little Rock, Arkansas 1982 Appointed by Board of Governors Ronald W. Bailey Executive Vice President and General Manager, Producers Rice Mill, Inc., Stuttgart, Arkansas 1980 G. Larry Kelley President, Pickens-Bond Construction Co., Little Rock, Arkansas 1981 E. Ray Kemp, Jr Vice Chairman of the Board and Chief Administrative Officer, Dillard Department Stores, Inc., Little Rock, Arkansas 1982 LOUISVILLE BRANCH Appointed by Federal Reserve Bank J. David Grissom Chairman and Chief Executive Officer, Citizens Fidelity Bank and Trust Company, Louisville, Kentucky 1980 Fred B. Oney President, The First National Bank of Carrollton, Carrollton, Kentucky 1981 Sister Eileen M. Egan.. .President, Spalding College, Louisville, Kentucky 1981 Howard Brenner Vice Chairman of the Board, Tell City National Bank, Tell City, Indiana 1982 Appointed by Board of Governors Richard O. Donegan ...Senior Vice President and Group Executive, General Electric Company, Louisville, Kentucky 1980 Vacant 1981 James F. Thompson Professor of Economics, Murray State University, Murray, Kentucky 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 Directories and Meetings Term expires MEMPHIS BRANCH Dec. 31 Appointed by Federal Reserve Bank Charles S. Youngblood .President and Chief Executive Officer, First Columbus National Bank, Columbus, Mississippi 1980 Stallings Lipford President, First-Citizens National Bank of Dyersburg, Dyersburg, Tennessee 1981 Bruce E. Campbell, Jr. .Chairman of the Board and President, National Bank of Commerce, Memphis, Tennessee ... 1981 Earl L. McCarroll President, The Farmers Bank & Trust Co., Blytheville, Arkansas 1982 Appointed by Board of Governors Frank A. Jones, Jr President, Dietz Forge Company, Memphis, Tennessee 1980 Benjamin P. Pierce President, Tyrone Hydraulics, Inc., Corinth, Mississippi 1981 Patricia W. Shaw Senior Vice President and Assistant Secretary, Universal Life Insurance Company, Memphis, Tennessee 1982 District 9—MINNEAPOLIS Class A James H. Smaby President, Commercial National Bank and Trust Company, Iron Mountain, Michigan 1980 Zane G. Murfitt President, Flint Creek Valley Bank, Philipsburg, Montana 1981 Henry N. Ness Senior Vice President, The Fargo National Bank, Fargo, North Dakota 1982 Class B Donald P. Helgeson Secretary and Vice President, Jack Frost, Inc., St. Cloud, Minnesota 1980 Russell G. Cleary Chairman and President, G. Heileman Brewing Company, LaCrosse, Wisconsin 1981 Joe F. Kirby Chairman, Western Surety Company, Sioux Falls, SouthDakota 1982 Class C Stephen F. Keating Minneapolis, Minnesota 1980 William G. Phillips Chairman and Chief Executive Officer, International Multifoods, Minneapolis, Minnesota .. 1981 Sister Generose Gervais . Administrator, St. Mary's Hospital, Rochester, Minnesota 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 309 Term expires HELENA BRANCH Dec. 31 Appointed by Federal Reserve Bank Harry W. Newlon President, First National Bank, Bozeman, Montana 1980 Jase O. Norsworthy President, The N.R.G. Company, Billings, Montana 1980 LynnD. Grobel President, First National Bank of Glasgow, Glasgow, Montana 1981 Appointed by Board of Governors Patricia P. Douglas ... .Fiscal Affairs Vice President, University of Montana, Missoula, Montana 1980 Norris E. Hanford Fort Benton, Montana 1981 District 10—KANSAS CITY Class A Wayne D. Angell President, Council Grove National Bank, Ottawa, Kansas 1980 JohnD. Woods Chairman and Chief Executive Officer, The Omaha National Bank, Omaha, Nebraska ... 1981 Howard K. Loomis President, The Peoples Bank, Pratt, Kansas 1982 Class B James G. Harlow, Jr. ..President and Chief Executive Officer, Oklahoma Gas and Electric Co., Oklahoma City, Oklahoma 1980 Alan R. Sleeper Alden, Kansas 1981 Charles C. Gates President and Chairman of the Board, Gates Rubber Company, Denver, Colorado 1982 Class C Joseph H. Williams ....Chairman and Chief Executive Officer, The Williams Companies, Tulsa, Oklahoma 1980 Doris M. Drury Professor of Economics, University of Denver, Denver, Colorado 1981 PaulH. Henson Chairman, United Telecommunications, Inc., Kansas City, Missouri 1982 DENVER BRANCH Appointed by Federal Reserve Bank William H. Vernon Director, and Former Chairman and Chief Executive Officer, Santa Fe National Bank, Santa Fe, New Mexico 1980 Delano E. Scott President and Chairman, The Routt County National Bank of Steamboat Springs, Steamboat Springs, Colorado 1980 Kenneth C. Naramore . .President, Stockmen's Bank & Trust Company, Gillette, Wyoming 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 Directories and Meetings Term expires Appointed by Board of Governors Dec. 31 AlvinF. Grospiron Denver, Colorado 1980 Caleb B. Hurtt President and Corporate Vice President, Martin Marietta Aerospace Corporation, Denver Division, Denver, Colorado 1981 OKLAHOMA CITY BRANCH Appointed by Federal Reserve Bank W. L. Stephenson, Jr. .. Chairman and Chief Executive Officer, Central National Bank & Trust Co. of Enid, Enid, Oklahoma 1980 V. M. Thompson, Jr Chairman and Chief Executive Officer, Utica National Bank and Trust Co., Tulsa, Oklahoma 1980 J. A. Maurer Chairman, Security National Bank & Trust Co., Duncan, Oklahoma 1981 Appointed by Board of Governors Samuel R. Noble Chairman of the Board, Noble Affiliates, Inc., Ardmore, Oklahoma 1980 Christine H. Anthony . .OklahomaCity, Oklahoma 1981 OMAHA BRANCH Appointed by Federal Reserve Bank F. Phillips Giltner President, First National Bank of Omaha, Omaha, Nebraska 1980 W. W. Cook, Jr President, Beatrice National Bank and Trust Company, Beatrice, Nebraska 1981 Joe J. Huckfeldt President, Gering National Bank and Trust Company, Gering, Nebraska 1981 Appointed by Board of Governors Robert G. Lueder President, Lueder Construction Company, Omaha, Nebraska 1980 GretchenS. Pullen Chairman of the Board, Swanson Enterprises, Inc., Omaha, Nebraska 1981 District 11—DALLAS Class A Frank Junell Chairman of the Board, The Central National Bank of San Angelo, San Angelo, Texas 1980 Lewis H. Bond Chairman of the Board and Chief Executive Officer, Texas American Bancshares Inc., Ft. Worth, Texas 1981 John P. Gilliam President and Chief Executive Officer, First National Bank in Valley Mills, Valley Mills, Texas 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 311 Term expires Class B Dec. 31 Kent Gilbreath Professor of Economics, Department of Economics and Finance, Baylor University, Waco, Texas 1980 J. Wayland Bennett Charles C. Thompson Professor of Agricultural Finance and Associate Dean, College of Agricultural Sciences, Texas Tech University, Lubbock, Texas 1981 Robert D. Rogers President, Texas Industries, Inc., Dallas, Texas. 1982 Class C Irving A. Mathews Chairman of the Board and Chief Executive Officer, Frost Bros., Inc., San Antonio, Texas.. 1980 Gerald D. Hines Owner, Gerald D. Hines Interests, Houston, Texas 1981 Margaret S. Wilson Chairman of the Board and Chief Executive Officer, Scarbroughs Stores, Austin, Texas 1982 EL PASO BRANCH Appointed by Federal Reserve Bank ClaudeE. Leyendecker .President, Mimbres Valley Bank, Deming, New Mexico 1980 Arnold B. Peinado, Jr. . Partner, AVC Development, El Paso, Texas ... 1981 Ernest M. Schur Chairman of the Executive Committee, The First National Bank of Odessa, Odessa, Texas 1981 Arthur L. Gonzales .... Chairman of the Board and Chief Executive Officer, First City National Bank of El Paso, El Paso, Texas 1982 Appointed by Board of Governors Chester J. Kesey C. J. Kesey Enterprises, Pecos, Texas 1980 JosefinaA. Salas-Porras. Executive Director, BI Language Services, El Paso, Texas 1981 A. J. Losee Shareholder, Losee, Carson, & Dickerson, Professional Association, Artesia, New Mexico .. 1982 HOUSTON BRANCH Appointed by Federal Reserve Bank RaymondL. Britton .. .Labor Arbitrator & Professor of Law, University of Houston, Bates College of Law, Houston, Texas 1980 JohnT. Cater President, Bank of the Southwest National Association, Houston, Texas 1981 Ralph E. David President, First Freeport National Bank, Freeport, Texas 1981 Will E. Wilson President and Chief Executive Officer, First Security Bank of Beaumont, N.A., Beaumont, Texas 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 Directories and Meetings Term expires Appointed by Board of Governors Dec. 31 Gene M. Woodfin Chairman of the Board and Chief Executive Officer, Marathon Manufacturing Company, Houston, Texas 1980 George V. Smith, Sr. .. .President, Smith Pipe & Supply, Inc., Houston, Texas 1981 Jerome L. Howard Chairman of the Board and Chief Executive Officer, Mortgage & Trust, Inc., Houston, Texas 1982 SAN ANTONIO BRANCH Appointed by Federal Reserve Bank John H. Garner President and Chief Executive Officer, Corpus Christi National Bank, Corpus Christi, Texas- 1980 John H. Holcomb Owner-Manager, Progreso Haciendas Company, Progreso, Texas 1981 Charles E. Cheever, Jr. . President, Broadway National Bank, San Antonio, Texas 1981 George Brannies Chairman of the Board and President, The Mason National Bank, Mason, Texas 1982 Appointed by Board of Governors Lawrence L. Crum Professor of Banking and Finance, The University of Texas at Austin, Austin, Texas 1980 Carlos A. Zuniga Partner, Zuniga Freight Services, Inc., Laredo, Texas 1981 Pat Legan Owner, Legan Properties, San Antonio, Texas . 1982 District 12—SAN FRANCISCO Class A Ole R. Mettler President and Chairman, Farmers & Merchants Bank of Central California, Lodi, California. 1980 Robert A. Young Chairman and President, Northwest National Bank, Vancouver, Washington 1981 Frederick G. Larkin, Jr. Chairman of the Executive Committee, Security Pacific National Bank, Los Angeles, California 1982 Class B J. R. Vaughan Partner, Richards, Watson, Dreyfuss & Gershon, Los Angeles, California 1980 Malcolm T. Stamper ... President, The Boeing Company, Seattle, Washington 1981 Clair L. Peck, Jnr Chairman of the Board, C. L. Peck Contractor, Los Angeles, California 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 313 Term expires Class C Dec. 31 Cornell C. Maier Chairman, President and Chief Executive Officer, Kaiser Aluminum & Chemical Corp., Oakland, California 1980 Alan C. Furth President, Southern Pacific Company, San Francisco, California 1981 Caroline L. Ahmanson .Chairman of the Board, Caroline Leonetti, Ltd., Beverly Hills, California 1982 LOS ANGELES BRANCH Appointed by Federal Reserve Bank James D. McMahon President, Santa Clarita National Bank, Newhall, California 1980 Harvey J. Mitchell President, First National Bank of San Diego County, Escondido, California 1981 Bram Goldsmith Chairman of the Board, City National Bank, Beverly Hills, California 1982 Fred W. Andrew President and Chief Operating Officer, Superior Farming Company, Bakersfield, California .. 1982 Appointed by Board of Governors Lola M. MeAlpin-Grant Assistant Dean, Loyola Law School, Los Angeles, California 1980 Harvey A. Proctor Chairman of the Board, Southern California Gas Company, Los Angeles, California 1981 TogoW. Tanaka President, Gramercy Enterprises, Los Angeles, California 1982 PORTLAND BRANCH Appointed by Federal Reserve Bank Kenneth Smith General Manager, The Confederated Tribes of Warm Springs, Warm Springs, Oregon 1980 Jack W. Gustavel President and Chief Executive Officer, First National Bank of North Idaho, Coeur d'Alene, Idaho 1981 Robert F. Wallace Chairman of the Board, First National Bank of Oregon, Portland, Oregon 1981 Merle G. Bryan President, Forest Grove National Bank, Forest Grove, Oregon 1982 Appointed by Board of Governors Loran L. Stewart Director, Bohemia, Inc., Eugene, Oregon 1980 Jean Mater Vice President, Mater Engineering, Ltd., Corvallis, Oregon 1981 Phillip W. Schneider ... Northwest Regional Executive, National Wildlife Federation, Portland, Oregon 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 Directories and Meetings Term expires SALT LAKE CITY BRANCH Dec. 31 Appointed by Federal Reserve Bank Mary S. Knox Chairman, Idaho State Bank, Glenns Ferry, Idaho 1980 Spencer F. Eccles President and Chief Operating Officer, First Security Corporation, Salt Lake City, Utah .. 1981 David P. Gardner President, University of Utah, Salt Lake City, Utah 1981 Fred H. Stringham President, Valley Bank and Trust Company, South Salt Lake, Utah 1982 Appointed by Board of Governors J. L. Terteling President, The Terteling Company, Inc., Boise, Idaho 1980 Wendell J. Ashton Publisher, Deseret News Publishing Company, Salt Lake City, Utah 1981 Robert A. Erkins Geothermal Agri/Aquaculturist, White Arrow Ranch, Bliss, Idaho 1982 SEATTLE BRANCH Appointed by Federal Reserve Bank Rufus C. Smith Chairman Emeritus, The First National Bank of Enumclaw, Enumclaw, Washington 1980 Douglas S. Gamble President and Chief Executive Officer, Pacific Gamble Robinson Co., Seattle, Washington . 1981 C. M. Berry President, Seattle-First National Bank, Seattle, Washington 1981 Donald L. Mellish Chairman of the Board, National Bank of Alaska, Anchorage, Alaska 1982 Appointed by Board of Governors Virginia L. Parks Vice President for Finance and Treasurer, Seattle University, Seattle, Washington 1980 GeorgeH.Weyerhaeuser.President and Chief Executive Officer, Weyerhaeuser Company, Federal Way, Washington 1981 Merle D. Adlum President, Maritime Trades Department, Puget Sound District Council, AFL/CIO, Seattle, Washington 1982 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 315 Presidents and Vice Presidents Federal Reserve President Bank First Vice President Vice Presidents or branch Boston Frank E. Morris Daniel Aquilino ' R. W. Eisenmenger ] James A. Mclntosh T. F. Hunt, Jr.1 Niels 0. Larsen ' Richard A. Walker l T. E. Cimeno, Jr. F. K. Cummings Norman S. Fieleke James W. Grieb Luther M. Hoyle, Jr. Kenneth H. Kulesza Robert J. Listfield Stephen K. McNees Alicia H. Munnell D. A. Pelletier Richard E. Randall Laurence H. Stone Walter T. Sullivan Richard F. Syron Thomas Vangell Herbert F. Wass New York.. Anthony M. Solomon Peter Fousek l Ronald B. Gray l T. M. Timlen, Jr. P. B. Henderson, Jr.1 Scott E. Pardee ' Thomas C. Sloane • Peter D. Sternlight ' James O. Aston Peter Bakstansky Suzanne Cutler Chester B. Feldberg Henry S. Fujarski Margaret Greene Whitney R. Irwin Roger M. Kubarych Edwin R. Powers A. M. Puckett Geri M. Riegger Irwin D. Sandberg F. C. Schadrack, Jr. Robert C. Thoman Richard Vollkommer H. W. Whiteman, Jr. H. David Willey Buffalo John T. Keane Philadelphia David P. Eastburn K. G. Adack ' Edward G. Boehne i Richard L. Smoot John D. Johnson J Thomas K. Desch Peter M. DiPlacido Guy H. Edwards James F. Gaylord Hiliary H. Hollo way A. A. Kudelich Donald J. McAneny Donald J. Mullineaux L. C. Murdoch, Jr. William H. Stone, Jr. Ronald D. Watson Cleveland .. Willis J. Winn John M. Davis, Jr.1 W. H. Hendricks ' W. H. MacDonald George E. Booth, Jr. Randolph G. Coleman Harry W. Huning R. Thomas King James H. Nash, Jr. T. E. Orminston, Jr. Lester M. Selby Harold J. Swart Donald G. Vincel Cincinnati . Robert E Showalter ' Charles A Cerino Pittsburgh . Donald C. Benjamin Richmond . Robert P. Black Welford S. Farmer ' James Parthemos * Jimmie R. Monhollon John F. Rand ! Joseph F. Viverette l Elizabeth W. Angle L. W. Bostian, Jr. J. A. Broaddus, Jr. Timothy Q. Cook George B. Evans Roy L. Fauber William C. Glover R. B. Hollinger, Jr. Richard L. Hopkins William D. Martin III A. V. Myers, Jr. C. D. Porter, Jr. Aubrey N. Snellings Andrew L. Tilton James F. Tucker Digitized forF oFrR nAotSesE sRee last page of listing. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 Directories and Meetings Presidents and Vice Presidents—Continued Federal Reserve President Bank First Vice President Vice Presidents or branch Baltimore R. D. McTeer, Jr.1 William E. Pascoe III Gerald L. Wilson Charlotte Stuart P. Fishburne l RnvH 7 F.iihanks Thomas E. Snider Culpeper 2 . John G. Stoides A. D. Tinkelenberg Atlanta .... William F. Ford Harry Brandt l George C. Guynn ' Robert P. Forrestal Billy H. Hargett l Arthur H. Kantner ! Brown R. Rawlings ' W. R. Caldwell William N. Cox III W. M. Davis Delmar Harrison Robert E. Heck John R. Kerr William G. Pfaff H. Terry Smith John M. Wallace Edward Willingham Birmingham Hiram J. Honea Jacksonville Charles D. East Miami F. J. Craven, Jr. Nashville Jeffrey J. Wells New Orleans James D Hawkins Chicago ... Robert P. Mayo Brian Carey l James R. Morrison ' Daniel M. Doyle Karl A. Scheld ! Harry S. Schultz l Carl E. Vander Wilt ! Richard P. Anstee Paul J. Bettini Harris C. Buell, Jr. George W. Cloos Franklin D. Dreyer Robert M. Fitzgerald Charles W. Furbee Daniel P. Kinsella Joseph C. Kvasnicka Robert A. Ludwig William T. Newport Dorothy M. Nichols Louis J. Purol William Rooney R. M. Scheider Ruby L. Sloan Adolph J. Stojetz Ruth V. Vilona Eugene J. Wagner Patricia W. Wishart Allen G. Wolkey Detroit William C. Conrad ' F. S. Dominick St. Louis... Lawrence K. Roos Anatol B. Balback ' Joseph P. Garbarini l Donald W. Bradley G. Glass ! F. G. Russell, Jr.1 Moriarty, Jr. Harold E. Uthoff l Ruth A. Bryant Carol B. Claypool Charles R. Halbrook James R. Kennedy William J. Sneed Warren G. Snover Robert W. Thomas Delmer Weisz Little Rock. John F. Breen Louisville Donald L. Henrv l Memphis Robert E. Matthews For notes see last page of listing. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 317 and Vice Presidents—Continued Federal Reserve President Bank First Vice President Vice Presidents or branch Minneapolis E. Gerald Corrigan Melvin L. Burstein ! John P. Danforth ! Thomas E. Gainor L. W. Femelius ! J. A. MacDonald ' Sheldon L. Azine Lester G. Gable Phil C. Gerber Gary P. Hanson Bruce J. Hedblom Douglas R. Hellweg Howard L. Knous David R. MacDonald Clarence W. Nelson Arthur J. Rolnick James R. Taylor R. W. Worcester Helena Betty J. Lindstrom Kansas City Roger Guffey James R. Bell ' W. T. Billington ! Henry R. Czerwinski James R. Bowen ' Thomas E. Davis ! James A. Cacy Cecil B. Foley Jay K. Mast G. H. Miller, Jr. M. L. Mothersead Barry K. Robinson Robert E. Scott Jerry D. Shreeves Donald A. Slover Denver ... Wayne W. Martin ' James F. O'Meara Oklahoma City.... William G. Evans Omaha ... Robert D. Hamilton Dallas Ernest T. Baughman Joseph E. Burns ! G. C. Cochran III l Robert H. Boykin Harry E. Robinson ' Tony J. Salvaggio ' C. J. Pickering Larry J. Reck George F. Rudy Neil B. Ryan E. W. Vorlop, Jr. El Paso Joel L. Koonce, Jr. Houston ... J. Z. Rowe San Antonio Carl H. Moore San Francisco John J. Balles John J. Carson ' Kenneth A. Grant • John B. Williams Michael W. Keran ' Donald V. Masten ' Kent O. Sims ' Joseph R. Bisignano William M. Burke Robert C. Dietz H. Peter Franzel George P. Galloway Harry W. Green Warren H. Hutchins Henry B. Jamison Hector M. Martin Rix Maurer, Jr. Michael J. Murray Louis E. Reilly Eugene A. Thomas Thomas Warren Los Angeles Richard C. Dunn l James M. Davis Portland... Angelo S. Carella Salt Lake City A. Grant Holman Seattle Gerald R. Kelly l 1. Indicates Senior Vice Presidents. 2. Culpeper Center is not considered a branch. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 Directories and Meetings Conference of Presidents Conference of First Vice Presidents The presidents of the Federal Reserve Banks are organized into a Conference of The Conference of First Vice Presidents Presidents that meets from time to time to of the Federal Reserve Banks was orgaconsider matters of common interest and nized in 1969 to meet from time to time, to consult with and advise the Board of primarily for the consideration of opera- Governors. At a meeting held September tional matters. On September 20, 1979, 18-19, 1979, Ernest T. Baughman, Presi- Robert H. Boykin, First Vice President of dent of the Federal Reserve Bank of the Federal Reserve Bank of Dallas, was Dallas, was elected Chairman, and Roger elected Chairman, and Henry R. Czerwin- Guffey, President of the Federal Reserve ski, First Vice President of the Federal Bank of Kansas City, was elected Vice Reserve Bank of Kansas City, was elected Chairman, for 1980. Martha T. Sukovich Vice Chairman of the conference for of the Federal Reserve Bank of Dallas was 1980. Martha T. Sukovich and Richard K. appointed Secretary, and Richard K. Rasdall, Jr., were appointed Secretary Rasdall, Jr., of the Federal Reserve Bank and Assistant Secretary respectively. of Kansas City was appointed Assistant Secretary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

321 Index Acceptances, bankers (See Bankers Banking supervision and regulation by acceptances) Federal Reserve System—Continued Assets and liabilities Policy actions and statement, 78, 227 Banks, by class, 273 Regulations (See Regulations, Board Board of Governors, 241 of Governors) Federal Reserve Banks, 246-51 Regulatory improvement project, 167, Automatic transfer accounts, 192 169, 234 Board of Governors (See also Federal Balance of payments, review of 1980, Reserve System) 24-29 Annual Reports to Congress, 169-90 Bank holding companies Consumer Advisory Council, 169, Board policy statements, 78-79, 220, 173, 182, 296 231 Delegation of authority, actions Foreign activities, 219, 220, 225 under, 223, 226, 231 Inspection, 219, 220, 221-22 Discount rates at Federal Reserve Legislation Banks, 80-86 Enacted, 214 Financial statements, 240-44 Recommendations, 195, 196, 197 Interpretations, 233 Litigation, 198-202 Legislative recommendations, 195-97 Nonbanking activities, 73 Litigation, 198-208 Number and assets, 219 Members and officers, list, 292 Policy statements, 78, 227, 231-32 Policy actions and statements, 65-86, Regulation by Federal Reserve System, 168,220, 227, 231 222-28 Publications (See Publications) Bank mergers and consolidations, 223- Regulations (See Regulations, Board 24, 226, 282-87 of Governors) Bankers acceptances Regulatory improvement project, 167- Authority to purchase and to enter 68, 169, 233, 234 into repurchase agreements, Salaries, 242 87-89 Training (See Training) Federal Reserve Banks Branch banks Earnings, 238, 258 Changes in number, 279 Holdings, 238, 246, 248, 250 Federal Reserve Open market transactions during Bank premises, 238, 264 1980, 256 Directors, 297-314 Repurchase agreements, 246, 248, 250, Vice presidents in charge, 315-17 256 Foreign, by U.S. banking organiza- Banking offices tions, 220, 224-26 Changes in number, 278 Bretton Woods Agreements, 216 Par offices, number, 280 Banking supervision and regulation by Capital accounts Federal Reserve System Banks, by class, 273 In 1980, 219-33 Federal Reserve Banks, 247, 249, 251 Litigation, 198, 202, 203, 204, 205, Clearing and collection (See Transfers of 206, 208 funds) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 Index Commercial banks Directors, Federal Reserve Banks and Assets and liabilities, 273 branches, 196, 297-314 Banking offices, changes in number, Discount rates at Federal Reserve Banks 278 (See Interest rates) Number, by class, 273 Discount window, 65, 192 Supervision and regulation by Discounts and advances by Federal Federal Reserve System, 219-33 Reserve Banks (See Federal Reserve Transfers of funds (See Transfers of Banks: Loans) funds) Dividends, Federal Reserve Banks, 237, Community Reinvestment Act, 168, 174 260, 262 Condition statement of Federal Reserve Banks, 246-51 Consumer Advisory Council, 169, 173, Earnings of Federal Reserve Banks, 182, 296 237, 258, 262 Consumer and community affairs Economy in 1980, 4-12 Annual Reports to Congress, 169-90 Educational activities, consumer (See Board actions, review, 167-69 Training) Community Reinvestment Act, 168, Electronic fund transfers (See Transfers 174 of funds) Consumer Advisory Council, 169, 173, Equal Credit Opportunity Act, Annual 182, 296 Report to Congress, 176-83 Publications, 167, 169, 176, 178, 180, Examinations and inspections 187 Bank holding companies (See Bank Training, consumer, 167, 169, 174, holding companies) 176, 180, 181, 187 Federal Reserve Banks, 237 Transfers of funds (See Transfers Foreign operations of U.S. banking of funds) organizations, 219, 220, 224-26 Truth in Lending (See Truth in Improvements, 220 Lending) Schools, 183, 222 Credit (See also Loans) Specialized, 221 Equal Credit Opportunity Act, State member banks, 177, 219-20, 176-83 230-31, 232-33 Farm, legislation, 218 Expenses Stocks, 71, 232 Board of Governors, 240-44 Truth in Lending (See Truth in Federal Reserve Banks, 237, 258, 262 Lending) Credit unions, 204, 212 Farm credit, legislation, 218 Federal Advisory Council, 295 Debt ceiling and public debt, 215, 216 Federal agency securities Defense production loans, 239 Authority to purchase and to enter Depository Institutions Deregulation into repurchase agreements, 87and Monetary Control Act of 1980, 89, 113, 133, 151, 165 209-15 Federal Reserve Bank holdings and Deposits earnings, 238, 246, 248, 250, 254 Banks, by class, 273 Futures and forward contracts, Federal Reserve Banks, 247, 249, Board policy actions, 220 251,275,277 Open market transactions of Federal Interest rates (See Interest on deposits) Reserve System during 1980, 256 Reserve requirements (See Reserve Repurchase agreements, 246, 248, 250, requirements) 254, 256 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 323 Federal Financial Institutions Examina- Federal Reserve notes—Continued tion Council, 173, 183, 217, 222 Cost of printing, issue, and redemp- Federal Financing Bank, 88 tion, 242 Federal Open Market Committee Interest paid to U.S. Treasury, 238, Audit of System Open Market 260, 262 Account, 237 Legislation, 210 Continuing authorizations, review, 112 Federal Reserve Reform Act of 1977, Litigation, 202, 204 196 Meetings, 87, 294 Federal Reserve System (See also Board Members and officers, 294 of Governors) Policy actions, 87-166 Banking supervision and regulation Federal Reserve Act, legislative recom- by, 219-33 mendation, 195 Consumer affairs (See Consumer and Federal Reserve Agents, 297 community affairs) Federal Reserve Banks Foreign currency operations (See Assessments for expenses of Board of Foreign currency operations) Governors, 242, 260, 262 Map of Federal Reserve Districts, 289 Bank premises, 238, 246, 248, 250, Membership, 233 264 Payments mechanism, development Branches (See Branch banks) (See Transfers of funds) Capital accounts, 247, 249, 251 Training (See Training) Chairmen and deputy chairmen, 297 Federal Trade Commission Act, 183-87, Condition statement, 246-51 215 Delegation by Board of authority, Financial Institutions Regulatory and Interest Rate Control Act of 1978, actions under, 223, 226, 231 195 Directors, 196, 297-314 Financial Institutions Supervisory Act, Discount rates [See Interest rates) 221-22 Dividends, 237, 260, 262 Financial markets and monetary policy, Earnings and expenses, 237, 258, 262 13-23 Examination or audit, 237 Foreign banks, 65, 195, 197, 226, 228-30 Loans Foreign currency operations Discounts and advances, 246, 248, Authorization and directive, 87, 250, 258, 274, 276 90-92, 112, 113, 125 Holdings and earnings, 238 Federal Reserve earnings on foreign Interest rates, 267 currencies, 258 Lending authority, legislation, 65, Review, 112 192, 210 Freedom of Information Act, 207 Volume, 265 Officers and employees, number and salaries, 266 Operations, volume and cost, 239, Gold, tables on gold certificate accounts 265, 266 of Federal Reserve Banks and gold Payments mechanism, development stock, 246, 248, 249, 250, 251, 274, 276 (See Transfers of funds) Government in the Sunshine Act, Presidents and vice presidents, 315-17 litigation, 207 Profit and loss, 260 U.S. government securities (See U.S. government securities) Federal Reserve notes Home Mortgage Disclosure Act, 66, Condition statement data, 246-51 187, 216-17 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 Index Insured commercial banks Margin requirements Assets and liabilities, 273 Regulation T, 71 Banking offices, changes in number, Table, 272 278 Member banks (See also National banks) Interest on deposits (See also Interest Affiliates, legislative recommendarates) tions, 195-96 Foreign banks, 65 Assets, liabilities, and capital ac- Legislation, 211 counts, 273 Maximum rates payable on time and Banking offices, changes in number, savings deposits, table, 270 278 Regulation Q, 65, 70 Foreign activities, 224-25 Interest rates (See also Interest on Loans deposits) Borrowings from Federal Reserve Federal Reserve Banks Banks (See Federal Reserve Changes, 80-86 Banks) Table on rates, 267 Executive officers and certain Interlocking relationships, 70, 232 others, 195, 231 International banking, 65, 69, 197, 210, Number, 273 219, 220, 224-30 Reserve requirements (See Reserve re- International Banking Act, 65, 195, quirements) 197, 225, 228, 230 Reserves and related items, 274-77 International developments, review, State member banks (See State member 24-29 banks) Interpretations, Board of Governors, Transfers of funds (See Transfers of 72, 73, 182, 198, 233 funds) Investments Mergers and consolidations, 223-24, 226, Banks, by class, 273 282-87 Federal Reserve Banks, 246, 248, 250 Monetary Control Act of 1980, 65, 80, Foreign, by U.S. banking organiza- 191, 209 tions, 225, 227-28 Monetary policy Financial markets relative to, 13-23 Reports to Congress, 30-62 Review of 1980, 3-29 Labor market developments, 9 Mortgage loans, legislation, 66, 168, Legislation 174, 187, 216-17 Enacted, 209-18 Mutual savings banks, 278 Recommendations, 195-97 Litigation National banks (See also Member banks) Bank holding companies, 198-202 Assets and liabilities, 273 Board procedures and regulations, Banking offices, changes in number, challenges, 202-08 278 Loans (See also Credit) Foreign branches, 225 Affiliates of member banks, legislative Legislation, 214 recommendations, 195-96 Number, 273 Banks, by class, 273 Negotiable order of withdrawal (NOW) Defense production, 239 accounts, 184, 192, 209, 212 Executive officers of member banks Nonmember banks and certain others, 195, 231 Assets and liabilities, 273 Federal Reserve Banks (See Federal Banking offices, changes in number, Reserve Banks) 278 Mortgages, legislation, 66, 168, 174, Number, 273 187, 216-17 Reserve requirements, 65, 66, 191, 209 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 325 Par banking offices, number, 280 Regulations, Board of Governors— Payments mechanism, development (See Continued Transfers of funds) E, Electronic Fund Transfers, 67, 167 Policy actions F, Securities of Member State Banks, Board of Governors 69, 230 Discount rates at Federal Reserve G, Securities Credit by Persons other Banks, 80-86 than Banks, Brokers, or Dealers, Regulations (See Regulations, Board 232-33 of Governors) H, Membership of State Banking Statements and rules, 78-80, 168, Institutions in the Federal Re- 220, 227, 231 serve System, 221 Federal Open Market Committee K, International Banking Operations, Authority to effect transactions in 65, 69 System Open Market Account L, Management Official Interlocks, Domestic operations, 87-90, 93, 70, 232 98, 106, 113, 114, 120, 125, O, Loans to Executive Officers, Di- 129, 133, 134, 139, 145, 151, rectors, and Principal Share- 159, 165 holders of Member Banks, 231 Foreign currency operations, 87, Q, Interest on Deposits, 65, 70 90-92, 112, 113, 125 T, Credit by Brokers and Dealers, Review, 112 71, 233 Presidents and vice presidents of Federal Y, Bank Holding Companies and Reserve Banks Change in Bank Control, 73 Conferences of Presidents and of First Z, Truth in Lending, 74, 167-68, Vice Presidents, 318 169-73, 205, 207 List, 315-17 Regulatory improvement project, 167- Salaries of presidents, 266 68, 169, 233, 234 Price stability, sunset of Credit Repurchase agreements Control Act, 217 Authority to purchase and to enter Prices, 10 into, 87-89 Pricing principles for System services, 79 Bankers acceptances, 87-88, 246, 248, Profit and loss, Federal Reserve Banks, 250, 256 260 Federal agency securities, 87-89, 246, Publications 248, 250, 254, 256 Consumer, 167, 169, 176, 178, 180, U.S. government securities, 87-89, 187 246, 248, 250, 254, 256, 274, 276 Technical, 168, 173, 220, 221, 223, Reserve requirements 224, 227, 232 Depository institutions, 65, 66, 191, 209 Regulations, Board of Governors (See Foreign banks, 65, 197 also Regulatory improvement Member banks project) Changes, 65, 66 A, Extensions of Credit by Federal Table, 267 Reserve Banks, 65, 192 Reserves, member banks B, Equal Credit Opportunity, 182 Reserve requirements (See Reserve C, Home Mortgage Disclosure, 66, requirements) 187, 188 Reserves and related items, 274-77 Credit Restraint, 75 D, Reserves of Member Banks and Salaries change in title to Reserve Re- Board of Governors, 242 quirements of Depository Institu- Federal Reserve Banks, 266 tions, 65, 66 Schools (See Training) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 Index Securities (See specific types) Transfers of funds—Continued Securities Acts Amendments of 1975, Electronic fund transfers, 67, 167-69, 221 174, 175 Silver futures market, 215 Federal Reserve operations, volume Small Business Regulatory Flexibility and cost, 239, 265, 266 Act, 215 Negotiable order of withdrawal Special drawing rights, 246, 248, 250, (NOW) accounts, 184, 192, 209, 274, 276 212 State member banks (See also Member Payments mechanism, development, banks) 236 Applications by, 231 Truth in Lending Assets and liabilities, 273 Act Banking offices, changes in number, Annual Report to Congress, 169-76 278 Board's actions, review, 167-69 Control of, changes, 224 Legislation, 213 Examination, 177, 219, 220, 221-22 Litigation, 205, 207 230-33 Regulation Z, 74, 167-68, 205, 207 Foreign activities, 219, 220, 225 Mergers and consolidations, 223-24, U.S. government securities 226, 282-87 Authority to buy, to enter into repur- Number, 219, 273 chase agreements, and to lend, Securities, 69, 230 87-89, 113, 133, 151, 165 Supervision and regulation (See Banking Bank holdings, by class of bank, 273 supervision and regulation by Fed- Federal Reserve Banks eral Reserve System) Authority to buy directly from U.S. System Open Market Account Treasury, 88 Audit, 237 Earnings, 237, 238, 258 Authority to effect transactions Holdings, 238, 246, 248, 250, 252, Domestic operations, 87-90, 93, 98, 274, 276 106, 113, 114, 120, 125, 129, Futures and forward contracts, Board 133, 134, 139, 145, 151, 159, policy actions, 220 165 Litigation, 207 Foreign currency operations, 87, Open market transactions, 256 90-92, 112, 113, 125 Repurchase agreements, 246, 248, 250, Review, 112 254, 256, 274, 276 Special certificates purchased directly Thrift institutions, 194, 211, 212 from U.S. Treasury, 255 Training Usury laws, 174, 213 Consumer, 167, 169, 174, 176, 180, 181, 187 V loans, 239 Interagency, 183 Staff, 222 Transfers of funds Wage stability, sunset of Credit Control Automatic transfer accounts, 192 Act, 217 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis