Annual Report of the Federal Reserve Board, 1981

Annual wort 1981 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., April 15, 1982 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-Eighth Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1981. 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 1981 3 INTRODUCTION 4 THE ECONOMY IN 1981 6 Household sector 7 Business sector 8 Government sector 9 Labor market developments 10 Prices 12 MONETARY POLICY AND FINANCIAL MARKETS 13 Monetary aggregates and interest rates 19 Aggregate flows of funds 23 INTERNATIONAL DEVELOPMENTS 24 Current account balance 24 Capital transactions 26 Operations in foreign currencies 28 MONETARY POLICY REPORTS TO CONGRESS 28 Report on February 25, 1981 46 Report on July 20, 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 2 Records, Operations, and Organization 65 RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS 65 Regulation C (Home Mortgage Disclosure) 65 Regulation D (Reserve Requirements of Depository Institutions) 67 Regulation D (Reserve Requirements of Depository Institutions) and Regulation Q (Interest on Deposits) 69 Regulation E (Electronic Fund Transfers) 69 Regulation F (Securities of Member State Banks) 69 Regulation J (Collection of Checks and Other Items and Wire Transfers of Funds) 70 Regulation K (International Banking Operations) 71 Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending) 72 Regulation Q (Interest on Deposits) 73 Regulation T (Credit by Brokers and Dealers) 73 Regulation Y (Bank Holding Companies and Change in Bank Control) 74 Regulation Z (Truth in Lending) 74 Policy statements and other actions 76 1981—Discount rates 84 RECORD OF POLICY ACTIONS—FEDERAL OPEN MARKET COMMITTEE 84 Authorization for domestic open market operations 86 Domestic policy directive 87 Authorization for foreign currency operations 89 Foreign currency directive 90 Meeting held on February 2-3, 1981 98 Meeting held on March 31, 1981 108 Meeting held on May 18, 1981 113 Meeting held on July 6-7, 1981 121 Meeting held on August 18, 1981 128 Meeting held on October 5-6, 1981 134 Meeting held on November 17, 1981 140 Meeting held on December 21-22, 1981 147 CONSUMER AND COMMUNITY AFFAIRS 148 Educational activities 148 Truth in Lending 153 Equal Credit Opportunity 156 Home Mortgage Disclosure 157 Federal Trade Commission Act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 LEGISLATIVE RECOMMENDATIONS 161 Reserve requirements on money market mutual funds 161 Exemption of smaller institutions from reserve requirements 161 Helping regulatory agencies to deal with ailing depository institutions 162 Amendments to Financial Institutions Regulatory and Interest Rate Control Act of 1978 163 Financial transactions with affiliates 163 Expansion of Class C directors 163 Amendments to the International Banking Act 165 LITIGATION 165 Bank holding companies—Antitrust action —Review of Board actions 168 Other litigation involving challenges to Board procedures and regulations 175 LEGISLATION ENACTED 175 Increases in debt ceiling 175 Cash Discount Act 175 International Investment Survey Act of 1976 176 Economic Recovery Tax Act of 1981 177 Defense Production Act and Gold Commission 177 Overseas Private Investment Corporation Amendment Act of 1981 177 George Washington Commemorative Coin Act 177 Farm Credit Administration 178 International banking facilities 178 Social security 180 BANKING SUPERVISION AND REGULATION 180 Supervision for safety and soundness 185 Regulation of U.S. banking structure 190 Enforcement of other laws and regulations 194 REGULATORY SIMPLIFICATION 194 Progress during 1981 194 Board actions and staff work 199 FEDERAL RESERVE BANKS 199 Pricing of services 201 Developments in payments mechanism 201 Examination 202 Income and expenses 203 Federal Reserve Bank premises 203 Holdings of securities and loans 203 Loan guarantees for defense production 204 Volume and cost of operations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 BOARD OF GOVERNORS 205 Financial statements 211 STATISTICAL TABLES 212 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1981 214 2. Statement of condition of each Federal Reserve Bank, December 31, 1981 and 1980 218 3. Federal Reserve Bank holdings of U.S. government and federal agency securities, December 31, 1979-81 221 4. Federal Reserve Bank holdings of special short-term Treasury certificates purchased directly from the United States, 1972-81 222 5. Federal Reserve open market transactions, 1981 224 6. Income and expenses of Federal Reserve Banks, 1981 228 7. Income and expenses of Federal Reserve Banks, 1914-81 232 8. Bank premises of Federal Reserve Banks and Branches, December 31, 1981 233 9. Volume of operations in principal departments of Federal Reserve Banks, 1978-81 234 10. Principal operations of Federal Reserve Banks—Expense, ratio of expense for each operation to total expenses, and average number of employees, 1978-81 234 11. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1981 235 12. Federal Reserve Bank interest rates, December 31, 1981 235 13. Reserve requirements of depository institutions 238 14. Maximum interest rates payable on time and savings deposits at federally insured institutions 240 15. Margin requirements 241 16. Principal assets and liabilities, and number of insured commercial banks, by class of bank, June 30, 1981 and 1980 242 17. Reserves of depository institutions, Federal Reserve Bank credit, and related items—Year-end, 1918-81, and month-end, 1981 246 18. Changes in number of banking offices in the United States, 1981 248 19. Mergers, consolidations, acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1981 257 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS FEDERAL RESERVE DIRECTORIES AND MEETINGS 260 Board of Governors of the Federal Reserve System 262 Federal Open Market Committee 263 Federal Advisory Council 264 Consumer Advisory Council 265 Federal Reserve Banks and Branches 289 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Part 1 Monetary Policy and the U.S. Economy in 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction Economic activity in the United States reduce rates of price increase in marincreased little on balance during kets for many goods and services. 1981, extending the sluggishness that Damping of inflation and inflation began in 1979. Over this period, expectations continued to be the pringrowth in nominal gross national cipal objective of monetary policy in product was constrained by the appli- 1981. To this end, the ranges estabcation of a monetary policy aimed at lished for the monetary aggregates by damping deeply entrenched inflation- the Federal Open Market Committee ary pressures. The rate of inflation, provided for a slower expansion in which had increased in 1980, slowed money and credit than in 1980. Over appreciably during the course of the four quarters of 1981, growth of 1981. By year-end there were indica- the narrow money stock fell short of tions of more moderate wage and its target range, but growth of the price behavior that could permit sus- broader measures exceeded the upper tained progress toward lower rates ends of their ranges. These disparate of inflation in an environment of more movements were attributable largely satisfactory economic performance. to efforts by the public to trim hold- The rebound in economic activity ings of narrow money, especially in that began in mid-1980 continued view of the increasing availability and into early 1981, but aggregate de- popularity of financial assets paying mand soon leveled out, and in the market-related rates of interest and final quarter of the year real gross included in the broader measures of national product turned down sharply. money. Payroll employment, which had been Interest rates remained unusually rising moderately, declined in the high and volatile in 1981. Short-term fourth quarter to a level only slightly rates were close to record levels at the above that of a year earlier, and the start of the year and, after a moderate unemployment rate at year-end was decline, returned to about those levels close to the highest since World in late spring. But as the economy War II. weakened and reserve positions eased, Abundant agricultural supplies, short-term rates dropped sharply. In combined with weak demand, caused contrast, long-term interest rates reinflation in food prices to ease signifi- mained on a generally upward course cantly in 1981. The stability of petro- throughout the year, in large part releum markets after the initial effect of flecting continued concerns in finanthe decontrol of oil prices also con- cial markets about huge current and tributed to a deceleration in the over- prospective federal deficits and the all price level as the year progressed. difficulties of achieving progress More fundamentally, the lengthening against inflation in such circumperiod of economic slack began to stances. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1981 In 1981 the nation made substantial was federal purchases of goods and progress in reversing the acceleration services. of inflation. In the process, however, Industrial production rose slightly production declined, and employment during the first half of 1981, but fell posted disappointingly small gains. nearly 7 percent between July and The economy was expanding rapidly December. Decreases were particuas the year began, continuing the re- larly large in the output of construcbound from the 1980 recession. But tion supplies and of consumer durable it began losing momentum as the year goods; in contrast, production of deprogressed, and was contracting fense and space equipment continued sharply in the closing months of the to expand. The widespread declines year. On balance, real gross national in overall production caused capacity product in the fourth quarter was only utilization rates for both manufacturabout % percent higher than a year ing and materials to fall to about 73 earlier. Thus 1981 extended the percent by December, the lowest period of sluggish economic perfor- levels since 1975. mance that began in 1979. Over this The continued sluggishness of ecospan, anti-inflation policy confronted nomic growth limited the demand for the powerful upward momentum in labor, and job gains were meager in prices, and as nominal GNP growth 1981. Nonfarm employment rose was constrained, little room was left moderately through the first three for increases in real activity. By the quarters of 1981, but heavy job losses end of 1981, however, mounting evi- in the fourth quarter left payrolls at dence suggested that the psychology year-end only 150,000 higher than that had contributed to the persis- they were at the end of 1980. The tence of inflation was diminishing in trade and service sectors accounted intensity, and that higher unemploy- for most of this increase; employment ment and lower capacity utilization declined in manufacturing and conwere at last forcing a moderation in struction, falling by December to wage- and price-setting decisions. levels below the 1980 trough. Over Sizable public and private de- the year as a whole, the rise in total mands for credit in 1981, occurring employment did not keep pace with in an environment of monetary re- the expansion of the labor force, even straint, were reflected in unusually though the number of new job seekers high interest rates. The high cost of rose much more slowly than during financing exerted disproportionate the 1970s. Consequently, the unemstrains on those sectors of the econ- ployment rate, after declining slightly omy in which spending is heavily re- through the first half of 1981, rose liant on credit. Homebuilding, state steadily through most of the second and local construction, and consumer half and by December reached 8.8 durable goods were comparatively percent, fractionally below its 1975 weak in 1981. The only component postwar high. of aggregate demand that grew rapidly Inflation slowed noticeably in 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1981 5 Indicators of Economic Performance Percentage change, Q4 to Q4 Ratio Real (i\P ' final sales Index, 1967=100 Millions of units Housing starts 1975 1977 1979 1981 1975 1977 1979 1981 All data are seasonally adjusted at an- terms of 1972 dollars. The inventory-sales nual rates. The industrial production index ratio is based on real (1972 dollars) manu- (monthly) is Federal Reserve data; the un- facturing and total trade sales and inventories. employment rate (monthly) and the change Prices are measured by the fixed-weight price in unit labor costs are U.S. Department of index for gross domestic purchases (1972 Labor data; auto sales are from the Motor weights); percentage change is from four Vehicle Manufacturers' Association. All other quarters earlier. Unit labor costs are for the data are from the U.S. Department of Com- nonfarm business sector; percentage change is merce. Real GNP and real final sales are in from four quarters earlier. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 The Economy in 1981 Early in the year, the signs of more services, continued to rise despite a moderate increases in prices were marked deceleration in food and gasconfined to a few markets, particu- oline prices. larly those in which prices are highly In real terms, aggregate personal sensitive to changing economic condi- consumption expenditures increased tions. But as time passed, a broader about 1 percent last year, even deceleration became evident. By mid- less than the rise in real disposable year, price increases for a wide range income. Households cut back spendof consumer goods had dropped far ing on a wide range of discretionary below the double-digit pace of 1979 items, such as furniture, appliances, and 1980; further progress was made and recreation equipment, but their in the second half when price infla- cautious spending behavior was most tion in the capital goods sector also evident in automobile purchases. slowed. Surveys of consumer atti- Domestic producers last year sold tudes suggested that expectations only 6.2 million cars, the lowest figabout inflation in the near term were ure in two decades. Cash rebates, beginning to improve. With the pace below-market interest rates, and other of inflation slackening, inflation ex- sales incentive programs induced a pectations moderating, and employers brisker selling pace early in the year hesitant to increase hiring, wage in- and again in the third quarter. But creases also began to moderate in these increases were followed by ex- 1981. Nominal wage gains were tremely poor sales in the second and smaller than those in 1980; moreover, fourth quarters, when most programs wage concessions by workers became were removed. In contrast to domeswidespread toward year-end, and as tic sales, sales of imported cars held 1982 began, the stage seemed set for up quite well. About 2.3 million fora moderation in wage demands. eign cars were bought, only 4 percent less than in 1980; they accounted for a record 27 percent of the auto mar- Household Sector ket. Personal consumption expenditures, which account for about two-thirds Income, Consumption, and Saving of GNP, were constrained last year Percentage change, Q4 to Q4 by the weakness in real income growth. Even with the personal in- 8 Real consumption , ,. . come tax cuts in the fourth quarter, i | l Roeal dis posabulle income real disposable income rose only about 2 percent during 1981, mark- £L ing the third consecutive year of sluggish growth.1 At the same time, the share of household budgets absorbed by basic necessities, such as food, energy, and other essential goods and 1975 1977 1979 1981 1. Throughout the discussion of "The Economy in 1981," annual figures repre- Based on U.S. Department of Commerce sent changes from the fourth quarter of data, seasonally adjusted at annual rates. Real 1980 to the fourth quarter of 1981 unless consumption and real disposable income are Digitized ifnodr iFcaRtAedS EoRth erwise. in terms of 1972 dollars. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1981 7 Expenditures in real terms on resi- eration in home prices. The recorded dential construction fell 22 percent average prices of new and existing last year. By the fourth quarter, out- homes sold during 1981 rose only lays were nearly 40 percent below the 4 or 5 percent. For the first time peak level in early 1978, making the since 1974, measured prices of existdownturn the longest in the postwar ing homes sold were up less than period and, by many measures, the overall prices. Moreover, the concesmost severe. Total housing starts sionary financing involved in many averaged 1.1 million units in 1981. sales was not reflected by available As interest rates for new mortgage price measures. Adjusting for the commitments peaked at a new high effects of such financing, average in October, starts tumbled to an an- home prices may not have increased nual rate of 900,000 units during the at all last year, and in some regions final quarter. These annual and prices actually may have declined. quarterly levels were the lowest since 1946. However, near the end of the Business Sector year there were indications that activ- Business fixed investment adjusted ity and sales were stabilizing. for inflation increased 3 percent dur- The decline in homebuilding activ- ing 1981. Despite this gain, by the ity was particularly sharp in the final quarter of the year, capital single-fanprily sector, which accounts spending was still 2% percent befor around two-thirds of the housing low its peak in the third quarter of market. Single-family starts fell 1979. The weakness over the past around 45 percent to the lowest level two years can be traced in part to on record, paralleling a sharp decline the stagnation in real final sales, in home sales. During the autumn, which resulted in extensive and growsales of new homes were at their slow- ing underutilization of capacity and est pace since the beginning of data a sharp decline in profits. In addicollection in 1963, and sales of exist- tion, the real cost of capital rose being homes set a 10-year low. cause of the upward trend in cor- Construction in the multifamily porate bond rates. sector declined about 33 percent in Business purchases of equipment 1981 even though sustained demand rose fractionally in real terms last for condominiums and cooperatives, year after a decline of almost 4 pertypically offered at lower prices than cent during 1980. Outlays for electridetached homes, provided some sup- cal machinery and transportation port. But subsidized rental construc- equipment, particularly cars and tion (under the section 8 program trucks, fell during 1981, while puradministered by the Department of chases of other equipment increased Housing and Urban Development) slightly. In contrast, spending on fell to about half of its 1980 total. nonresidential structures, especially Building of nonsubsidized rental units for commercial and industrial buildalso was quite weak in 1981 as high ing and for petroleum drilling, concredit costs and longer-run uncer- tinued to hold up relatively well, intainties about profitability continued creasing 8% percent in real terms to depress this market. during the year. The slowdown in real estate mar- Forward-looking indicators suggest Digitizedk foert sF RwAaSsE rRe flected in a marked decel- that the weakness in capital spending http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 The Economy in 1981 is likely to continue in 1982. Con- sions for accelerated depreciation, and tracts and orders for plant and equip- indirect business taxes rose at only ment in real terms declined through- one-third the pace of 1980. Growth of out most of 1981; the fourth-quarter personal income tax receipts was curlevel was about 4 percent below that tailed by the 5 percent reduction in of a year earlier. In addition, sur- income tax withholdings in the fourth veys of spending plans suggested that quarter. On the other hand, contribucapital outlays in real terms for cal- tions for social insurance accelerated endar year 1982 would be little sharply, pushed by increases in both changed from 1981. the tax rate and the tax base for social Responding to high carrying costs security. and weak sales, firms attempted to Total federal government expendikeep inventories on the lean side last tures in nominal terms grew about year. Nonetheless, widespread invol- 13Vi percent last year compared with untary accumulation occurred in the 19 percent in 1980. National desecond half as the economy softened. fense purchases rose rapidly, as did Constant dollar inventory-to-sales ra- outlays for the Strategic Petroleum tios in most industries approached, Reserve and agricultural support proand in some cases exceeded, the highs grams. Spending for other nondeof 1975. Seeking to curtail excess fense programs was reduced. Net instockbuilding, firms cut production terest payments increased nearly 45 substantially in the last four months percent during 1981 primarily beof the year. The sizable liquidation cause of the high level of interest of total manufacturing and trade in- rates and the large deficits in fiscal ventories in December indicated that years 1980 and 1981. Transfer paythe adjustment of stocks to the re- ments grew less rapidly than during duced level of sales was under way. 1980, while grants to state and local governments decreased 9 percent over the year. With expenditures Government Sector growing more rapidly than receipts Total government purchases of goods in 1981, the deficit, as measured by and services in real terms rose 2 per- the national income and product accent during 1981. However, advance counts, widened to about $100 billion in the total masks widely divergent at an annual rate in the final quarter. movements between its two sectors. Responding to the reductions in On the one hand, federal purchases federal assistance, state and local increased rapidly; on the other, state governments curtailed their spending and local spending fell, in marked last year. In addition, growth of departure from its past trend. own-source revenues slowed as a re- Federal tax receipts increased only sult of lower profits-tax receipts and 9V4 percent last year, about 2 per- a smaller advance in personal taxes. centage points less than during 1980 State and local purchases of goods primarily as a consequence of the and services fell 2 percent in real weakness in economic activity and terms; they had risen 3 percent per provisions of the Economic Recovery year on average during the 1970s. Tax Act of 1981. Corporate tax Payroll employment dropped subaccruals declined sharply because of stantially because of the termination the fall in profits and the new provi- of the federally funded public service Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1981 9 Real Government Purchases of ing sector recovered a bit in late 1980 Goods and Services and early 1981, but not enough to Percentage change make up the losses during the 1980 recession. Construction employment peaked in April at 150,000 below its Federal 1980 high, and the 1981 peak for ! | State and -I I f""! local manufacturing jobs in July was more than one-half million below the level two years earlier. Factory employment started to edge off in August, and large cutbacks began in October. 1975 1977 1979 1981 Layoffs in the cyclically sensitive dur- Based on U.S. Department of Commerce able goods industries accounted for data, seasonally adjusted at annual rates. Real purchases are in terms of 1972 dollars. Per- about two-thirds of the decline in centage change is from fourth quarter to total employment in the fourth quarfourth quarter. ter; the metals, transportation equipment, and machinery industries sufemployment program under the Comfered the largest losses. Employment prehensive Employment and Training in nondurable goods industries also Act. By year-end, most state govfell, cutbacks continued at construcernments had imposed hiring freezes. tion sites, and employment in retail Construction spending, adjusted for trade turned down. From September inflation, fell to its lowest level in to December, nonfarm employment 25 years. In the last quarter of 1981 fell almost 950,000. the sector's operating budget (total Despite the gain in employment surplus excluding social insurance during the first three quarters of 1981, funds) recorded a small surplus. the unemployment rate receded only slightly from its year-end 1980 level Labor Market Developments of IVi percent. Then, with the sharp Continuing its rebound from the mid- rise in layoffs in the last four months 1980 recession, employment ex- of the year, the jobless rate jumped panded during the first three quarters \XA percentage points to 8.8 percent. of 1981. Most of the hiring was con- The increase for adult men was parcentrated in services and trade. With ticularly sharp because more of them demand subsiding and industrial ac- are employed in the cyclically sensitivity slowing, employment growth in tive durable goods and construction the goods-producing sector slackened industries; the unemployment rate for and then began to turn down after this group rose from 5.8 percent in midyear. In the final quarter of the July to a postwar record of 7.9 peryear, declines in industry employment cent in December 1981. became widespread as businesses In 1981, as in 1980, growth of the acted to bring production in line with labor force fell far below its annual sales. On balance, total nonfarm em- average of 2Vi percent during the ployment at the end of 1981 was just 1970s. In part, the slowdown re- XA percent above the level one year flected a shrinking teenage populaearlier and only 3A percent above the tion. More fundamentally, the weaklevel at the end of 1979. ness in labor demand over the past Digitized for FRASER Employment in the goods-produc- two years apparently discouraged new http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 The Economy in 1981 job seekers. The labor force partici- negotiated previously. However, pation rate for adult women, who had union contracts were reopened in entered the work force in large num- many industries during 1981. These bers during the 1970s, edged up less industries faced severe competitive than 1 percentage point in 1981; the pressures from imports or from nonrate for teenagers actually declined. union producers, and some experi- Because 1981 began with an eco- enced serious financial difficulties. As nomic recovery under way and ended a result, unions and firms in the airduring a contraction, growth in pro- line, meatpacking, and rubber indusductivity showed considerable cyclical tries agreed to significant cost-saving fluctuation over the year. Increases changes in negotiated contracts; by in output per hour in the first half year-end, negotiators in the trucking were well above the trend rate of and auto industries had begun to talk growth in recent years. But in the about similar departures from their second half, productivity deteriorated traditional contracts, which are due as production dropped sharply and to be renewed in 1982. capacity use declined. Wage demands were slow to re- Prices spond to the erosion of employment opportunities over the course of 1981. The trend in inflation improved no- Nevertheless, the trend of escalating ticeably during 1981, and by yearlabor costs showed clear indications end all aggregate measures of inflaof turning around. Wage rates for tion were well below double-digit production and nonsupervisory work- rates for the first time since 1978. ers posted increases of just over 8 per- The fixed-weight price index for gross cent in 1981, down from 9Vi percent domestic purchases rose SVA percent in 1980. And, after moving up in the over the four quarters of 1981, much beginning of the year, the rate of in- less than in 1979 and 1980. This crease in white-collar earnings ap- slowdown in inflation was even more peared to have leveled off by year- pronounced in the consumer and proend. However, the moderation in ducer price indexes, which had been wage gains in 1981 was partially off- rising at a 14 to 15 percent annual set by a substantial increase in the pace early in 1980: the consumer social security payroll tax, and total price index rose 9Vi percent, and the hourly compensation in the nonfarm producer price index for finished business sector rose 9V\ percent over goods rose only IVA percent over the the four quarters of the year, down four quarters of 1981. slightly from 10 percent in 1980. Retail food prices slowed markedly, New contracts under collective to an increase of less than 5 percent bargaining did not contribute directly during 1981, the smallest advance to a slowing in wages during 1981, since 1976. Good growing weather in but the stage was set for a moderation 1981 helped to push farm prices for in 1982 negotiations. Scheduled bar- crops 15 percent below year-earlier gaining was light during 1981, and levels, and prices for meats and livegains in union wages remained large stock also declined. Although supply relative to those received by non- developments in agriculture were union workers, reflecting deferred in- much more favorable than in 1980, a creases and cost-of-living adjustments part of the price slowdown was also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1981 11 related to the general weakening of the reducing the rate of price increase. economy. Slow growth of income Prices for consumer commodities restrained demand in domestic mar- other than food, energy, and houses kets, while foreign customers reacted rose 8 percent in 1981, compared to sharply higher U.S. prices in the with 9V4 percent in 1980, and prices wake of a net appreciation of 16 per- for capital equipment slowed markcent in the trade-weighted exchange edly, from a 12 percent advance in value of the dollar during 1981. 1980 to 9Y4 percent last year. How- Energy prices rose sharply in the ever, price pressures persisted in conopening months of 1981 after further sumer services, notably for medical price increases by the Organization of care. Petroleum Exporting Countries and The inflationary psychology that the President's decontrol of prices in had permeated many aspects of ecodomestic petroleum markets. At the nomic behavior during the previous same time, the war between Iran and half decade appeared to be subsiding Iraq curtailed supplies in the interna- in 1981. Surveys by the Survey Retional oil market. However, by the search Center of the University of summer a substantial decline in de- Michigan indicated a downturn in mand led to price stability for pe- expectations of inflation over the troleum products. In contrast, the near term. Furthermore, prices of price of natural gas rose steadily sensitive industrial commodities and throughout 1981 for the third con- precious metals drifted down throughsecutive year, as allowed under the out 1981 after a decade marked by decontrol schedule of the 1978 Na- repeated speculative bursts. Finally, tural Gas Policy Act. the behavior of real estate prices be- In areas other than food and energy, gan to reflect the severe declines in signs also accumulated during 1981 home sales, after several years of that slack demand, and in part the rapid increases that were fueled in rapid appreciation of the dollar, were part by speculative pressures. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 Monetary Policy and Financial Markets The principal objective of monetary emerged largely in response to the policy in 1981 was to exert continu- high interest rates of recent periods ing resistance to inflationary pressures and have been facilitated by regulathrough measured restraint on the tory changes that relaxed controls on expansion of money and credit, and deposit interest rates and on the types thereby to lay the foundation for sus- of instruments that may be offered by tained growth in real activity over the banks and other depository institulonger term. Ranges for the mone- tions. tary aggregates that the Federal Re- Reflecting continued strong deserve believed to be consistent with mands for credit and concerns about this objective implied a deceleration the inflation outlook, interest rates in money growth in 1981 from the fluctuated at generally high levels preceding year. Over the year, the during most of 1981, before moving actual growth of the various mone- down in the fourth quarter. Shorttary measures exhibited divergent pat- term interest rates began the year terns. Growth in the narrow money close to record highs as the rebound stock was unusually weak; despite a in the economy in late 1980 boosted strong pickup late in the year, Ml demands for money and credit above ended the year below its target range. amounts consistent with the targeted The broader aggregates grew at a ranges for growth in the aggregates. relatively rapid rate, exceeding the After a dip early in the year, shortupper limits of their specified ranges. term rates returned to near-record The differences in behavior among levels in the spring. In the second the aggregates last year were consid- half, such rates moved down sharply, erably greater than those indicated by reflecting the more accommodative the historical relationships among provision of reserves by the Federal these measures, largely because of Reserve and reduced demands for rapid and fundamental changes that money associated with the weakenwere taking place in financial markets. ing in economic activity. In particular, the public displayed Long-term interest rates fluctuated more sophistication in the use of cash around a distinct upward trend for management techniques, as evidenced much of the year that produced new by the growth nationwide of negoti- highs by the end of the third quarter. able order of withdrawal (NOW) ac- Given the prospect for substantial counts, the increased use of savings federal budget deficits in coming instruments that pay market rates of years, market participants remained interest, and the explosive growth of concerned about persistent pressures money market mutual funds. These on credit supplies and the implications developments tended on balance to of deficit spending for the fight against damp growth of Ml while boosting inflation. Such concerns continued dethat of the broader measures. Such spite widespread weakening in ecochanges in financial institutions and nomic activity and indications of more cash management practices have moderate rates of price increase. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 13 Thus, although yields on long-term weak early in 1981. With the demand securities moved down briefly during for reserves falling relative to the the fourth quarter, much of that de- provision of nonborrowed reserves cline was reversed by early 1982. consistent with the monetary targets Aggregate credit flows in 1981 re- of the Federal Open Market Comflected the changing pace of produc- mittee (FOMC), short-term rates tion and income growth as well as eased. By the end of the first quarconditions in financial markets. ter, the federal funds rate was 6V2 Households and businesses continued percentage points below its January to expand their borrowing throughout peak, while other short-term rates the first three quarters, but their use were down 2 to 3 percentage points. of credit contracted in the final At the beginning of the second months with the cumulative weaken- quarter, however, growth in money ing in the economy. High interest accelerated sharply, renewing presrates discouraged financing in long- sures in the reserves market. These term bond and mortgage markets; pressures led to a rise in short-term consequently, credit needs in the pri- market interest rates. In early May, vate sector were met largely through the Federal Reserve increased both shorter-term borrowing. Credit de- the basic discount rate and the surmands of the federal government charge rate by 1 percentage point. reached record levels, as the deficit Although the narrow money stock was enlarged in part by the decline contracted in May and June, the in tax revenues and the rise in social federal funds rate hovered near preservice expenditures that typically vious peaks in the summer months. accompany a cyclical downturn in However, other short-term rates bethe economy, and by the tax cut late gan to ease somewhat in midsummer. in the year. By late summer, the cumulative weakness in growth of Ml led to efforts by the Federal Reserve to Monetary Aggregates increase supplies of nonborrowed reand Interest Rates serves. As a consequence, the federal Money market conditions varied con- funds rate declined through the fourth siderably over the course of 1981, quarter, and other short-term interest reflecting pressures arising as the rates also fell. In late September and Federal Reserve attempted to hold again in mid-October, the surcharge growth in the monetary aggregates was reduced 1 percentage point, and close to its targets. At the beginning in November it was eliminated. In of the year, short-term interest rates addition, the discount rate was rewere at, or only a bit below, record duced from 14 percent to 13 percent highs, after having been on an up- in early November and to 12 percent trend since mid-1980 as economic one month later. activity rebounded and the System Long-term rates moved quite difsought to restrain monetary expan- ferently. Bond rates, like many shortsion in the face of an upsurge in the term rates, began the year only a bit public's demand for money. Narrow below the record highs that had been money (Ml) contracted at the end established in December. However, in of 1980, and after allowance for contrast to the declines in yields on shifts to NOW accounts, it remained short-term instruments, long-term Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 Monetary Policy rates generally rose over the first rates moved well above their previous quarter. Many participants in finan- highs even as some short-term rates cial markets apparently were con- retraced part of their earlier declines. cerned about the prospects for con- The decline in bond rates in the tinuing large federal budget deficits fourth quarter, more moderate than and the growing backlog of potential the drop in short-term interest rates, long-term financing by corporations, in seemed to reflect the widespread dethe face of efforts to control inflation terioration of economic activity and with monetary restraint. These con- some renewed optimism about the cerns remained a prominent feature prospects for reduced inflation of market sentiment during the sec- spurred by encouraging price data. ond and third quarters, and long-term At year-end, however, these declines Interest Rates Percent per annum Short-term Long-term Aaa U.S. government bonds State and local government bonds 1975 1977 1979 1981 Monthly averages except for Federal Re- utility bonds, weighted averages of new pubserve discount rate and conventional mortgages licly offered bonds rated Aaa, Aa, and A by (based on quotations for one day each month). Moody's Investors Service and adjusted to Yields: U.S. Treasury bills, market rate on Aaa utility basis by Federal Reserve staff; U.S. three-month issues, discount basis; conven- government bonds, market yields adjusted to tional mortgages, rates on first mortgages in 20-year constant maturity by U.S. Treasury; primary markets, unweighted and rounded to state and local government bonds (20 issues, nearest 5 basis points, from U.S. Department mixed quality), Bond Buyer. of Housing and Urban Development; Aaa Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 15 Reserves and Monetary Aggregates Based on seasonally adjusted data unless otherwise noted; in percent except memo items in billions of dollars x 1980 1981 Item 1979 1980 1981 Q4 Ql Q2 Q3 Q4 Member bank reserves2 Total 2.5 7.1 4.3 14.3 5.5 4.2 4.0 3.2 Nonborrowed .1 7.8 6.8 4.7 10.7 -2.4 7.9 10.5 Required 2.3 6.8 4.6 13.0 6.4 5.0 3.1 3.5 Monetary base3 7.6 8.8 4.9 10.6 5.2 5.8 4.3 3.9 Concepts of money4 Ml 7.4 7.3 5.0 11.1 4.6 9.2 .3 5.7 Ml-B shift adjusted 7.4 7.3 2.3 11.1 -.9 5.7 -.4 4.7 M2 8.4 9.2 9.5 8.8 7.5 12.0 8.3 8.8 M3 9.8 10.0 11.4 10.7 11.1 12.2 11.2 9.2 Nontransaction components of M2 Total (M2 minus Ml) 8.8 9.8 11.0 8.0 8.5 12.9 11.0 9.9 Small time deposits 22.7 14.5 15.9 12.3 21.1 10.2 16.7 12.4 Savings deposits -11.8 -4.6 -16.3 .2 -26.8 -7.9 -22.8 -11.8 Money market mutual fund component (n.s.a.) 386.2 96.2 132.6 5.2 86.5 125.7 91.2 74.0 Overnight RPs and overnight Eurodollar deposits (n.s.a.) 20.1 25.8 7.2 22.0 13.9 49.2 14.9 -44.1 MEMO (change in billions of dollars) Managed liabilities at commercial banks5 57.1 22.9 64.7 23.6 25.4 9.8 29.2 .3 Large time deposits, gross 20.7 28.5 66.7 16.4 22.1 13.9 26.4 4.3 Nondeposit funds 37.4 -5.6 -2.0 7.2 3.3 -4.1 2.8 -4.0 Net due to foreign-related institutions 25.1 -22.9 -6.2 -.5 -2.8 -1.8 3.5 -5.1 Other6 12.3 17.3 4.2 7.7 6.1 -2.3 -.7 1.1 U.S. government deposits at commercial banks .2 .4 2.4 -.9 .1 2.5 -2.5 2.2 1. Changes are calculated from the average mand deposits at mutual savings banks. M2 amounts outstanding in each quarter. is Ml plus overnight repurchase agreements 2. Annual rates of change in reserve mea- (RPs) issued by commercial banks, overnight sures have been adjusted for regulatory changes Eurodollar deposits held by U.S. nonbank in reserve requirements. residents at Caribbean branches of U.S. banks, 3. Consists of total reserves (reserve bal- money market mutual fund shares other than ances of depository institutions in the current institution-only fund shares, and savings and week plus vault cash held two weeks earlier), small time deposits (including retail RPs) at currency in circulation (currency outside the all depository institutions. M3 is M2 plus large U.S. Treasury, Federal Reserve Banks, and the time deposits at all depository institutions and vaults of depository institutions), and surplus large term RPs issued by commercial banks vault cash at depository institutions. and thrift institutions and institution-only 4. Ml consists of currency in circulation, money market mutual funds. traveler's checks of nonbank issuers, demand 5. Managed liabilities have been adjusted to include liabilities shifted to international deposits at all commercial banks other than banking facilities in December 1981. those due to domestic banks, the U.S. government, and foreign banks and official institu- 6. Consists of borrowings from other than commercial banks through federal funds retions less cash items in the process of collection purchased and securities sold under repurchase and Federal Reserve float, and other checkable agreements plus loans sold to affiliates, loans deposits (OCD). OCD consists of negotiable sold under repurchase agreements, and other order of withdrawal and automatic transfer borrowings. service accounts at depository institutions, credit union share draft accounts, and de- n.s.a. Not seasonally adjusted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 Monetary Policy were in large part reversed as con- the early 1960s and below the range cerns again mounted about federal of 3Vi to 6 percent adopted for this borrowing requirements over the aggregate by the FOMC. next few years. While the narrow money stock was Continued high interest rates in unusually weak in 1981, the broader 1981 evidently stimulated more in- monetary aggregates were above the tensive use of cash-economizing tech- upper limits of their specified target niques by businesses and households, ranges. In past periods of rising inleading to an extraordinarily weak terest rates, the velocity of M2—dedemand for narrow money, given in- fined as the ratio of GNP to M2—has come and interest rates, during most risen because funds were diverted of the year. The introduction at the from fixed-rate accounts at depository end of 1980 of NOW accounts na- institutions to higher-yielding market tionwide may have stimulated a gen- instruments. But the composition of eral reconsideration by households M2 has changed markedly since of alternative deposit and nondeposit 1978: its nontransaction component instruments and thereby reinforced now contains a variety of attractive the response to continued high inter- assets bearing market-related yields. est rates. Increasing familiarity with The volume of such instruments conmoney market mutual funds may also tinued to expand rapidly in 1981, have been a factor in the slow growth insulating M2 from the damping efof Ml. fects of rising interest rates by en- As expected, NOW accounts at- couraging investors to keep their tracted a sizable volume of funds in funds in financial intermediaries. The 1981, amounting to roughly $51 bil- growth of the money market mutual lion, more than 80 percent of which fund component of M2—which was was at commercial banks. The flows revised in February 1982 to exclude into NOW accounts were strong in funds confined to institutional inthe first four months of the year vestors—was particularly strong, acand then slowed substantially. Funds counting for almost 60 percent of the were shifted into NOW accounts from increase in the nontransaction comdemand deposits and from interest- ponent of M2 in 1981. earning assets included in M2, such Inflows of savings and small-deas savings accounts. Because shifts nomination time deposits accounted from savings accounts and other non- for a much smaller proportion of the demand-deposit sources distort the increase in the nontransaction comgrowth of Ml-B, the Federal Reserve ponent of M2 in 1981 than in other established its growth range for this recent years. Outflows from savings aggregate on a basis that abstracted accounts were much greater in 1981 from such shifts, facilitating compari- than in the preceding year, even after sons with earlier years. Adjustments adjusting for shifts into NOW acwere estimated on the basis of various counts, although late in the year runsurveys of depository institutions and offs of savings deposits were reversed individuals, as well as by statistical as heightened uncertainty about the techniques. After account is taken of economy apparently contributed to these adjustments, Ml-B expanded in greater liquidity preference. Net issu- 1981 at a rate of only IVk percent, ance of six-month money market the slowest growth for any year since certificates was only about a third of 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-B shift adjusted Targeted and actual Ml-B 8'•':% 440 440 420 420 Targeted and actual M2 Targeted and actual M3 'w 180° 2200 2100 1700 2000 Targeted and actual bank credit Reserve aggregates 40 1300 Total reserves 38 1200 Nonborrowed reserves '80 1981 '80 1981 Ml-B shift adjusted is adjusted for the im- into international banking facilities. pact of nationwide NOW accounts. The reserve aggregate series have been ad- Targets are ranges adopted by the FOMC justed to remove discontinuities associated for 1980 Q4 to 1981 Q4. with changes in reserve requirement ratios and Data for bank credit before February are the distorting effects of weekend reserve avoidadjusted for a discontinuity in the series. The ance activities in 1980. Nonborrowed reserves December figure is adjusted for shifts of assets include extended credit. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 Monetary Policy that in 1980 as rates paid on these deposits and a reduction in borrowcertificates exceeded those available ings from abroad. Commercial banks on money market funds for only two in particular financed most of the or three months in 1981. In addition, excess of strong credit expansion over flows into 21/i-year small savers cer- core deposit growth by issuing largetificates were quite weak until August, denomination certificates of deposit. when the cap on the ceiling rate The rapid growth of money market imposed in late 1980 was removed. mutual funds catering only to institu- In October, tax-exempt all savers tional investors also accounted for a certificates were introduced, attracting sizable portion of the difference be- $43 billion in the fourth quarter of tween M2 and M3. 1981. Savings and loan associations Commercial bank credit, inclusive accounted for almost half of this flow, of assets shifted from domestic bankwhile commercial banks and mutual ing offices to international banking savings banks garnered 40 and 10 facilities (IBFs) in December, grew percent respectively. The all savers 8% percent in 1981, somewhat faster certificates apparently augmented than in 1980; exclusive of assets overall deposit flows only moderately, shifted to IBFs, bank credit grew however; most of the funds are SV4 percent, still a bit faster than in thought to have come from savings the previous year. (IBFs are limitedand other time deposits already in- purpose facilities that were authorized cluded in M2. in early December to accept deposits Finally, retail repurchase agree- from and to extend credit to foreign ments, which were included in M2 entities; the foreign deposit liabilities with the February 1982 revision, of IBFs are not subject to reserve edged up over the first few months requirements or to interest rate ceilof 1981 and then advanced sharply ings, and in a number of states earnin the summer. (Retail repurchase ings of IBFs have been granted favoragreements are in denominations of able tax treatment.) The pickup in less than $100,000, mature in less expansion of bank credit in 1981 rethan 90 days, and are not subject to flected stronger total loan growth, interest rate limitations.) During the including that at IBFs. Business lendthird quarter of 1981, many deposi- ing of U.S. offices of commercial tory institutions actively promoted banks accelerated as conditions in this instrument, both to retain funds bond and equity markets were unthey already held and to attract funds favorable for most of the year. In that might later be rolled over into all addition, commercial and industrial savers certificates. loans to U.S. residents booked at M3 grew HVi percent in 1981, foreign branches of U.S. banks, which Wi percentage points faster than in are not included in the standard meas- 1980 and 2 percentage points more ure of bank credit, increased substanthan M2. Large-denomination time tially more in 1981 than in 1980 as deposits, which account for the bulk the spread of the prime rate over of the difference between M3 and the London interbank offer rate M2, increased rapidly in 1981 as de- (LIBOR) remained large by historipository institutions expanded their cal standards during much of the year. managed liabilities offered domesti- Many large banks include a LIBORcally to offset the weakness in core based rate as a pricing option in loan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 19 agreements with large corporate cus- Funds Raised by tomers, and some report that they Domestic Nonfinancial Sectors often book or rebook loans at their Billions of dollars foreign branches when customers elect the LIBOR option. The pickup in total loan growth at commercial Total banks in 1981 also reflected a small increase in lending to consumers and nonbank financial institutions as well Private sectors as a stronger pace of security lending. Faced with large loan demands, banks 200 markedly slowed their security acqui- Federal government sitions in 1981; U.S. government obli- State and local gations accounted for the bulk of the slowdown. Aggregate Credit Flows 1977 1979 1981 Excludes equities. Data are semiannual After a rapid rebound in the second totals at seasonally adjusted annual rates. half of 1980, net credit flows to nonfinancial sectors of the U.S. economy government financed a $93 billion continued strong in the first half of combined deficit of the federal gov- 1981, then fell sharply in the final ernment and off-budget agencies. Net months of the year in response to the issuance of state and local governweakening in economic activity. For ment debt remained sizable during the the year as a whole, net credit flows year despite sharply rising yields on to domestic nonfinancial sectors tax-exempt securities. totaled approximately $369 billion, The U.S. Treasury raised approxian increase of 12 percent from 1980, mately $87 billion in U.S. credit marbut somewhat below the totals for kets in 1981 and financed the re- 1978 and 1979. mainder of the combined federal Borrowing by households and deficit by drawing down its cash balbusinesses rose only moderately in ance and through nonmarket sources 1981 with virtually all of the increase of finance. The borrowing by the in the form of short- and interme- Treasury was concentrated in mardiate-term credit obligations, includ- ketable debt issuance that more than ing bank loans, commercial paper offset redemptions of savings bonds issues, and consumer installment and nonmarketable debt in an amount credit. The volume of corporate close to $10 billion. Net sales of bond financing, in contrast, remained Treasury bills accounted for roughly below the record levels of 1980 as one-fourth of the funds raised in marlong-term interest rates generally kets, and coupon issues accounted for trended up through much of the year, the remainder. Money market mutual and activity in the already sluggish funds absorbed a substantial portion mortgage markets weakened steadily of the net increase in short-term as the year progressed. In the public Treasury debt; households, which sector, net borrowing by the U.S. typically are attracted to open mar- Treasury reached a new high as the ket instruments in periods of high Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 Monetary Policy interest rates, also were major direct capital requirements generally conpurchasers of government securities tinued to rise, and demands for funds in 1981. On the other hand, com- in municipal markets remained sizmercial banks greatly curtailed their able. Such demands were enlarged acquisitions of Treasury securities in further by increased use of tax-exempt an environment of strong demand for industrial revenue bonds to finance bank loans. private corporate needs. State and local governments experi- On the supply-of-funds side, howenced increased financial pressures in ever, the market for tax-exempt se- 1981, resulting in part from cuts in curities weakened perceptibly in 1981 federal grants coupled with sluggish as the primary institutional investors, growth in tax revenues. Although property and casualty insurance commany governmental units reduced panies and commercial banks, greatly their activities in this environment, curtailed their acquisitions. Indeed, Net Funds Raised and Supplied in Credit Markets Billions of dollars 19811 Sector Ql Q2 Q3 Q4' Net funds raised Total, all sectors 476 418 478 468 537 510 397 U.S. government 37 79 87 128 43 58 120 State and local government 18 25 22 30 22 12 26 Foreign 20 27 31 33 38 16 37 Private domestic nonfinancial 318 226 259 233 317 284 203 Business 147 124 153 113 190 168 140 Household 171 102 107 120 127 117 63 Domestic financial 82 61 78 44 117 139 12 Private intermediaries — 34 18 35 18 65 63 -7 Sponsored credit agencies 24 24 30 9 40 65 5 Mortgage pool securities . 24 19 13 17 12 11 14 Net funds supplied Total, all sectors 476 418 478 468 537 510 397 U.S. Government 19 24 25 31 29 20 19 State and local government 17 24 21 34 12 14 23 Foreign -6 20 12 50 26 -25 -5 Private domestic nonfinancial 93 32 60 11 103 86 38 Business 8 4 12 -5 25 16 12 Household 85 28 48 16 78 70 26 Domestic financial 354 319 361 341 367 414 322 Private intermediaries 292 270 308 321 321 321 267 Commercial banks 121 100 103 70 134 112 98 Thrift institutions 56 58 26 42 42 8 12 Insurance and pension funds 66 80 84 69 90 84 92 Other2 49 32 95 140 56 117 65 Sponsored credit agencies 29 25 31 10 42 66 6 Mortgage pool securities . 24 19 13 17 12 11 14 Federal Reserve System .. 8 5 9 -7 -8 16 34 1. Seasonally adjusted at annual rates. end investment companies, and security bro- 2. Includes finance companies, money mar- kers and dealers, ket funds, real estate investment trusts, open- p Preliminary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy 21 such investors provided only about the acceleration in real GNP growth 30 percent of net funds raised in mu- and greatly reduced corporate needs nicipal markets in 1981 compared for external financing. But as the with 85 percent in 1979 and 1980. economy slowed, corporate profits A lessening of the need for tax- turned sluggish, while sizable unexempt income, because of reduced intended inventory accumulation earnings in the case of the insurance boosted requirements for financing. companies and the availability of Consequently, businesses undertook other methods for sheltering income an exceptionally large volume of from taxes in the case of banks, ap- financing in the second and third parently reduced the attractiveness of quarters, most of which was concenmunicipal securities to these two trated in short-term markets, espetypes of institutions and left individ- cially at commercial banks and in the uals as the primary purchasers of tax- commercial paper markets. The pace exempt securities in 1981. For their of borrowing diminished considerably part, individuals may have required in the final months of the year in higher yields on such securities— association with the contraction in especially in the latter part of the production and lower capital requireyear—in light of forthcoming reduc- ments, but on balance corporate tions in marginal income tax rates, credit demands were about 20 perthe introduction of the tax-exempt cent higher for the year than in 1980. all savers certificate, and the broad- Although corporations issued a recened eligibility for individual retire- ord volume of new stock, net financment accounts and the enlargement ing in equity markets was negative of maximum contributions to Keogh in 1981 as retirements and cash purplans in 1982. chases of stock in connection with Reflecting all these factors, yields merger activities exceeded the volume on municipal securities rose consid- of new issues. erably more last year than did rates The focus of business demands on on taxable debt issues. At year-end, short-term sources of funds reflected the ratio of tax-exempt to taxable in large part the high cost of issuing yields exceeded by 5 percentage long-term debt in 1981. Yields on points its average level of the last 10 corporate bonds trended up during years. Even though yields on munici- most of the year, with rates on highpal bonds rose to record levels, the est-grade issues reaching record levels net volume of tax-exempt financing above 17 percent in the fall. Although remained substantial, buoyed in part the brief decline in long-term interest by a rebound in offerings of mortgage rates in November produced a surge revenue bonds in the final quarter. in new bond issues, for the year as a For the year 1981, net funds raised whole long-term debt issuance by by state and local governments totaled corporations was substantially below an estimated $22 billion, compared the record volume of 1980. Thus corwith $25 billion in the previous year. porations made virtually no progress Net credit flows in the nonfinancial in funding short-term liabilities in business sector followed an uneven 1981, and the ratio of short-term to pattern during 1981. At the begin- total debt of the nonfinancial corponing of the year, strong growth in rate sector rose to an unprecedented corporate internal funds accompanied level. Reflecting this development Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 Monetary Policy and the general deterioration in other sharply in 1981, in consequence of financial measures and profitability, rising interest rates and tightening downgradings of corporate debt is- supplies of mortgage credit. Weak suers accelerated in 1981, while the deposit flows and continued erosion number of bankruptcies and failures of earnings constrained the supply of rose sharply. mortgage funds at thrift institutions, The household sector increased its and rates on new commitments for borrowing slightly in 1981 from the conventional home mortgages at savlow 1980 levels. All of the increase ings and loan associations rose perreflected growth in consumer install- sistently during much of the year to ment credit, which had been severely reach record levels above 18Vi perdepressed during and immediately cent in October. Direct credit flows after the credit restraint program of from insurance companies and fed- 1980. Increases in automobile loans erally sponsored agencies remained bolstered growth in installment credit near 1980 levels, providing no offset in the first and third quarters of 1981, to the reduction in mortgage lending when manufacturers sought to stimu- from depository institutions. In adlate car sales through rebates or other dition, the flow of funds through incentive programs; financing of con- municipal units slowed because of sumer durable goods and other restrictions on the issuance of mortnonauto goods also strengthened dur- gage revenue bonds. ing the spring and early summer. The taut mortgage credit condi- Even with the pickup, consumer tions encouraged use of so-called installment debt expanded much "creative financing" techniques, inmore slowly in 1981 than in 1978 cluding wraparound loans, builder and 1979. Partly as a result, the buydown arrangements, and the asfinancial position of the household sumption of low-rate first trusts when sector appeared to have improved in house sellers were willing to take back some respects since the beginning of a second mortgage. Adjustable-rate 1980. By late 1981 delinquency rates instruments became a more common on installment loans had fallen con- feature of mortgage lending, facilisiderably from 1980 peaks, and auto tated by changes in federal regulations finance companies were reporting and the evolution of secondary martheir lowest delinquency rates in al- kets for such instruments. By yearmost a decade. At the same time, end, almost 40 percent of convenhowever, delinquency rates on mort- tional first mortgage home loans being gages moved up. made carried some adjustable-rate Flows of home mortgage funds, feature that spread the risks of future which form the major share of fluctuations in interest rates between household net borrowing, contracted borrower and lender. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

23 International Developments Economic activity in foreign indus- inflation rates during the year, but trial countries, on average, recovered for most, progress was slow and diffionly weakly in 1981 from the slow- cult. down experienced in 1980. Indus- Most countries had planned to retrial production in those countries at duce their budget deficits in 1981, the end of the year was generally but the severity of the decline in acclose to, or below, the level reached tivity curtailed expected receipts while at the end of 1978. The exception raising unemployment-related outwas Japan, where activity moved lays. Though fiscal policy remained ahead as strong exports offset slack restrictive, the main thrust of the domestic demand. With production anti-inflation effort was exerted by faltering in industrial countries, un- monetary policy, which generally was employment rates reached the highest geared to restraining the growth of levels in the postwar period. This the money stock. U.S. short-term general economic slowdown largely interest rates were above foreign rates reflected efforts by authorities to except for an interval late in the achieve a significant reduction in in- year, but they tended to decline relaflation. Such efforts, involving mainly tive to foreign rates over the course restrictive monetary and fiscal poli- of the year. cies, were aided by a reduction in Through the first eight months of oil prices from their peak in the 1981, the weighted-average exchange spring, but were impeded in some value of the dollar increased spectaccases by the depreciation of curren- ularly, scoring a rise of 27 percent. cies against the dollar. Several coun- After the August peak, the dollar's tries were able to scale down their average value declined 9 percent to year-end. Several factors may have supported the dollar in the early part Gross National Product of the year. There was no further rise 1970=100 in U.S. short-term interest rates relative to foreign rates, but U.S. rates stayed at a high level, and the passage United States of the fiscal program of the new administration through the Congress favorably impressed the market. Moreover, the U.S. international balance on current account (trade, services, and transfers) remained positive, while the current account of Germany remained in deficit and Japan 1977 1979 1981 Foreign is multilaterally weighted average of was just beginning to shift from the Group of Ten (G-10) countries plus deficit to surplus. After midyear Switzerland, using 1972-76 total trade weights. these conditions began to change: Data for the United States are from the U.S. Department of Commerce. U.S. interest rates dipped relative to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 International Developments those in other major countries; the U.S. Balances on Trade and likelihood that U.S. budget deficits Current Account would be much larger than projected Billions of dollars stirred market concern about the outlook for inflation; and given the sharp runup in the dollar's exchange value, a shift to deficit in the U.S. current account seemed likely, in contrast to stronger current account positions for Germany and especially for Japan. Current Account Transactions Major influences on the U.S. current account in 1981 were the continued Merchandise trade weakness in world economic activity, 1977 1979 1981 changes in the exchange value of the Data are from the U.S. Department of dollar, the rise in interest rates on Commerce and are seasonally adjusted at dollar-denominated assets, and the annual rates. reduction in U.S. demand for imin the trade deficit was matched by ported petroleum. Demand for U.S. gains in net service receipts, so that exports was weak, and the volume of the overall current account registered shipments fell somewhat, though the close to the same small surplus as in value of exports was higher as export 1980. prices continued to rise. The volume of U.S. merchandise imports rose Capital Transactions moderately during the year as a considerable decline in the volume of oil Net outflows of private capital, as reimports was offset by a higher volume corded in the international accounts, of other imports. Import prices de- were considerably reduced in 1981 clined somewhat with the appreciation from the exceptionally high amount of the dollar and falling commodity reported in 1980. Net outflows prices. For the year as a whole the through banking channels appear to trade deficit was somewhat higher have increased somewhat, but outthan in 1980, and it was tending to flows associated with U.S. direct forrise in the later months. eign investments (including earnings In the earlier part of the year the retained abroad) were much lower U.S. trade balance was still under the than in other recent years. The reducinfluence of the depreciation of the tion in the flow of financing from U.S. dollar in 1977 and 1978. However, firms to their foreign affiliates probthe subsequent rise in the dollar was ably reflected high U.S. interest rates, increasing the trade deficit by the but another important element was a fourth quarter of 1981. Meanwhile, drop in foreign earnings associated larger net interest returns on interna- with low demand abroad and prestional portfolio investments were sures on oil prices in the course of the more than offsetting a decline in net year. earnings on direct investments. For Banking data indicate that U.S. the year as a whole, the small increase nonbanks made increasing use of in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 25 ternational banking channels in 1981. porations appear to have borrowed U.S. investors, including money mar- considerable amounts from offshore ket mutual funds, placed large banking offices. The continuation of amounts in dollar deposits at the a large positive residual in the interforeign offices of U.S. and foreign national accounts suggests that a sigbanks. Yields on such assets tend to nificant net inflow was not captured be higher than those on comparable in the reporting system for those U.S. assets because they are not sub- accounts. ject to the costs of reserve require- Foreign official reserve assets in ments. At the same time, U.S. cor- the United States rose only slightly U.S. International Transactions1 Billions of dollars Quarter Year Transactions 1980 1981 1980 1981 Q4 Ql Q2 Q3 Q42 Current account3 3.7 5.5 1.4 33 1.1 2.1 -1.0 Merchandise trade balance -25.3 -27.8 -5.6 -4.7 -6.9 -7.0 -9.3 Exports 224.0 236.1 57.1 61.0 60.4 57.9 56.8 Imports 249.3 264.0 62.7 65.7 67.3 65.0 66.1 Investment income (net)4 .. 32.8 36.5 8.2 9.0 8.7 9.5 9.3 Other services 3.3 3.9 1.1 .5 1.5 1.1 Unilateral transfers, private and government -7.1 -7.0 -2.3 -1.5 -1.5 -1.9 -2.1 Private capital flows, net -36.7 -29.4 -6.4 -14.9 -3.9 6.1 -16.7 Bank-reported capital, net (outflows, —) -36.1 -38.4 -5.4 15.1 -7.7 1.9 -17.5 U.S. net purchase (—) of foreign securities -3.3 -5.4 -.4 -.5 -1.5 -.5 -2.9 Foreign net purchase ( 4-) of U.S. Treasury securities 2.7 1.3 1.0 1.4 .7 -.5 -.3 Foreign net purchase of other U.S. securities 5.4 7.3 2.2 2.5 3.5 .8 .5 U.S. direct investment abroad4 .. -18.5 -9.9 -7.1 -1.6 -4.9 -1.4 -2.0 Foreign direct investment in United States4 10.9 13.7 2.1 2.5 3.8 3.9 3.5 Other corporate capital flows, net 2.5 2.2 1.2 -4.0 2.2 2.0 2.0 Foreign official assets in United States (increase, + ) .. 15.5 4.9 7.7 5.5 -2.8 -5.8 8.0 U.S. government foreign assets, net (increase, —) -13.4 -11.4 -5.4 -5.9 -2.4 -1.2 -1.9 Reserve position in IMF -.4 Convertible currencies and other -1.7 -2.5 -1.2 -.7 -.8 -.6 reserve assets U.S. government foreign credits -6.5 -1.6 -4.3 -2.4 -.1 .9 and other claims, net -1.5 -5.2 -7.3 .1 -2.8 -1.5 -1.5 Allocation of special drawing rights 1.2 1.1 1.1 Seasonal adjustment discrepancy 2.1 -.3 1.2 -2.6 1.7 Statistical discrepancy 29^6 293 .6 11.2 6.7 1.4 9.9 1. Details may not add to totals because of 3. Current account seasonally adjusted; rounding. other accounts not seasonally adjusted. 2. Data are partial and preliminary, and 4. Includes reinvested earnings. include Federal Reserve staff estimates. SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 International Developments Weighted-Average Exchange Value and U.S. authorities did not intervene in Interest Rate Differential the market after late March, they Percent per annum March 1973=100 were prepared to intervene on several occasions. The dollar began to rise strongly in late January as the new administra- Weighted-average tion took office with an established exchange value agenda to reduce government expenditures and to support a tight 98 monetary policy with the aims of reducing inflation and revitalizing the U.S. economy. In January and February the Federal Reserve and the 86 Treasury continued to purchase foreign currency to add to balances and 1980 1981 to provide cover for the Treasury's Exchange value of U.S. dollar is the index note liabilities ("Carter notes") deof weighted-average exchange value of the nominated in foreign currency. In U.S. dollar against currencies of the other G-10 countries plus Switzerland, using 1972-76 those two months the Federal Retotal trade weights. serve made net purchases of $1,048 Interest rate differential is the interest rate on three-month U.S. CDs minus the weighted- million equivalent of marks and $10 average foreign three-month interest rate for million equivalent of Swiss francs, but other G-10 countries plus Switzerland using sold $50 million equivalent of Jap- 1972-76 total trade weights. anese yen, while the Treasury purin 1981, after a sizable buildup in chased like amounts of marks and 1980. The change reflected mainly Swiss francs. the strengthening of the dollar, with The dollar weakened from late several countries that had accumulated reserves in 1980 selling dollars, Selected Exchange Rate Indexes on balance, in support of their cur- December 1979=100 rencies in exchange markets in 1981. Reserves held in the United States by the oil-producing countries (OPEC) rose substantially in 1981, about as much as in 1980, though the OPEC surplus declined sharply between the two years. Operations in Foreign Currencies 100 The exchange value of the dollar appreciated sharply in 1981, as noted U.K. pound above, and U.S. authorities pur- 1980 1981 chased, net, $2 billion equivalent of Weighted-average dollar is the index of foreign currencies in the early months weighted-average exchange value of the U.S. of the year. After a reassessment of dollar against the currencies of other G-10 intervention policy a minimal inter- countries plus Switzerland, using 1972-76 total trade weights. Other currencies are bilateral vention policy was adopted. Although rates against the U.S. dollar. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 27 U.S. Government Purchases and Sales (—) of Foreign Currencies, 19811 Millions of dollars equivalent Agency German marks Swiss francs Japanese yen Total f 1,151 10 0 1,151 Federal Reserve i -129 0 -50 -179 f 1,137 10 0 1,137 Treasury ( -113 0 0 -113 1. Data refer to transactions during the first quarter of 1981; there were no U.S. government transactions after March. February through late March as mone- activity. By year-end, however, the tary conditions tightened abruptly in dollar had firmed somewhat with the Germany and several other foreign renewed rise of U.S. interest rates. countries while U.S. interest rates It ended the year showing a net addeclined. The United States inter- vance from year-end 1980 of 16 pervened on only two days in March, cent on a weighted-average basis, purchasing marks on one day, then including gains of 25 percent against selling marks to support the dollar sterling, 13 percent against the mark, as the market faltered after the and 8 percent against the yen. news of the assassination attempt on The Federal Reserve's foreign cur- President Reagan. For the month the rency assets at year-end were valued Federal Reserve and the Treasury at $3,247 million, mostly in marks. each sold, net, $25 million equivalent No drawings on the Federal Reserve of marks. swap network were outstanding. In From late March through early addition, the Federal Reserve held, August the dollar soared, reaching under warehousing agreement, some a peak, on a weighted-average basis, $1,932 million equivalent of foreign some 27 percent higher than at year- currencies for the Treasury. The Fedend 1980. From early August through eral Reserve realized profits of $4.9 the end of November the dollar de- million on foreign currency purchases clined, first because of the market's and sales in 1981, but incurred transconcern over the inflationary impli- lation losses of $310.8 million on its cations of the prospective budget foreign exchange position at year-end, deficits, then because of a weakening reflecting the dollar's sharp appreciain U.S. interest rates and economic tion during the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 Monetary Policy Reports Monetary Policy Reports to Congress Given below are reports submitted to ing a double-digit pace, and a recent the Congress by the Federal Reserve further jump in international oil prices on February 25,1981, and on July 20, has threatened to worsen that trend. 1981, pursuant to the Full Employ- There was broad consensus that fightment and Balanced Growth Act of ing inflation must be the top priority 1978. for national economic policy. The Federal Reserve shaped its policy for Report on February 25,1981 1980 with the objective of reining in inflationary forces in the economy A Review of Developments in 1980 and establishing a framework within Monetary Policy and the Performance which decisionmakers in both the pubof the Economy in 1980 lic and the private sectors could look The past year was marked by con- forward over the longer run to a ressiderable turbulence in the nation's toration of reasonable stability in the economy and credit markets. Output general price level. and employment experienced extraor- The basic premise of the System's dinarily sharp swings—generally con- policy is the broadly accepted notion founding forecasters inside and out- that inflation can persist over appreside government—and so, too, did ciable spans of time only if it is acinterest rates and financial flows. On commodated by monetary expansion. balance, the level of the aggregate The strategy to which the System has output of goods and services at the committed itself is to hold monetary end of 1980 was little changed from growth to rates that fall short of such that at the beginning of the year, and accommodation and thus encourage with a growing labor force, unem- adjustments consistent with a return ployment was appreciably higher. At to price stability over time. To be the same time, inflation continued at sure, the relationships between the about the same unacceptably high rate growth of money and the behavior of as in 1979. the economic variables of ultimate Many factors—some of them be- concern—such as production, employyond the realm of the purely eco- ment, and inflation—are not in pracnomic—combined to produce this dis- tice absolutely stable or predictable, tressing performance. At bottom, especially in the short run. But the however, the behavior of the economy crucial fact is that rates of monetary demonstrated rather vividly the diffi- expansion in the vicinity of those culties of overcoming a deeply en- specified by the Federal Open Market trenched inflation and, particularly, Committee (FOMC) last February the stresses that arise when necessary implied a substantial degree of remonetary restraint is not adequately straint on the growth of nominal gross supported by other instruments of national product—that is, the compublic policy. bined result of inflation and real As 1980 began, the underlying growth. Put differently, the FOMC's trend of price increase was approach- ranges for monetary growth implied Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 29 that, if inflation did not abate, there inflationary expectations. These exwould in all likelihood be strong finan- pectations contributed importantly to cial restraint on economic activity re- the upward pressures on interest rates flected in an easing of pressures on that were associated with the Federal markets for goods and services and Reserve's efforts to contain growth in thence on productive capacity, factors the monetary and credit aggregates. that in turn would help to contain Then, in March, President Carter anthe momentum of inflation. This sta- nounced an anti-inflation program bilizing influence was especially criti- that included the application by the cal in a circumstance in which the Federal Reserve of special restraints impulse of a price hike by the Organi- on credit growth by utilizing the zation of Petroleum Exporting Coun- powers of the Credit Control Act of tries could easily have led to a 1969. ratcheting upward of the trend rate The tightening of credit markets of inflation. and the psychological impact of the In any event, inflation did not abate credit restraint program on consumers in 1980. But neither did it gain new contributed to the sharpness of the momentum as many feared it might. economic decline that occurred in the Rather, the increases in most aggre- first half of the year, although a degate price indexes were about the cline at some point had long been same as were recorded in 1979. The anticipated in the light of strong presfixed-weight price index for GNP rose sures on financial positions and other 9Vi percent last year, a little more factors. The drop in real GNP during than in 1979, while the consumer the second quarter far exceeded the price index rose 12^ percent, some- expectations of forecasters; in fact, it what less than in 1979. Such rates of was the sharpest of the postwar peinflation themselves result in a sub- riod. However, with the slump in acstantial increase in the amount of tivity came a pronounced weakening money needed to finance transactions. of demands for money and credit and Thus, even though the monetary ag- a steep decline in interest rates. The gregates generally expanded at rates lowering of credit costs, coupled with near or a bit above the upper ends of removal of the special credit rethe FOMC's announced ranges, the straints, in turn was instrumental in steep rise in prices resulted in marked bringing about a rebound in ecopressures in the credit markets that nomic activity in the second half of exerted restraint on economic activity the year, which turned out to be unand kept inflationary pressures from expectedly early and strong and reworsening. stored real GNP almost to its year- These developments did not occur end 1979 level. During this period evenly throughout the year. During of recovery, the public's demands on the opening months, the late-1979 financial markets grew and interest boost in imported oil prices combined rates rose as the System attempted with other factors—including strife in to hold monetary expansion within Afghanistan, unsettlement in the Mid- bounds. dle East generally, and attendant fears The financial pressures on the prithat an escalation of defense spend- vate sector of the economy last year ing might greatly enlarge already were intensified by the competition sizable federal deficits—to aggravate of the federal government for the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 Monetary Policy Reports limited supply of credit. The federal fluences militated against a robust deficit (unified basis, including off- pattern of consumer spending. The budget agencies) grew from $41 bil- period leading up to 1980 had been lion in calendar year 1979 to $83 bil- marked by weakness in real disposlion in calendar year 1980. During able personal income and by an ero- 1980, moreover, the massive federal sion of the financial flexibility of deficit and repeated upward revisions households. Faced with budgetary in spending forecasts added to the strains caused by relatively rapid inprevailing mood of uncertainty and creases in the prices of such basic weakened public confidence in the necessities as food and energy, many government's willingness and ability American families had sought to to mount a successful anti-inflation maintain customary consumption pateffort. terns—and in some cases to finance In 1980, as in most periods of extra purchases in anticipation of infinancial tension, those types of pur- flation—by borrowing. A declining chases that involve longer-term in- trend in the personal saving rate sugvestments of large sums were hardest gested that consumers were becoming hit. The residential construction sec- overextended and that some weakentor, especially, was squeezed by high ing in spending relative to income was interest rates and, particularly in the quite likely; indeed, the saving rate first half of the year, by reduced rose from 4.7 percent in the fourth credit availability. Housing starts fell quarter of 1979 (a 28-year low) to from an annual rate of 1.6 million 6.2 percent in the second quarter of units in the fourth quarter of 1979 1980. Automobile purchases, which to a rate of 1.1 million units in the tend to be deferrable in the short run, second quarter of 1980; starts then bore the brunt of the consumer resnapped back sharply to just over trenchment. Although credit condi- 1.5 million units by the end of the tions discouraged dealers from financsummer, leveling off as interest rates ing large inventories and to some moved upward again in the final extent were a depressant on demand months of the year. The mortgage for autos more generally, the steep markets have seen remarkably rapid increases in the prices of cars and institutional change in the past year, gasoline appear to have been more reflecting an adaptation to recurrent decisive elements in the picture. cyclical pressures on key lenders and Business firms, like households, ento the difficulties potential home- tered 1980 in a weakened financial buyers face with traditional mortgage condition. The preceding years of instruments. Still, these changes have expansion had seen a substantial denot insulated the real estate market terioration in aggregate measures of from the effects of inflated home corporate liquidity; many enterprises prices and of high mortgage rates on were heavily burdened with shortthe willingness and ability of people term debt, and they thus were exto borrow and buy houses. posed to severe cash-flow pressures Credit conditions also played a when interest rates rose. The combirole in dampening personal consump- nation of deteriorating balance sheets, tion expenditures in 1980—particu- a high cost of capital, and slackening larly outlays on big-ticket durable demands for final products resulted goods. However, several other in- in a 5 percent drop in real business Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 31 fixed investment during 1980. Some ation of the dollar relative to contiindustries—particularly in the de- nental European currencies over the fense, energy, and high-technology course of the year. sectors—did register gains in capital Employment traced a path similar outlays, but those elements of strength to that of output in 1980—that is, were more than offset by declines in down substantially in the first half and most cyclical manufacturing indus- up substantially in the second, with tries. Plant construction spending was little net change. There was some especially weak. Meanwhile, busi- alteration in the composition of emnesses kept a tight rein on inventories, ployment over the course of the encouraged by the high costs of carry- year, however, with jobs in manufacing stocks; a moderate accumulation turing and construction decreasing during the first-half recession—con- and those in service industries incentrated in the automotive and re- creasing. The combination of this lated industries—was largely elimi- change in employment mix and a nated in the subsequent rebound. tendency for employers to lag in ad- In the government sector, pur- justing their work forces to lower chases of goods and services by the levels of production contributed to a federal government rose moderately continued disappointing performance in real terms during 1980, reflecting of labor productivity—output per in part a pick-up in defense outlays. hour worked—which showed no gain At the state and local level, real pur- for the year. chases were about unchanged, owing With no moderating influence from to fiscal strains associated with a the productivity side, the rise in unit slowing of growth in tax revenues and labor costs reflected directly the becutbacks in federal grants as well as havior of wages and other labor exto political pressures for spending penses during 1980. In the nonfarm restraint. business sector, average hourly com- The slackening of domestic aggre- pensation—which includes employer gate demand worked to hold down contributions for social insurance and imports; in the case of petroleum im- the cost of fringe benefits—rose 10 ports, the impact of decreased eco- percent, a bit more than in 1979. nomic activity was reinforced by the However, this measure, because it incentive for conservation provided does not account for changes in the by a sharply increased relative price mix of employment or in overtime, of oil and other energy products. At probably understates the acceleration the same time, U.S. exports—includ- in wage rates. For example, the ining both agricultural commodities and dex of average hourly earnings for other products—rose appreciably in production and nonsupervisory perreal terms. Net exports thus regis- sonnel, which does include adjusttered a noticeable increase during ments for such factors, increased 1980, and the U.S. current account 9Vi percent in 1980 compared with moved into sizable surplus in the 8 percent in 1979. second half of the year. The trade Wages typically are slow in reand current-account developments sponding to economic slack, and given contrasted sharply with those of some the large increases in consumer prices other major industrial countries and in 1979 and 1980, there were strong contributed to a substantial appreci- tendencies toward sizable catch-up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 Monetary Policy Reports wage hikes even in the face of an that legislative initiatives then pendunemployment rate that reached IV2 ing in the area of financial regulation percent last spring. This tendency could alter the desired rates of inmanifests itself in a direct way when crease, as could any other unanticiformal cost-of-living escalator clauses pated developments that indicated the exist. Such clauses are most common prescribed growth rates were inconin the manufacturing sector, especially sistent with the basic objectives of when there is collective bargaining by policy. As stated, however, the ranges large industrial unions, and the accel- suggested a clear deceleration of eration of wage rates was in fact rela- money and credit growth from the tively pronounced in that sector. pace of 1979—a specification that appeared appropriate in terms of both The Growth of Money and Credit the near-term and long-term requirein 1980 ments of anti-inflation policy. In its report to the Congress last Feb- As noted in the preceding section, ruary, the Board of Governors indithe monetary and credit aggregates cated the plans of the FOMC regardgrew quite rapidly in the opening part ing the growth of money and credit of the year. Then, as economic acin 1980. As in previous years, the tivity began to fall rapidly, the growth FOMC set desired ranges for the of money and credit slowed markgrowth of several monetary aggreedly. Indeed, the narrow monetary gates and of commercial bank credit. aggregates, Ml-A and Ml-B, which Measured from the fourth quarter of are measures of the public's transac- 1979 to the fourth quarter of 1980, tion balances, actually contracted sigthe growth ranges were as follows: nificantly in the second quarter. This Ml-A, ZVi to 6 percent; Ml-B, 4 to decline, occurring as it did at the percent; M2, 6 to 9 percent; M3, same time that interest rates were fallto 9Vi percent; and bank credit, ing sharply, was considerably greater 6 to 9 percent.1 It was recognized than would have been expected on the basis of historical relationships among 1. Ml-A is currency plus private de- money, income, and interest rates. mand deposits at commercial banks net of The weakness in the Ml measures deposits due to foreign commercial banks tended to restrain the growth of the and official institutions. Ml-B is Ml-A plus other checkable deposits (that is, ne- broader monetary aggregates. Bank gotiable order of withdrawal accounts, ac- credit meanwhile contracted slightly. counts subject to automatic transfer ser- At midyear, when the FOMC revice, credit union share draft balances, and assessed the monetary growth ranges demand deposits at mutual savings banks). for 1980, there were few, if any, M2 is Ml-B plus savings and smalldenomination time deposits at all deposi- signs of the then-incipient economic tory institutions, shares in money market recovery. The monetary aggregates, mutual funds, overnight repurchase agree- though again on the rise, were either ments (RPs) issued by commercial banks, below or in the lower portion of the and overnight Eurodollar deposits held by U.S. residents at Caribbean branches of previously announced ranges. The U.S. banks. M3 is M2 plus large time de- Depository Institutions Deregulation posits at all depository institutions and and Monetary Control Act of 1980 term RPs issued by commercial banks and had been signed into law by the end savings and loan associations. Bank credit of March, but there was no clear eviis total loans and investments of commercial banks. dence yet of significant impact on the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 33 behavior of the monetary aggregates. in the latter months of the year—the In these circumstances, the FOMC growth of the monetary aggregates reaffirmed the ranges for money and on a fourth-quarter-to-fourth-quarter bank credit that it had adopted in basis in 1980 was generally near or February, but it did indicate that, if a bit above the upper ends of the the public continued to economize on ranges announced by the System. the use of cash as strongly as in the Bank credit growth was within the second quarter, Ml-A and Ml-B range specified by the FOMC. might well finish the year near the Considerable care must be exerlower end of their respective ranges.2 cised in assessing the behavior of Such a proviso was called for because Ml-A and Ml-B. Last February a sustained downward shift in the de- when the ranges for the aggregates mand for money implies that a given were set, it was assumed that the rate of monetary growth is more ex- growth rates of the two aggregates pansionary in its impact on the econ- would differ only by V2 percentage omy than would otherwise be the point based on an expectation that, case. under prevailing statute, growth in Over the second half of the year, automatic transfer service (ATS) however, the monetary aggregates and negotiable order of withdrawal and bank credit grew very rapidly. (NOW) accounts would draw few There was a surprisingly swift and funds from demand deposits (destrong turnaround in economic ac- pressing Ml-A) and savings deposits tivity. And simultaneously the pub- (boosting Ml-B). With the passage lic's demand for money retraced most of the Monetary Control Act, howof the evident downward shift of the ever, which authorized NOW acfirst half. Both of these developments counts on a nationwide basis as of may have been associated with the December 31, 1980, commercial phasing out of the extraordinary credit banks began to promote ATS acrestraint program at the end of the counts more vigorously. As a result, second quarter. In retrospect, this actual growth of ATS and NOW acprogram seems to have played a counts substantially exceeded the greater role than was apparent at amount allowed for in the FOMC midyear in influencing the particular ranges for Ml-A and Ml-B. patterns of spending and financial Ml-A increased 5 percent over the flows that developed in the spring year ended in the fourth quarter of and summer. 1980, close to the midpoint of the Although the Federal Reserve re- FOMCs range for that aggregate. sisted the accelerating growth in Meanwhile, growth in Ml-B was 1V\ money and credit—and did succeed percent, 3A of a percentage point above the upper end of its longer-run in bringing about a clear deceleration range. But if the FOMCs ranges are adjusted for current estimates of the 2. Previous episodes had occurred, particularly in the mid-1970s, of lasting down- actual impact of shifting into ATS ward shifts in the demand for Ml balances and NOW accounts, the increases in following rises in interest rates to new both narrow aggregates are close to record levels. Such interest rate movethe upper bounds of the FOMCs ments evidently encouraged greater efforts ranges for 1980. to economize on holdings of nonearning assets. Although, conventionally, fourth- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 Monetary Policy Reports quarter averages have been adopted The effects on M2 of shifting into as the basis for measuring annual ATS and NOW accounts likely are growth in the money and credit ag- minor, since nearly all the inflows to gregates, the choice is somewhat arbi- those instruments appear to be from trary and is only one of many possible assets within this broad aggregate. approaches. Moreover, citing figures For the year as a whole, M2 grew for any particular calendar period about 934 percent, % of a percentage does not necessarily give a clear sense point above the upper end of the of the longer-term trends, which are FOMC's range. All of the growth in more relevant in assessing policy. For the nontransaction component of M2 that reason, the table offers measure- occurred in those assets offering ments of annual growth on several market-related yields—primarily 6bases. Owing to the particular month- month "money market certificates," ly patterns over the past two years, 2 V2 -year "small-saver certificates," the fourth-quarter-to-fourth-quarter and shares of money market mutual calculations show a lesser tendency funds. As of December, these assets toward deceleration in the growth of accounted for 45 percent of the non- Ml-A and Ml-B than do other mea- transactional component of M2, comsurements of the 1980 experience. pared with 28 percent a year earlier. In earlier periods of high interest rates, when such instruments did not Growth of Money and Bank Credit1 exist, M2 tended to decelerate mark- Percentage changes edly as disintermediation occurred, with savers shifting funds into market Bank Item Ml-A Ml-B M2 M3 credit instruments. In 1980, the growing popularity of these relatively new as- Fourth quarter sets may well have drawn some funds to fourth into M2 from market securities such quarter 1978 7.4 8.2 8.4 11.3 13.3 as Treasury bills, causing M2 to grow (7.9) (8.0) 1979 5.0 7.7 9.0 9.8 12.3 somewhat more rapidly than in the (6.7) (6.8) preceding two years and also faster 1980 5.0 7.3 9.8 9.9 7.9 (6.3) (6.7) relative to Ml-B. December to M3 grew almost 10 percent over December the four quarters of 1980, Vi percent- 1978 7.1 8.2 8.3 11.2 13.6 age point above the upper end of its (7.8) (7.9) 1979 5.2 7.5 8.9 9.4 11.5 longer-run range. Large-denomina- (6.6) (6.8) tion time deposits expanded mod- 1980 4.1 6.5 9.7 10.3 8.9 (5.2) (5.8) erately at commercial banks and thrift Annual averinstitutions during the year; in the age to annual case of banks, which issue the bulk average 1978 7.7 8.2 8.9 11.7 12.3 of these instruments, the borrowing (8.0) (8.0) was offset by a reduction of net liabili- 1979 5.2 7.8 8.9 10.3 13.4 (6.8) (7.0) ties to foreign branches. 1980 4.6 6.4 9.1 8.6 8.3 Bank credit grew about 8 percent (5.6) (5.9) in 1980. Fluctuations in this measure 1. Numbers in parentheses are adjusted for the estimated impact of shifting to ATS and followed the general pattern of aggre- NOW accounts from other assets and should gate credit flows in the economy, but give a better indication of the underlying trend they were exaggerated by changes in of monetary expansion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 35 the composition of business borrow- fourth quarter, businesses again ing. During the first quarter, non- deferred long-term borrowing and financial firms avoided long-term bor- tapped their banks for credit. rowing at record high interest rates Broader measures of credit flows in and turned instead to the commercial the economy also exhibited a considbanks for funds. In fact, they appear erable cyclical fluctuation in 1980, as to have borrowed beyond their im- shown in the accompanying table. mediate needs in anticipation of Total funds raised by all sectors of the greater credit stringency. During the economy in credit and equity markets second quarter, as bond rates dropped fell by almost one-half in the second sharply and as banks tightened their quarter, then retraced most of that lending policies in response to the decline in the third quarter. For the special credit restraint program, cor- year as a whole, aggregate funds porations issued an unprecedented raised were substantially less than in volume of long-term securities and re- 1978 and 1979. Commercial banks paid outstanding bank loans. During provided about the same share of total the summer months as interest rates credit flowing to all sectors as in 1979, began to rise, the pattern of financing while the share of thrift institutions began to reverse again, and in the rose somewhat. Net Funds Raised and Supplied in Credit and Equity Markets Billions of dollars 19801 Sector Q2 Q3 Q4* NET FUNDS RAISED Total, all sectors 482 483 434 497 253 454 534 U.S. government 54 37 79 62 67 99 89 State and local government .. 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 98 126 Domestic financial 81 88 70 87 20 73 104 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 482 484 435 498 253 456 534 U.S. government 20 23 26 29 30 24 21 State and local government — 15 13 20 18 2 36 23 Foreign 40 -6 22 -8 47 22 27 Private domestic nonfinancial .. 51 81 29 74 -51 55 39 Business _ i 10 10 8* -10 22 22 Household 52 71 19 66 -41 33 17 Domestic financial 356 373 338 385 225 319 424 Private intermediaries 305 308 285 315 179 293 353 Commercial banking 129 121 104 117 -2 129 Thrift institutions 76 56 57 35 27 74 94 Insurance and pension funds 84 90 98 103 108 93 86 Other2 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 8 5 9 20 -26 15 1. Seasonally adjusted annual rates. end investment companies, and security 2. Includes finance companies, money mar- brokers and dealers, ket funds, real estate investment trusts, open- p. Preliminary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 Monetary Policy Reports Issues in Monetary Control nomic variable. However, it has per- Monetary growth in 1980 was, on ceived a clear value in focusing spebalance, fairly close to the ranges spec- cial attention on the behavior of the ified by the FOMC. And, more im- money stock, especially in an environportant, the Federal Reserve's actions ment in which inflation is such a clearly imposed a significant—and prominent concern. A special role for essential—degree of restraint on the the monetary aggregates is, furtheraggregate demand for goods and ser- more, dictated by the requirement of vices in the economy. Nonetheless, the Humphrey-Hawkins Act that the particularly in view of the magnitude Federal Reserve report to the Conof the short-run swings in interest gress on its objectives for monetary rates and financial flows in the past expansion. year, questions have been raised—in- Analysts of all schools agree that, side as well as outside the Federal over the long run, inflation cannot Reserve—about the techniques of im- persist without monetary accommodaplementing monetary policy and, espe- tion. Thus, careful attention to the cially, about the efficacy of the new trend of monetary expansion is an operating procedures adopted in Oc- absolutely essential feature of respontober 1979. These questions have sible monetary policy. In addition, been addressed in an intensive study however, in a shorter-run context, of the recent period, New Monetary monetary aggregates are attractive as Control Procedures: Federal Reserve intermediate targets because they pro- Staff Study. vide a mechanism of "automatic sta- As a prelude to discussing the key bilization." When the economy begins points raised by the staff work, it is to expand too rapidly, the associated useful to describe in broad outline the increase in the quantity of money general approach of the Federal Re- demanded for transaction purposes serve to monetary policy. For a num- comes into conflict with the monetary ber of years, monetary aggregates target, and this results in a rise in have played a key role as intermediate market rates of interest; the rise in targets for policy, that is, as variables interest rates, in turn, damps the agstanding midway in an economic chain gregate demand for goods and serlinking the proximate instruments of vices. Similarly, if there is a recesthe Federal Reserve—open market sionary impulse to the economy, the operations, the discount window, and associated reduction in the demand reserve requirements—to the vari- for cash balances leads to an easing ables of ultimate concern, such as of credit conditions that moderates production, employment, and prices. the impact of that impulse. Pursuit of Economists have debated extensively an interest rate target carries with it a the question of the optimal interme- greater danger that an unanticipated diate target variable, with the con- impulse to the economy will tend to troversy centering on the virtues of be fully accommodated, with greater monetary aggregates versus interest inflationary or recessionary conserates. The System historically has, in quence. effect, taken an eclectic view, believ- Open market operations are the ing that it would be remiss in ignoring major tool of monetary control. Bethe information provided by the fore October 1979, the basic apmovements of any financial or eco- proach employed by the System was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 37 to supply or absorb reserves through for the portion of total reserves exopen market operations with an eye pected to be provided through borto holding short-term interest rates rowings at the Federal Reserve Bank —most immediately, the federal funds discount windows. rate—within a relatively narrow but Between meetings of the FOMC, changing band thought consistent with the Open Market Desk focuses on the desired growth of the money stock. achieving a given level of nonbor- This method placed considerable im- rowed reserves, the reserve measure portance on the System's ability to that is controllable through open predict the quantity of money the market operations on a day-to-day public would wish to hold at given basis. If the monetary aggregates interest rates. This never was an easy deviate from their prescribed growth matter, but in 1979, as the advance of rates, the resultant movement in reprices accelerated and inflationary ex- quired reserves is reflected in an inpectations became a more significant crease or decrease in borrowing at the and volatile factor affecting economic discount window. Owing to adminisand financial behavior, predicting the trative limitations imposed by the public's desired money holdings at Federal Reserve on the frequency, given levels of nominal interest rates amount, and purposes of borrowing, became exceedingly difficult. As a an increase in borrowing puts upward consequence, in October the FOMC pressure on the federal funds rate as altered its technique of monetary con- individual depository institutions bid trol, substituting the volume of bank more aggressively in the market for reserves for interest rates as the day- the available supply of nonborrowed to-day guide in conducting open mar- reserves in an effort to shift the need ket operations. to borrow to other institutions. A de- Under the approach adopted in Oc- cline in borrowing has the opposite tober 1979, the FOMC sets short-run effect. The resultant movements in targets for monetary expansion, as it short-term interest rates induce portdid previously, to guide operations be- folio adjustments by depository institween meetings. The staff then calcu- tutions and the public that tend to lates corresponding paths for various move the money stock back toward reserve aggregates. A path for total the targeted level. If it appears that reserves is calculated based on the ex- these automatic effects are not going pected relationship between reserves to be prompt enough or strong enough and the money stock—the so-called —as evidenced in part by sustained reserves money multiplier. This rela- deviations in total reserves from their tionship is variable and not known path—the System can reinforce them with certainty because of the differ- by making adjustments in the path for ences in reserve requirements on var- nonborrowed reserves that increase ious components of the monetary the upward or downward pressures on aggregates, which shift in relative im- money market interest rates. Similar portance from week to week; more- effects can be achieved through over, in addition to required reserves, changes in the discount rate, given depository institutions also hold a the nonborrowed reserves path. varying amount of excess reserves. A The workings of this mechanism of path for nonborrowed reserves then monetary control are illustrated clearis calculated by making an allowance ly by the movements in reserves and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

3 8 Monetary Policy Reports interest rates during 1980. During a growing risk that downward presthe early part of the year, when the sures on the dollar might cumulate. money stock was running above the In a way, the Federal Reserve was FOMC's short-run target, the volume caught in an expectational crossfire. of adjustment credit provided by the On the one side, those who concendiscount window increased substan- trate on the money stock in assessing tially while the amount of nonbor- policy feared that the System was berowed reserves provided through open ing too restrictive because the various market operations declined, partly as measures of money were slowing a consequence of reductions in the sharply or contracting; on the other, nonborrowed reserves path to hold some of those in the financial markets down total reserves and restrain the and elsewhere who view interest rates growth of money over time. During as the indicator of policy feared that this period the federal funds rate rose the System was being inflationary besharply. Restraint was intensified by cause rates were falling sharply. The increases in the basic discount rate FOMC, in weighing the risks, decided and the introduction in mid-March of to exercise some caution in the latter a surcharge on frequent borrowing by part of the spring by setting its shortlarge banks. run monetary growth targets with a As the monetary aggregates weak- view to a gradual rather than an imened in the spring, the pattern of the mediate return to the longer-range first quarter was reversed. The Sys- path for the year. tem countered the weakness of the The picture soon changed dramaticaggregates by maintaining the supply ally, however, for by midsummer the of total reserves; this required sub- monetary aggregates—buoyed by the stantial injections of nonborrowed re- surprisingly strong turnaround in ecoserves to offset the impact of the nomic activity—were rising rapidly. repayment of discount window bor- And as required reserves began to exrowings. The federal funds rate fell ceed nonborrowed reserves, borrowsharply. ing and interest rates climbed. As in The sharp plunge in interest rates, the first quarter, pressures on money even though it occurred against a market interest rates were reinforced backdrop of marked monetary weak- by reductions in the path for nonborness and steep recession, did arouse rowed reserves and by increases in the concerns in some circles about the discount rate and imposition of sur- System's commitment to anti-infla- charges on frequent borrowing. Bortionary restraint. This nervousness rowing and the federal funds rate conwas evident not only in domestic fi- tinued to rise until mid-December nancial markets but in foreign ex- when a drop in the money stock rechange markets too. By and large, lieved some of the pressure on reserve the foreign exchange value of the dol- positions. lar had fluctuated in a way that rep- The staff study has examined the resented a fairly direct response to the experience of 1980 in considerable pronounced relative movement of in- detail in an effort to assess the causes terest rates on assets denominated in of the extreme variability of money dollars or foreign currencies. But as and interest rates in 1980 and the U.S. interest rates reached compara- efficacy of the new reserves-oriented tively low levels, there was a sense of operating procedure in achieving the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 39 objectives of policy. Certain key con- rowed reserves as an operating tarclusions of the study may be high- get—would improve short-run monelighted. tary control. 1. The year 1980 was one of ex- 4. Clearly, efforts to limit severely traordinary variability in money and deviations in money from its longernominal interest rates. In the case of run growth path would require acmoney, however, it is important to ceptance of much more variable note that comparisons with past years short-term interest rates. are complicated by the fact that mone- 5. Short-run variability in the montary data for those periods have been etary aggregates does not appear to considerably smoothed as additional involve significant impacts on the beinformation has been obtained on havior of the economy. Weekly and changes in seasonal patterns. If the monthly changes in the monetary ag- 1980 figures are compared with the gregates are inherently quite "noisy." initial figures for earlier years, the dif- Moreover, available models suggest ference in monetary variability is sub- that, because of the relatively long stantially reduced. Still, after making response lags involved, sizable quarsuch allowances, it appears that terly (or even semiannual) fluctuamoney has been somewhat more vari- tions in monetary growth—if offsetable over the past year, especially on ting—do not leave an appreciable a monthly or quarterly basis—though, imprint on movements in output and as far as can be judged from available prices. data, remaining within the range of 6. The federal funds rate has been foreign experience with money-stock more variable since October 1979, as variability. would be expected with use of a re- 2. Much of the variability—cer- serves operating target, but in addition tainly the broad swings—in money very short-run fluctuations in other and interest rates since October 1979 market rates—both short- and longwas attributable to an unusual com- term—also have been larger in magbination of economic circumstances nitude than formerly. These rates of and not to the new operating proce- interest have exhibited higher correladures per se. The "real" and financial tions than previously with movements sectors of the economy were subjected in the federal funds rate. The reasons to unusual disturbances in 1980. The for this closer correlation between the imposition and subsequent removal of federal funds and other rates in the credit controls, especially, appear to very short run are not entirely clear, have had a major impact on the de- and it is not certain that such a patmands for money and credit and to tern will prevail in the future. But, in have strongly affected the behavior of any event, there are few signs that the money and interest rates in the second resulting variability has imposed apand third quarters. preciable costs in terms of reduced 3. Simulation exercises utilizing efficiency of financial markets or of several models of the money market increased costs of capital in the period provided no clear evidence that, under analyzed by the study. Considerable present institutional arrangements, al- difficulties arise in separating the efternative operating techniques—us- fects of the new operating technique ing, for example, total reserves or the from those of other factors. However, monetary base instead of nonbor- it does appear that much of the strain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 Monetary Policy Reports on financial institutions and many of broad ranges of tolerance for money the changes in financial practices ob- market interest rates—generally specserved in the past year were related to ified in terms of the federal funds the broad cyclical pressures on inter- rate. These ranges, however, should est rates during the year, caused by not be viewed as rigid constraints on accelerated inflation and heightened the Open Market Desk in its pursuit inflationary expectations, and to the of reserve paths set to achieve targeted changes in demands for credit asso- rates of monetary growth. They have ciated with the behavior of economic not, in practice, served as true conactivity. straints in the period since October The FOMC has reviewed the staff's 1979, as the FOMC typically has alwork. Fundamentally, the research tered the ranges when they have besuggests that the basic operating pro- come binding. But, in a world of uncedure represents a sound approach to certainty about economic and financial attaining the longer-run objectives set relationships, the ranges for interest for the monetary aggregates. How- rates have served as a useful triggerever, the FOMC and the Board of ing mechanism for discussion of the Governors will be considering the implications of current developments practicability of modifications that for policy. might reduce slippages between re- The reserves operating procedure serves and money, without unduly in- —or any modification of it—needs to creasing the risk of an unnecessarily be viewed in the context of a number heightened variability of interest rates. of practical considerations that affect These modifications include the possi- the basic targets for the monetary agbility of prompter adjustment of non- gregates and the process of attaining borrowed reserve paths or of the them. First, targets need to recognize discount rate at times when, in asso- the lags in the adjustment of wages ciation with undesired movements in and prices that may limit the speed money, the levels of borrowing and, with which noninflationary rates of consequently, of total reserves are monetary expansion can be attained running persistently stronger or weak- without unduly restraining economic er than projected. In addition, the activity. Second, the potential for Board of Governors has already indi- costly disturbances in domestic financated its inclination to switch from cial or foreign exchange markets may the present system of lagged reserve occasionally require short-run deparaccounting to a system in which re- tures from longer-run monetary tarquired reserves are posted essentially gets. Third, precise month-by-month at the same time as deposits; it is con- control of money is not possible, nor tinuing to study the practical merits is it necessary in terms of achieving of such a system to ensure that the desirable economic performance. Fioperating problems created for de- nally, uncertainties about the relationpository institutions and the Federal ship between money and economic Reserve and the potentially increased performance suggest the desirability volatility of the federal funds rate of a degree of flexibility in the targets would not outweigh the possible bene- —including the use of ranges for more fits in terms of tighter short-run than one measure of money—and the monetary control. potential need to alter previously The FOMC has continued to set established targets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 41 Monetary Policy and the Prospects forces. The growth of money and for the Economy in 1981 credit will have to be slowed to a rate consistent with the long-range growth The Federal Reserve's Objectives of the nation's capacity to produce at for the Growth of Money and Credit reasonably stable prices. Realistically, In its midyear report last July, the given the structure of the economy, Federal Reserve indicated to the Con- with the rigidities of contractual relagress that its policy in 1981 would be tionships and the natural lags in the designed to maintain restraint on the adjustment process, that rate will have expansion of money and credit. Noth- to be approached over a period of ing has occurred in the intervening years if severe contractionary presmonths to suggest the desirability of a sures on output and employment are change in that basic direction. Events to be avoided. have only served to underscore the The ranges of monetary expansion importance of such a policy—and of specified this month by the FOMC for complementary restraint in the fiscal the year ending in the fourth quarter dimension of federal policy as well. of 1981 reflect these considerations. Few would question today the viru- They imply a significant deceleration lence of the inflation that is afflicting of growth in the monetary aggregates the economy or the urgency of mount- from the rates observed in 1980 and ing an effective attack on the forces other recent years. The ranges are as that are sustaining inflation. The follows: for Ml-A, 3 to 5Vi percent; rapid rise of prices is the single great- for Ml-B, ZVi to 6 percent; for M2, est barrier to the achievement of bal- 6 to 9 percent; and for M3, 6V2 to anced economic growth, high em- 92/2 percent. It should be emphaployment, domestic and international sized that, owing to the introduction financial stability, and sustained pros- of NOW accounts on a nationwide perity. The experience of the past basis at the end of 1980, the monetary year—the stresses and dislocations ranges have been specified on a basis that have occurred—attests to the dif- that abstracts from the impact of the ficulty of dealing with inflationary shifting of funds into interest-bearing trends that have been many years in checkable deposits; only by adjusting the making, but it does not indicate for the distorting effects of such shifts that there is any less need to do so. can one obtain a meaningful measure Indeed, the need has become more ur- of monetary growth. The FOMC also gent, for as price increases continue, adopted a corresponding range of 6 to the public's expectations of inflation 9 percent for commercial bank credit. become more and more firmly em- The ranges for Ml-A and Ml-B bedded, and those expectations in turn are V2 percentage point less than those contribute to the stubborn upward the Federal Reserve sought in 1980. momentum of wages and prices. Since realized growth last year, after Persistent monetary discipline is a adjustment for the impact of shifting necessary ingredient in any effort to into interest-bearing checkable derestore stability in the general price posits, was close to the upper ends of level. To be sure, other areas of pol- the stated ranges for the period, the icy are also important, but it is essen- new ranges are consistent with a detial that monetary policy exert con- celeration of considerably more than tinuing resistance to inflationary V2 percentage point. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 Monetary Policy Reports The actual observed changes in economic and institutional circum- Ml-A and Ml-B will differ by a wide stances. In fact, there is a distinct margin; in fact, it is quite possible likelihood that, consistent with the that, because of the movement of planned decline in the growth of the funds from demand deposits to NOW narrower aggregates, growth in M2 in accounts, Ml-A could contract this 1981 will be in the upper half of its year, while Ml-B could grow more 6 to 9 percent range. With the changes rapidly in reflection of funds moving in regulatory ceilings that have made into NOW accounts from savings de- small-denomination time deposits posits and other assets. It must be more attractive in comparison to marstressed that valid comparison of ac- ket instruments and with the growing tual year-to-year growth has to allow popularity of money market mutual for this institutional change. funds, the nontransactional compo- The behavior of Ml-A and Ml-B nent of M2 is likely to continue growthus far this year has reflected this ing quite briskly. Moreover, if the tax pattern, but in an exaggerated degree cuts proposed by the President result because of the large initial transfer of in a marked increase in the proportion funds to NOW accounts. The next of income saved, this saving may consection discusses in some detail the tribute to relatively robust growth in distortions caused by shifting to NOW M2, which has, in any event, tended accounts and the expected behavior of in recent years to approximate the in- Ml-A and Ml-B. As the discussion crease in nominal GNP. indicates, any estimates of the extent The range for M3 in 1981 is the and character of the prospective shift same as that for 1980, but again is into NOW accounts must be tentative. below the actual growth experienced The Federal Reserve will be monitor- last year. The deceleration would reing the shifting into interest-bearing flect the slower expansion specified checkable deposits as the year pro- for M2, which accounts for more than gresses and will be assessing its impact three-quarters of the broader aggreon the expansion of the monetary ag- gate. Large-denomination time degregates. From time to time, the Sys- posits at commercial banks—the other tem will report its estimates of the ad- major component of M3—likely will justed growth of Ml-A and Ml-B so expand moderately again this year, that the public and the Congress can but much will depend on the patterns better assess the consistency of mone- of credit flows that emerge. The tary expansion with the FOMC's growth of bank credit is now expected stated objectives. to be about the same as in 1980. The 1981 range for M2 is the same Household borrowing at banks could as that in 1980; however, the upper increase, especially in the consumer end of the range is roughly % per- installment area, where use of credit centage point less than the actual was severely damped for a time last growth recorded in 1980. A reduction year by credit controls. However, in the range does not appear appro- nonfinancial firms likely will wish to priate at this time in light of what is rely less heavily on bank borrowing known about the relationships among than they did in 1980, in light of the the various monetary measures, as af- deterioration of balance-sheet liquidfected by public preferences for var- ity that they have already experiious types of assets and by expected enced. Indeed, should credit market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 43 conditions be such as to encourage a bearing accounts. Furthermore, varsubstantial funding of short-term debt ious surveys and other analyses have by corporations, commercial banks indicated that in the past roughly twomight play a lesser role in the overall thirds of the funds flowing into ATS supply of credit and M3 could be and NOW accounts have come from damped by reduced bank reliance on demand deposits and roughly onelarge time deposits. On the other third from savings deposits. hand, if conditions in the bond mar- During January, a somewhat larger kets are not conducive to long-term share of the funds flowing into interfinancing, then bank credit and M3 est-bearing checking deposits appears could be relatively strong. to have come from demand deposits —perhaps about 75 to 80 percent, Impact of Nationwide NOW Accounts with only about 20 to 25 percent on Monetary Growth in 1981 coming from savings deposits (or, to As noted in the preceding section, the a very limited extent, other sources). behavior of Ml-A and Ml-B will be This change from past patterns apgreatly affected this year by the ad- pears to reflect a relatively fast advent, under the Monetary Control Act justment on the part of holders of of 1980, of nationwide availability of large-denomination demand deposit NOW accounts and other interest- balances at commercial banks. The bearing checkable deposits. The phe- sources of subsequent growth in internomenon is qualitatively similar to est-bearing checkable deposits are exwhat occurred in 1980 when growth pected to be more along the lines of in Ml-A was depressed and growth in the past two-thirds-one-third break. Ml-B enhanced by the shifting of Depository institutions have marfunds into ATS accounts—but the keted the new accounts very aggresdistortions in 1981 will be quantita- sively, many of them lining up a siztively much greater. able number of customers before the With the introduction of a new end of 1980. Since December 30, the financial instrument like the NOW ac- net growth of interest-bearing checkcount, a broad adjustment of the pub- able deposits already has totaled more lic's asset portfolios may occur. Under than $22 billion. Obviously it is exthe present circumstances, however, it tremely difficult to forecast the further seems reasonable as a practical matter growth of interest-bearing checkable to expect that the major impact will deposits over the remainder of the be a shifting of funds into the new year. A working assumption would accounts from existing nonearning de- be that the net increase in such demand deposits and from the inter- posits this year will amount to someest-earning assets included in M2 where between $35 billion to $45 bil- (especially highly liquid, relatively lion, which would mean that half, or low-yielding savings deposits). The a little more than half, of the funds analysis of experience in past years already have been shifted. If the with NOW accounts in the northeast- shares of funds coming from demand ern part of the country and with ATS and savings deposits move promptly accounts throughout the nation indi- to a two-thirds-one-third proportion, cates that flows from demand and sav- the result will be a depressing effect ings deposits have accounted for the on Ml-A growth of 7 to 8 percentage great bulk of the growth of interest- points and an increase of 2 to 3 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 Monetary Policy Reports centage points in Ml-B growth. Tak- enced a deterioration in their financial ing the midpoints of these estimates condition. and applying them to the basic ranges The near-term prospects for prices specified by the FOMC for monetary are not favorable. In the months imgrowth this year, the observed change mediately ahead, the major price inin Ml-A from the fourth quarter of dexes will reflect the effect of poor 1980 to the fourth quarter of 1981 agricultural supply conditions on food would be — AV2 to —2 percent and prices and the impact of higher OPEC that in Ml-B would be 6 to 8V2 charges and domestic decontrol on percent. energy prices. Increases in the con- As already indicated, the growth of sumer price index, furthermore, will interest-bearing checkable deposits in reflect—in a way that exaggerates the January was extraordinarily rapid and true change in the average cost of livresulted in an extreme divergence of ing—the rise in mortgage interest Ml-A and Ml-B movements. Ob- rates that occurred in the latter part served Ml-A contracted at a 37Vi of 1980. percent annual rate in January, while Aside from these special factors, Ml-B increased at a 12V4 percent an- the basic trend of prices is linked nual rate. On the assumption that closely to the behavior of unit labor three-quarters to four-fifths of the costs, which constitute the largest elefunds flowing into interest-bearing ment in costs of production. As noted checkable deposits came from demand earlier, poor productivity performance deposits, both Ml-A and Ml-B, on has contributed to rising costs. It is an adjusted basis, showed only small also quite clear that wage demands growth in the early weeks of this year. have been sizable. Despite the acceleration in wage increases that has Outlook for the Economy occurred, the wages of many workers The economy entered 1981 on an up- have failed to keep pace with the upward trajectory, extending the recov- ward movement of prices in the past ery in activity from last year's brief few years. This development was virbut sharp recession. January saw fur- tually inevitable in light of the decline ther large gains in retail sales, employ- in productivity and the adverse termsment, and industrial production. On of-trade effects of the tremendous inthe whole, the demand for goods and crease in foreign oil prices. So long services has continued to prove more as those conditions continue, the averbuoyant than most analysts had ex- age worker cannot anticipate a rising pected. Unfortunately, at the same standard of living, and attempts to time inflation has not abated. "make up" losses in real income will The persistence of intense inflation- be reflected in strong cost and price ary pressures jeopardizes the continu- pressures. ity of economic expansion over the The condition of labor markets is, remainder of the year. Moreover, un- of course, a factor affecting wage deless the rise of prices slows, there can cisions. Despite the fact that the overbe little hope of an appreciable, sus- all unemployment rate stands at IV2 tained easing of interest rates or of a percent, scarcities of skilled workers substantial improvement in the bal- have occurred in some sectors of the ance sheets of the many units of the economy. But, even when slack in economy that already have experi- labor demand does exist, its impact Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 45 on wages is rather slow in emerging; once expectations are turned, further wages appear to have a strong mo- progress toward price stability should mentum rooted in inflationary expec- come more easily so long as excessive tations, which are based to a great pressures on productive capacity are extent on past experience as well as avoided. on attempts to maintain real income. The policy of monetary restraint Workers' wage demands are influ- adopted by the Federal Reserve is inenced by expectations about prices, tended to contribute to the process of as well as by patterns established in breaking the momentum of inflation. previous wage bargaining. Mean- Fiscal policy also has a crucial role to while, employers condition their wage play. Cuts in federal taxes potentially offers in good measure by their own can help to invigorate private capital sense of the prospects for inflation formation and thereby enhance proand of whether they will be able to ductivity, reduce costs, and pave the pass along higher compensation costs way for faster economic growth. But by increasing prices. it is important that government spend- This momentum must be turned in ing be held firmly in check at the same a favorable direction. To do so will time so that aggregate demand does require a commitment to monetary not become excessive and so that the and fiscal restraint that is firm and pressures of government demands on credible, and a direction of other gov- the credit markets do not impede the ernmental policies toward fighting in- financing of private investment. flation. Labor and management must The members of the FOMC, in asbe persuaded that the inflationary sessing the economic outlook, have process will not be accommodated— recognized the possibility of some rethat wage and price decisions based duction this year in business and peron an anticipation of rapid inflation sonal income taxes and some initial will prove inimical to their ability to steps in the longer-range effort toward maintain employment and sales vol- slowing the growth of federal expenume. Put more positively, they have ditures. Given these working assumpto be convinced that moderation in tions, the individual members of the their individual wage and price ac- FOMC have formulated projections tions will not put them at a relative for economic performance in the curdisadvantage and will in fact produce rent year that generally fall within the a better economic environment for ranges indicated in the accompanying everyone. table. As may be seen, the FOMC Such an alteration of the expecta- members' projections for output and tional climate will not be easy to inflation encompass those that underachieve. But it is important to do so. lie the administration's recent budget For, to the extent that those attitudes proposal. can be changed, the short-run costs of The members of the FOMC see inrestraint on aggregate demand, in the flation as remaining rapid in 1981, alform of economic slack, will be ame- though not so rapid throughout the liorated. Conversely, prolongation of year as seems likely to be the case high wage and price demands would early in the period. The failure of come into conflict with needed mone- inflation to slow more quickly and the tary and fiscal restraint, aggravating large budgetary deficits in prospect economic difficulties. In any event, for the year are seen as resulting in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 Monetary Policy Reports Economic Projections for 1981 strated in recent years. Deeply embedded expectations of inflation have created serious imbalances in financial markets, distorted spending patterns throughout the economy, and Changes from imparted a strong upward momentum fourth to wages and prices. At the same quarter to fourth time, productivity growth has slowed quarter, percent markedly, and the unemployment Nominal GNP . 9.5 9 to 12 11.0 rate has remained consistently high Real GNP -.3 -IV* to 1*4 1.4 GNP deflator . 9.8 9 to 10*4 9.5 by historical standards. Dealing with Average level in the inflation problem, with all its fourth quarter, difficulties, is essential if we are to percent provide a solid base for sustained Unemployment rate 7.5 8 to 8V4 7.7 growth, lower unemployment, and higher productivity, goals central to continued strong demands for money the Humphrey-Hawkins Act. and credit and in the maintenance of relatively high interest rates. Against The reduced rate of increase in this backdrop, economic activity is prices this year has reflected, in sublikely to show only intermittent stantial part, developments in the strength, and unemployment prob- food and energy sectors. Sensitive ably will rise between now and the commodity prices, more broadly, end of the year. have been restrained by the high cost of credit and reduced speculative in- Report on July 20,1981 terest. In short time periods, however, prices in these sectors can be Federal Reserve Policy and the greatly influenced by developments Outlook for 1981 and 1982 only tangentially related to broader The Objectives of Monetary Policy trends in the economy and can be The Federal Reserve reported to the quite volatile. The underlying infla- Congress in February that the prin- tionary tendencies in the economy cipal objective for monetary policy in generally are better captured by 1981 would be to exert continuing trends in labor costs—the largest eleresistance to inflationary forces. This ment in production costs for both goal requires gradual reductions over goods and services. While unit labor time in the expansion of money and costs have shown scattered and tencredit to rates consistent with sustain- tative indications of some moderation able growth in output at reasonably in their rise, their advance remains stable prices. Signs of a deceleration rapid. in broad price measures this year are One key element in slowing the encouraging. Nonetheless, inflation- rise in costs is avoiding excessive ary forces are still well entrenched, pressures on productive capacity. and the Federal Reserve must remain Restraint on growth of money and firmly committed to a policy of mone- credit helps to prevent such prestary restraint. sures. But the process of slowing The persistence of inflation and the inflation through monetary restraint extraordinary costs it imposes on the can entail strains on particular mareconomy have been widely demon- kets and sectors of the economy, es- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 47 pecially when so much of the task of ment the efforts of the monetary dealing with inflation rests on mone- authority. As businesses and wage tary policy. As long as strong de- earners become convinced that the mands for money and credit persist government is committed to slowing and inflationary expectations remain the rise in prices, expectations of intense, restrained monetary growth inflation will have a lessening impact may be accompanied by high interest on the determination of wages, inrates and considerable financial stress. terest rates, and prices. In this re- These financial strains impose par- gard, the stance of fiscal policy is ticular hardships on industries that of particular importance. Assurance depend heavily on credit markets that growth in federal expenditures such as construction, consumer dur- will be limited and that the budget able goods, and business equipment. will move toward balance will rein- Most obviously, the thrift institutions force the effectiveness of monetary are experiencing severe pressures on restraint and help relieve pressures earnings and reduced inflows of de- on financial markets. posits. More generally, the recent inflation, combined with a long period The Growth of Money and Credit of relatively slow growth in activity, The targeted ranges of growth for the has distorted the balance sheets of monetary aggregates announced in many businesses and individuals, February anticipated a deceleration in leaving them more vulnerable to ad- monetary growth. Measured from verse financial and economic develop- the fourth quarter of 1980 to the ments. fourth quarter of 1981, and abstract- Lasting relief from these financial ing from the effects of the authorizapressures will be dependent on suc- tion of negotiable order of withdrawal cess in dealing with the inflation that (NOW) accounts nationwide, the lies at the root of the problem. Mone- ranges adopted were as follows: for tary stimulus can encourage, at best, Ml-A, 3 to 5Vi percent; for Ml-B, only short-lived declines in interest 3Vi to 6 percent; for M2, 6 to 9 rates and would without question sus- percent; and for M3, 6Vi to 9Vi pertain or aggravate underlying infla- cent. The corresponding range for tionary forces. The only effective commercial bank credit was 6 to 9 way to bring down interest rates and percent. restore financial stability is through The monetary aggregates have the sustained pursuit of anti-inflation shown disparate patterns of growth policies. The more quickly inflation- so far this year. The narrow aggreary forces are defused, the greater gates, after adjusting for the newly the potential for a sustained easing authorized NOW accounts, have fallin credit market conditions and a en short of their ranges. At the return to more satisfactory produc- same time, M2 growth has been at tion and employment growth. the upper limit of its range, while Disciplined money policy is an M3 has exceeded the upper end of essential element in the effort to damp its range. The divergent behavior of inflationary forces. Progress in this the aggregates is symptomatic of the direction will be speeded and the rapid structural changes that are near-term hardships minimized if under way in financial markets in other government policies comple- response to high and volatile interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 Monetary Policy Reports rates and to an evolving regulatory this year have been low relative to environment. their past relationships to income and Recently, the most prominent interest rates. For example, despite structural development affecting the the rapid growth in nominal income measured aggregates has been the over the first half of 1981, shiftintroduction at the end of 1980 of adjusted Ml-B expanded at an an- NOW accounts nationwide. As ex- nual rate of only 2XA percent from pected, there have been major shifts the fourth quarter of 1980 to the of funds into NOW accounts from second quarter of 1981. This was less conventional checking accounts in- than half the rate at which Ml-B cluded in Ml-A and from interest- grew in 1980 even after allowing for earning assets included in M2. Con- the shift into automatic transfer sersequently, the Federal Reserve is vice (ATS) and related accounts last publishing estimates of Ml-A and year. In the first quarter especially, Ml-B that are adjusted for these growth in adjusted Ml-B was well shifts in order to facilitate compari- below what would have been expected sons with earlier years. Through on the basis of average historical rela- June, these adjustments have had the tionships among money, income, and effect of raising Ml-A by $28 billion interest rates. Relatively low growth and lowering Ml-B by $10 billion. in transaction balances has occurred Shifts into NOW accounts were par- on occasion when interest rates have ticularly large early in the year, re- reached new highs, such as happened flecting the rapid response by indi- at the turn of the year. In addition, viduals with large demand deposit the introduction of NOW accounts balances. Over the past two months, may have stimulated a general reconin contrast, the shift adjustments have sideration of alternative deposit and been negligible, as outflows from nondeposit instruments and thereby NOW accounts have been small. have intensified the response to the These outflows probably do not signal peak in rates. the end of the NOW account buildup. Indeed, at the same time that the The record in New England, where narrow aggregates have been unusu- NOW accounts were introduced some ally weak, the broader aggregates in time ago, suggests that the process the first half of 1981 have been at or of adjustment has further to go. Also, above the upper limits of their specia recent survey indicates that indi- fied ranges. Instruments that offer viduals are continuing to open NOW market-determined yields have conaccounts, though at a much reduced tinued to grow rapidly, insulating M2 pace from earlier in the year. Even from the damping effects of rising so, the adjusted and unadjusted data interest rates by encouraging invesare likely to continue to move much tors to keep their funds in financial more closely together than in the intermediaries rather than shifting early months of the year. into open market securities. The The shift adjustments published by growth of money market mutual the Federal Reserve have attempted funds has been particularly rapid, to correct for one important distort- averaging about 125 percent at an ing influence on the narrow aggre- annual rate from December 1980 to gates. After taking account of these June 1981; this growth accounted for adjustments, Ml-A and Ml-B so far 60 percent of the increase in the non- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 49 transaction component of M2. While ings at banks have grown somewhat available data do not permit accurate faster than loans over the first half of estimates, the exceptionally rapid 1981, with the bulk of the increase growth in these funds, which at least accounted for by U.S. government obin limited part are used as transaction ligations. So far this year, bank credit balances, may have lowered growth growth has been almost 3 percentage in recorded Ml-B somewhat. To the points slower than M3 growth. This extent that money market mutual divergence between the increase in funds attracted funds from the open bank asset portfolios and the expanmarket, the effect was higher M2 sion in M3—which includes most and M3. bank liabilities—mainly reflects the Thus far this year, growth of M3 large increase in money market muhas averaged llVi percent at an tual funds; much of the inflow to annual rate—about \VA percentage money funds was channeled into points faster than last year and 2 per- commercial paper and other nonbank centage points more than the growth instruments. of M2. Large-denomination certifi- At its meeting in July, the Federal cates of deposit, which are the main Open Market Committee (FOMC) additional instruments included in reassessed the ranges it had adopted M3, have been growing strongly, re- for money growth in 1981 and forflecting the need for depository insti- mulated preliminary objectives for tutions to expand their managed lia- 1982. In the light of all the circumbilities to offset the weakness in their stances, the FOMC elected to retain core deposits. In addition, M3 ap- the previously established ranges for pears to have been influenced by the monetary aggregates over the rechanging patterns of transactions mainder of 1981. In doing so, the between U.S. banks and their foreign FOMC recognized that the shortfall branches. in Ml-B growth in the first half of Over the first half of 1981, com- the year probably reflected in part mercial bank credit grew on balance some shifting of transaction balances at a rate a bit below the upper limit included in Ml-B into other highly of its range for 1981. Loan growth liquid assets; in light of that pattern was strong early in the year but soon and the desire to moderate growth in tapered off. With the prime rate money, the FOMC contemplates that lagging behind the drop in market growth in the narrow aggregates, adrates, business loan growth showed a justed for shifting into NOW acparticularly sharp deceleration, as counts, over the year as a whole may corporations switched much of their be near the lower ends of their annual borrowing to the commercial paper ranges. Growth in the broader agand bond markets. Later in the gregates, on the other hand, has been spring, however, business loan growth running at the top or somewhat above picked up again, as bond rates moved the upper ends of their ranges, and to all-time highs. Real estate loans given their behavior in the first half have shown a more even pattern of of the year, may be toward the upper growth, sustaining their moderate part of their ranges for the year as a 1980 rate of increase, while consumer whole. loans outstanding have continued to As indicated, the nontransaction edge down this year. Security hold- components of M2 that offer market- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 Monetary Policy Reports determined rates have been growing the major shift into NOW accounts, vigorously, apparently in part at the the FOMC now intends to target a expense of market instruments not single Ml figure in 1982 with the included in the aggregates. More- same coverage as the present Ml-B. over, the attractiveness of the small- Assuming that shifts into NOW acdenomination, time deposit compo- counts from nontransaction balances nent of M2 recently was enhanced by are small by that time, a separate the decision effective August 1 to shift-adjusted figure would not be uncap the ceiling on "small saver necessary. certificates" with maturities of two Reflecting the intent to reduce and one-half years or longer and to growth in money over time, the remove ceilings entirely on small time FOMC tentatively agreed on an Ml deposits with initial maturities of four range of V/i to 5V6 percent for 1982. years or more. This would involve reductions in the In the context of sluggish growth upper and lower ends of the range for of profits and an expanding need for Ml-B (as shift adjusted in 1981) of external financing, business loan de- Vi and 1 percentage point respectivemands seem likely to remain rela- ly. The growth ranges for M2 and tively strong, though a surge in long- M3 would be left unchanged from term financing could reduce business those in effect for 1981, a specificaborrowing at banks if bond rates were tion that would be fully consistent to fall. Other components of bank with a reduction in the actual growth credit are expected to continue recent of those aggregates in 1982. Thus, trends, with real estate loans showing the tentative ranges for the broader moderate growth and consumer lend- aggregates in 1982 are as follows: ing remaining weak. While total bank for M2, 6 to 9 percent, and for M3, credit is subject to considerable short- 6V2 to W2 percent. The associated run fluctuation, the 6 to 9 percent range for bank credit would remain at range for its growth in 1981 remains 6 to 9 percent. appropriate. While the level of the range for Ml Looking ahead to 1982 and be- is a reduction from the Ml-B range yond, the FOMC remains committed for 1981, it also is widened by Vi perto reducing the growth of money to a centage point. Interest-bearing transrate consistent with noninflationary action accounts are in the process of economic growth. The speed with becoming a sizable component of which monetary expansion can be Ml-B. To a certain degree, those reduced without large short-run ef- accounts have a greater savings comfects on production and employment ponent for individuals than noninterwill depend critically on the forces est-bearing demand accounts. Bebearing on inflation and credit market cause of the changed composition of demands, including the fiscal position this component, some time will have of the government. Also, during a to elapse before the behavior of Ml time of rapid institutional change, with this component can be related monetary targets must be chosen with with confidence to changing economclose attention to how such change ic and financial circumstances. Moremay affect particular aggregates and over, when this shift in composition the relationships among them. In this will end is also uncertain. At present, regard, looking toward completion of we are assuming that the great bulk of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 51 the growth in NOW accounts will ket interest rates should ease soon, have been completed by the end of homebuilding would tend to be slug- 1981, with only a small amount of gish for a while. Business fixed infunds continuing to be shifted from vestment also displays some signs of nontransaction balances. A firmer weakening, although energy remains judgment about the transition can be a strong sector. Contracts for busimade, of course, in light of added ness construction and orders for new experience when the 1982 targets are equipment have been on a downtrend reevaluated early next year. in real terms. In addition, the Com- The decision to leave unchanged merce Department's survey of capital the ranges for M2 and M3 reflects in spending intentions indicates that, for part the likelihood that the proportion the second time this year, firms have of credit demand financed through scaled back their expected outlays, depository institutions rather than and at present their spending plans market instruments will be modestly imply almost no growth in real terms increased by the trend toward re- for 1981 as a whole. duced regulatory constraints. Actual Consumers also may hold down growth in the broader aggregates is spending in response to slower expected to fall somewhat lower in growth in real income and to inditheir ranges than in 1981. cations that finding or retaining a job may become more difficult as the The Outlook for the Economy year progresses. Recent surveys in- The economy entered 1981 on a dicate that some retrenchment has sharp upward trajectory, but appar- taken place in anticipated expendiently little further growth in activity tures for consumer goods by househas occurred since early in the year. holds, in part owing to concerns Auto sales fell with the termination about restrictive credit conditions. of price concessions this spring, and The recent appreciation of the real retail sales excluding autos have dollar, combined with only moderate declined in the second quarter. Hous- economic growth abroad, points to a ing construction activity also has slowing in the growth of exports. slackened appreciably, while busi- Over coming quarters, the real volness spending for capital goods ume of exports could well decline a apparently has edged down after bit. allowing for inflation. Preliminary Government expenditures in real estimates suggest that real gross na- terms should rise relatively little. tional product showed no increase in Outside the defense area, spending the second quarter, and it now ap- by the federal government is expears that economic activity will re- pected to contract in real terms, main sluggish at least in the near based on proposed budget cuts for term. fiscal year 1982. And state and local In the investment sectors, the governments currently are seeking weakness in residential construction ways to curb expenditures in response likely will persist for some time. De- to reduced income from federal grants clines in housing starts, such as oc- and to slower growth in tax receipts. curred in the first half, typically are Some stimulus to private sector dereflected with a lag in reduced con- mands would be provided by the re- Digitized s f t o r r u F c R ti A o S n E R ac tivity. Thus, even if mar- ductions in personal and business http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 Monetary Policy Reports taxes now under consideration by the cost pressures in the period immedi- Congress; however, at this time most ately ahead. of the impact of the proposed tax cuts The members of the FOMC, in asseemingly would affect private mar- sessing the economic outlook, have kets in the second half of 1982. formulated projections for economic While the near-term outlook sug- performance in the current year and gests a flat economy, it is more difficult in 1982 that fall within the ranges into foresee the path of developments in dicated in the accompanying table. In 1982. A crucial element affecting this outlook is the speed with which prog- Economic Forecasts of the FOMC ress is made in reducing inflation. As noted earlier, some slowing has oc- Actual Projected Item curred in the rate of inflation thus far 1980 1981 1982 this year, and the near-term outlook Change from is that prices will continue to rise at a fourth quarter to fourth more moderate pace than last year. quarter, The recent decline in food prices percent Nominal GNP .. 9.4 10toll1/! 9*4 to 12*4 probably will be reversed in the sec- Real GNP -.3 1 to 31/2 Ito4 ond half of 1981 in response to tight- Implicit GNP deflator — ening supply conditions in some areas. Average level in But other factors should work to off- fourth quarter 9.8 IVi to 9 6V2 to 8V2 set these movements. In particular, Unemployment the current weakness in world oil rate (percent) markets appears to militate against any substantial rise in petroleum addition to the monetary growth rate prices over the next few quarters. 7.5 IV2 to 8V4 7 to 8V2 targets, the principal assumptions un- Also, the increase in the foreign exderlying these projections are that change value of the dollar since the there will be a cut in business and end of last year, unless reversed, personal income taxes, most of which should further reduce domestic price occurs in 1982, and that growth of pressures. federal expenditures will slow. The pace of wage increases has Most of the members believe that abated only a little despite relatively economic growth will remain sluggish high levels of unemployment. The in the second half of this year, resultrapid increases in consumer prices in ing in some further rise in the unem- 1980 have been a factor in large up- ployment rate by year-end. The outward wage adjustments this year, as look for 1982 reflects the broad range workers have attempted to recapture of views among members of the losses of real income. Strong produc- FOMC about the pace at which the tivity gains, such as occurred in the rate of inflation will be reduced. first quarter of this year, can hold While most expect growth in nominal down unit labor costs even when gross national product to slow somenominal wages rise rapidly. But a what next year, views on how the sluggish pattern of activity, such as is composition of expenditures will be anticipated for the remainder of this divided between prices and output year, is likely to be associated with are less uniform. small productivity gains, suggesting The administration, in association relatively little alleviation of labor with its mid-year budget review, has Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 53 updated its forecast of the behavior durable outlays and business fixed inof major economic variables for 1981 vestment. Spending in these sectors and 1982, as shown in the accom- began the year on a strong uptrend panying table. and was bolstered for a time by the various automobile price concessions. The Administration's Forecast In recent months, however, spending for consumer and business capital Item 1981 1982 goods has flattened out. At the same time, residential construction activity Change from fourth quarter to fourth quarter; weakened in response to rising mortpercent gage rates, after having been aided Nominal GNP 11.8 12.9 Real GNP 2.5 5.2 this winter by comparatively moderate Implicit price deflator ... 9.1 7.3 weather. Inventories appear to be Average level in fourth under good control, except for autos, quarter as high financing costs have reinforced Unemployment rate (percent) 7.7 7.0 the continuing desire of businesses to maintain lean stocks. As compared with the projections Unexpectedly favorable developof FOMC members, the administraments in volatile food and energy tion's forecast for 1982 indicates a prices played a major role in a noticegreater expansion in nominal GNP. able moderation of the broad mea- The forecast for the GNP deflator is sures of inflation during the first half. within the range indicated by Com- Nonetheless, some limited evidence of mittee members, but real growth is a slowing in underlying cost pressures higher. Such an outcome would seem was apparent. Unit labor costs adto depend on a substantial rebound in vanced less quickly in the first quarter productivity in the wake of the tax than over last year, reflecting a spurt and regulatory changes now in prosin productivity growth. The moderapect, and, relative to historical expetion in unit labor costs appears to rience, on a considerable willingness have continued this spring, as wage by the public to economize on cash increases slowed in a few sectors. The balances in response to continuing marked appreciation of the dollar in changes in financial technology and exchange markets also began to reother factors. duce inflationary pressures through the lowering of import prices and the A Review of Recent Economic and associated competitive restraint on Financial Developments domestic prices. Economic Activity Personal consumption expenditures. during the First Half of 1981 Consumer outlays rose sharply early The snapback from last year's brief in the year, with strength concenbut sharp recession carried into the trated in spending for relatively disearly part of 1981; however, the econ- cretionary items such as autos, furniomy clearly lost its upward momen- ture and appliances, and apparel. This tum during the first quarter. Over the increase in spending was associated past several months, activity has been with a reduction in the personal savabout unchanged on balance. The ing rate to its lowest level in nearly initial strength of aggregate demand 30 years. In part, the willingness of this year was centered in consumer consumers to save less and to borrow Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 Monetary Policy Reports more may have reflected the reduc- tal goods have been little changed on tion in their debt burdens that oc- balance, and business purchases of curred last year in conjunction with autos dropped sharply following the the credit restraint program. In ad- end of the rebate programs. Nonresidition, the drop in the saving rate dential construction spending also fell undoubtedly was related to the tem- in the second quarter, reflecting in porary opportunity to save on auto part the sustained tautness in finanpurchases afforded by the sizable re- cial markets so far this year. In adbates offered mainly in February and dition, the quickening of activity that March; auto sales accounted for more typically occurs in the spring was not than half of the increase in spending so strong as usual, after the relatively for durable goods in the first quarter. mild winter. Once most of the rebate programs Business inventories declined in ended, however, auto sales dropped real terms during the first quarter, sharply and remained at a reduced continuing the liquidation that had pace throughout the second quarter. been under way over the second half In addition to the cutback in auto de- of last year. Early this year, manumand, spending for furniture and ap- facturers were rebuilding their stocks pliances also weakened in the second at a substantial rate, but this accumuquarter. At the same time, outlays lation was more than offset by the for general merchandise increased liquidation of auto stocks that resulted only moderately, and continuing con- from the various rebate programs. servation efforts led to cutbacks in the With the end of the price concessions, volume of gasoline purchases. On bal- however, auto sales weakened appreance, consumption expenditures ap- ciably and dealer stocks rose quickly peared to have declined slightly in the during the second quarter. At the end second quarter after allowing for in- of June, the inventory of U.S.-made flation. In effect, after the first-quarter autos had risen to 87 days supply, surge in durable goods purchases, con- only slightly below the peak reported sumers retrenched to reestablish a in May 1980. Thus, with sharp inmore normal spending pattern; even creases in auto inventories and with so, the saving rate remained very low manufacturers' real inventories showby historical standards. ing relatively little change in April Business investment. Real business and May, overall business inventories fixed investment increased at a 13 per- probably rose in real terms during the cent annual rate in the first quarter, second quarter. Apart from autos, as temporary developments combined however, business inventories still apto boost spending. In the equipment peared to be well in line with sales in area, businesses took advantage of the the second quarter. rebates offered on cars and added Residential construction. Residenheavily to their fleets. Nonresidential tial construction activity weakened construction also increased vigorously considerably over the first half of early in the year, aided by the rela- 1981. Housing starts, which had been tively mild weather throughout much averaging about XVi million units at of the country. an annual rate in the latter part of Following this surge, capital spend- 1980, moved down toward a rate of ing appears to have declined this 1 million units over the course of the spring. Shipments of nondefense capi- past six months. Although starts de- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 55 clined early in the year, the value of during the first half of the year, but construction put in place did not be- sustained growth of order backlogs at gin to fall appreciably until the spring, manufacturers of defense goods indireflecting in part the favorable winter cates continued economic stimulus weather as well as the normal lag be- from this source. Increases on the tween starts and construction activity. revenue side of the budget offset this In the single-family sector, starts expansionary influence. Large social declined 30 percent from December security tax increases became effective 1980 to June 1981. Sales of new and at the beginning of the year, and the existing single-family homes also have rapid growth in GNP at the turn of the dropped sharply this year. With con- year boosted other revenues. On balventional mortgage rates again rising ance, the budget shifted toward reto unprecedented levels, sales activity straint. The federal deficit on a nahas been supported to some extent by tional income accounts basis probably sellers offering concessionary financ- shrank by about $26 billion at an aning. At the same time, some decelera- nual rate between the fourth quarter tion in house prices has been appar- of 1980 and the second quarter of ent; existing home prices increased at 1981, while the high-employment buda 4 percent annual rate during the first get, which abstracts from the effects five months of 1981 compared with of changes in economic activity, be- 14 percent last year. came more restrictive by a similar After showing a spurt late last year, amount as the unemployment rate multifamily starts also have dropped was little changed over the period. sharply this year. Activity in this sec- Real purchases by state and local tor has increasingly been devoted to governments edged down over the first the construction of condominiums six months of the year, following no and cooperatives rather than rental growth throughout 1980. In general units. First-quarter data indicate that the continued sluggishness in this secconstruction of such "for sale" units tor reflected the effects of fiscal limiwas up almost a third from a year tation measures passed in a number earlier and accounted for 45 percent of areas in recent years, as well as reof multifamily starts. The popularity duced growth of federal grants-in-aid. of condominiums and cooperatives Employment fell slightly in the first probably reflects their attractiveness half, with job losses greatest in the as a lower-cost alternative to new federally funded public service emsingle-family homes. ployment program. Spending for con- Government expenditures. Federal struction was about unchanged. Degovernment purchases of goods and spite the expenditure cuts, outlays did services rose at an annual rate of not decline so rapidly as receipts, and 15 percent in real terms in the first the state and local government secquarter and then declined in the sec- tor's operating surplus was almost ond quarter. This volatility was en- completely erased by spring after havtirely attributable to acquisitions of ing been consistently positive for sevagricultural inventories by the Com- eral years. modity Credit Corporation in the first International trade and payments. quarter and a runoff of these stocks in Real exports of goods and services the second quarter. Defense spending grew rapidly in the first quarter of in real terms was virtually unchanged 1981, in part because of strong growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 Monetary Policy Reports in GNP of two of our major trading percent throughout the first half of the partners, Canada and Mexico. The year, just below its 1980 high of 7.6 growth in real exports moderated percent. somewhat in the second quarter in re- Employment has continued to rise sponse to a slowing of economic ex- at a moderate pace in the services pansion abroad and the appreciation and trade sectors, while the number of the dollar. Increases in both agri- of manufacturing jobs has expanded cultural and nonagricultural exports sluggishly this year and remains becontributed to the growth of total ex- low the previous peak in 1979. Emports in the first half. The volume of ployment in the automotive industry imports also has expanded rapidly so has continued at a depressed level, far this year. Strong domestic de- despite some recalls, with 160,000 mands during the first quarter and the auto workers still on indefinite layoff appreciation of the dollar helped at the end of June. In recent months boost imports. Oil imports increased sharp declines occurred among confrom their year-end levels, although struction workers, reflecting weak the volume continued to be below the building activity this spring. The average for 1980 as a whole. number of government jobs also has The U.S. merchandise trade deficit contracted since February, as federal declined from about $22 billion at an hiring was curtailed and cutbacks in annual rate in the fourth quarter of federally funded public service jobs 1980 to roughly $18 billion in the reduced state and local payrolls. first quarter of 1981. The current Prices and labor costs. The pace account, reflecting this improved of inflation slowed considerably in the trade performance as well as larger first half of this year, receding from net investment income from abroad, double-digit rates for the first time changed from a $6 billion surplus in two years. The consumer price (annual rate) in the fourth quarter index rose at an annual rate of about of 1980 to a surplus of about $12 bil- 8Vi percent through May compared lion in the first quarter of this year. with 12i/2 percent over 1980. The But with export growth slowing re- relief has been concentrated in the cently, the trade deficit apparently food and energy areas; however, a widened in the second quarter and considerable slowing of price increases the current-account surplus was re- for consumer commodities more genduced. erally also has been evident in 1981 Employment and labor markets. compared with the previous year. In- Employment expanded at a much flation in the consumer service sector, slower rate during the first half of on the other hand, has diminished 1981 than during the second half of little, owing in large part to the sub- 1980; in June, nonfarm payroll em- stantial weight that rising labor costs ployment was about 565,000 higher have in this sector. than in December, compared with an Retail food prices rose at an anincrease of 860,000 over the preced- nual rate of less than 1 percent in the ing half-year. On balance, the in- first five months of 1981, in marked crease in employment was barely suf- contrast to the 10V4 percent pace of ficient to absorb the influx of workers 1980. The deceleration in food prices into the labor force, and the unem- in early 1981 was largely confined to ployment rate hovered around 7.4 sharp declines for meats and related Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 57 products. More recently, however, than food, energy, and homeownerslowdown has been much more wide- ship increased at an annual rate of spread. Prices of fresh fruits and 8V4 percent over the first five months vegetables fell sharply in May, and of 1981, somewhat below the 10 perthe rise in prices of dairy products cent pace over the 12 months of slowed noticeably. 1980. The moderation in price gains In the energy area, price increases for commodities excluding food has by the Organization of Petroleum Ex- been particularly striking; these items porting Countries, coupled with full decelerated from a pace of 11 Vi perdecontrol of domestic crude petro- cent over the 12 months of 1980 to leum, led to a surge in energy prices 8 percent in the first part of 1981. early in 1981; in the first three months Prices for consumer services other overall retail energy prices rose at just than home financing and energy, howunder a 50 percent annual rate. Later, ever, have barely edged off from the however, the rise in energy costs 1(H4 percent pace of 1980, as inslowed sharply, reflecting the emer- creases in these items tend to follow gence of relatively abundant supplies more closely the underlying trend in in petroleum markets. Declining de- labor costs. mands combined with high levels of Movements in labor costs reflected production by Saudi Arabia have re- several special factors in the first half sulted in price reductions at both the in addition to wage and productivity producer and the refiner levels in changes. Growth in hourly compenthe second quarter. Even so, energy sation—which includes employer conprices did not decline overall, as tributions to social insurance and the prices of natural gas—currently un- costs of fringe benefits—accelerated dergoing decontrol—and electricity from a pace of 10 percent in 1980 continued to rise. to 11V4 percent in the first quarter, Costs of homeownership, as mea- owing to an upward adjustment in the sured in the consumer price index, tax rate for social security contribualso have risen more slowly. So far tions and a rise in the base salary to this year, this component has in- which the tax rate is applied. creased at an annual rate near 8 per- On balance, the pace of wage incent, less than half the pace of 1980. creases in the first half appears to The home price measure used in con- have moderated somewhat. The index structing this component has fallen of average hourly earnings, which is on balance this year, but higher a measure of wage trends for producfinancing costs have more than offset tion and nonsupervisory personnel, this decline. The CPI measure of increased at an annual rate of SV2 perhome prices is based on a relatively cent in the first six months of the year small sample of home sales, and thus, compared with 9Vi percent last year. the recent absolute declines in this In manufacturing, moreover, wage measure may overstate the degree of increases so far this year have been softening in housing prices. How- running well below the 11 percent ever, other broader-based indexes in- rate posted in 1980, possibly due to dicate a distinct moderation in the the light calendar for new bargainrate of increase in home prices this ing settlements. While wage increases year. have abated somewhat, the pace of Prices of consumer items other advance remains strong. Some up- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 Monetary Policy Reports ward pressures have been generated centage point on May 5 in both the by catchup adjustments in response discount rate and the surcharge rate, to the steep rise in consumer prices gave an upward impetus to shortlast year. In addition, the scheduled term rates. These rates later declined minimum wage increase in January somewhat as money growth weakboosted wage rates in the trade and ened in May and June, but in early service sectors early in the year. July they were about at the same The sharp rebound in productivity levels or a bit higher than at the behad a moderating influence on the ginning of the year. rise in unit labor costs in the first Long-term interest rates moved quarter, offsetting some of the sizable quite differently than short-term rates, increases in wages and other labor particularly during the first quarter. expenses. Nonetheless, the cyclical Like many short-term rates, bond recovery of productivity since mid- rates began the year somewhat below 1980 has been sluggish by historical the record highs that had just been standards, and by the first quarter of established in December. However, 1981 output per hour in the nonfarm in contrast to the declines in yields business sector was just 1 percent on short-term instruments, long-term above the level a year earlier. More- rates generally rose over the first over, estimates of weak growth in out- quarter. Many financial market parput suggest that productivity gains ticipants apparently were concerned provided little, if any, offset to wage about underlying inflationary presincreases in the second quarter. sures and about the prospects for continuing large budget deficits in an Financial Developments environment of strong private credit during the First Half of 1981 demands. Such concerns, including Interest rates. Short-term market the growing backlog of potential longinterest rates began the year at, or term financing, continued prominent only a bit below, record highs after in market sentiment during much of having been on an uptrend since mid- the second quarter, and the rise in 1980 as economic activity rebounded short-term rates early in the quarter and the Federal Reserve sought to also helped move most long-term restrain monetary expansion. During rates well above their previous highs. the opening months of 1981, how- Since peaking in May, however, longever, money growth weakened, and term rates have retraced some of their the demand for reserves fell relative earlier gains for the year. This imto the provision of nonborrowed re- provement seems to reflect in part serves consistent with the FOMC's more optimism about the prospects monetary targets. Short-term rates for reduced inflation as encouraging began to ease, and by the end of the price data were reported, as indicafirst quarter, the federal funds rate tions appeared that economic growth was 6Vi percentage points below its had slowed, as firmness in monetary January peak, while other short-term policy was apparent, and as confirates were down 2 to 3 percentage dence grew that government policy points. Early in the second quarter, would appropriately restrain federal growth in money accelerated, renew- spending. ing pressures in the reserves market. Foreign exchange markets and the This, along with an increase of 1 per- dollar. The dollar appreciated strongly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 59 during the first half of 1981, rising Treasury were substantial in the first about 15 percent on a weighted- quarter, owing to a combined (onaverage basis. Increases against Euro- and off-budget) federal deficit that pean currencies averaged about 20 exceeded $38 billion. In addition, repercent, while the appreciation against demptions of savings bonds totaled the yen was 10 percent. Over some more than $2 billion, further boosting time intervals, short-run movements Treasury financing needs. The Treain exchange rates paralleled the sury met these needs primarily by iscourse of differentials between U.S. suing marketable securities and, to a and foreign short-term interest rates. lesser extent, by a further reduction But over the first half as a whole, the in cash balances. In the second quardollar appreciated considerably even ter, when normal seasonal tax rethough U.S. interest rates fell on bal- ceipts moved the combined federal ance relative to rates in key financial budget to a surplus position, the markets abroad, which have risen Treasury used inflows to rebuild its markedly. A substantial part of the cash balances and to pay down an dollar's buoyancy can be associated additional $2 billion of nonmarketwith the improved outlook for U.S. able securities. inflation and the growing consensus Borrowing by state and local govthat monetary restraint will be applied ernments remained heavy in the first over an extended horizon. In addi- quarter of 1981 despite a sharp detion, the continental European cur- cline in the issuance of mortgage revrencies have been weakened by the enue bonds. The volume of housingtensions over Poland and by general related bonds dropped dramatically political uncertainties in several Euro- after January 1, 1981, when statpean countries. utory restrictions on such offerings Domestic credit flows. After re- took effect. These restrictions, among bounding rapidly in the second half other things, place limitations on eligiof 1980, total funds raised in credit ble uses of the funds with respect to and equity markets by domestic non- the value and location of homes and financial sectors of the U.S. economy the types of home buyers and the leveled off in the first half of 1981, spread between mortgage rates and based on preliminary estimates. Firm the original cost of borrowing; also, credit market conditions contributed the volume of mortgage bonds that to some slowing in credit flows to pri- can be issued by governmental units vate sectors, especially mortgage flows is limited. The volume of nonhousing to households. Borrowing by non- issues early in 1981 was buoyed in financial businesses tapered off in the part by offerings that had been postfirst four months of the year, but poned in the fourth quarter, when a began to pick up in late spring. On large number of mortgage revenue a quarterly basis, the pattern of credit bonds were brought to market in anflows was greatly affected by the U.S. ticipation of regulatory restrictions Treasury, which tapped financial mar- and yields on municipal bonds rose kets for an exceptionally large volume to then-record levels. State and local of funds early in the year and then governments reduced their issuance did very little net borrowing in the of long-term debt in the second quarspring. ter as interest costs rose again to The credit requirements of the U.S. record highs. However, financing re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 Monetary Policy Reports quirements of many municipal units their offerings. In addition to shorter remained substantial, in part owing maturities, an increased volume of to declines in revenues resulting from convertible debentures and bonds cutbacks in grants-in-aid to state and with below-market—or zero—coulocal governments. pons were sold at deep discount. In the private sector, nonfinancial A moderate slowing in bond isbusiness firms borrowed at a reduced suance occurred in May when yields pace early in the year. The fall-off in on long-term debt reached new highs, borrowing was concentrated in short- and in June, expectations of nearterm credit markets, and, in particu- term rate declines may have led some lar, reflected a sharp deceleration in firms to delay or postpone offerings. growth of business loans from domes- But continued indications were that tic offices of U.S. banks. The lag of bond issuance would increase quickly the banks' prime lending rates behind in the event of improved market condownward movements in open market ditions because many firms would rates reduced the relative attractive- like to reduce their short-term inness to businesses of bank loans early debtedness. Flow of funds estimates in the year. During the first quar- indicate that the aggregate ratio of ter, some firms' short-term needs short-term debt to total debt of nonwere met by borrowing from foreign financial corporations has risen well branches of U.S. banks at rates tied above the previous record level to Eurodollar rates; issuance of com- reached in 1974. mercial paper also increased, though Net borrowing by the household not enough to offset the decline in sector declined slightly on balance in bank borrowing. Near midyear, more the first half of the year, as a modest favorable rate spreads for bank loans recovery in consumer credit growth and a bigger gap between cash flow only partially offset a reduction in net and investment expenditures—largely mortgage formation. Growth of conthe result of increased inventory ac- sumer installment credit was bolcumulation—encouraged renewed ex- stered in the first quarter by increases pansion of business loans at commer- in automobile loans, particularly at cial banks. Growth of nonfinancial finance company subsidiaries of the commercial paper also continued ro- automobile manufacturers. While auto bust in the second quarter. loans slowed in the second quarter While short-term borrowing fluc- in response to slackening car sales, tuated, long-term bond issuance by the nonauto consumer goods and perbusiness firms was maintained at a sonal loan categories of installment fairly heavy pace over most of the credit showed some pick-up. Despite first half. Some companies with the increases in consumer installment major long-range investment pro- debt, the debt position of the housegrams apparently have elected to hold sector continued to improve in come to the bond markets at regular the first half of the year. The ratio intervals to reduce their risk of hav- of consumer installment debt repaying to finance large amounts at par- ments to disposable personal income ticularly unfavorable rates. Firms fell further from 1979 peaks in the tapping the bond markets, mean- first four months of 1981, reflecting while, sought to hold down borrowing strong growth in income. costs by adjusting various terms of Home mortgage borrowing dropped Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports 61 sharply in the first half. The weak- viously mentioned restrictions on isness in mortgage activity was ac- suance of mortgage revenue bonds. counted for mostly by reduced lend- The taut mortgage credit conditions ing by thrift institutions. Weak deposit have led to increased use of so-called flows and continued erosion of earn- "creative financing" techniques, inings constrained the supply of mort- cluding wraparound loans, builder gage funds at thrift institutions, and buydown arrangements, and the asrates on new commitments for con- sumption of low-rate first trusts when ventional home mortgages at savings house sellers are willing to take back and loan institutions rose to a record a second mortgage. One effect of level of near 17 percent in late May such financing arrangements has been and remained near this level in June to slow the prepayment of old, lowand July. Net mortgage lending at yielding mortgages at the thrift insticommercial banks also fell, and fewer tutions, thus reducing the earnings funds for housing were available from potential from reinvestment of funds municipal units owing to the pre- by these institutions. 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 C clearer and more concise and to focus (Home Mortgage Disclosure) the disclosure requirements on those that would be most useful and that July 29, 1981—Revision could be provided at a reasonable The Board revised Regulation C to cost. To satisfy the requirement that implement amendments to the Home institutions provide notice in their Mortgage Disclosure Act and to sim- lobby of the availability of the mortplify the language and substance of gage data, the Board will furnish a the regulation. poster upon request, thereby eliminating the need for lenders to design Votes for this action: Messrs. their own notices. Volcker, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. The revised regulation was effec- Votes against this action: None. tive July 31, 1981; the lobby notice Absent and not voting: Mr. Schultz. requirement was effective September 30, 1981. The Home Mortgage Disclosure Act of 1975 required most lenders Regulation D in standard metropolitan statistical (Reserve Requirements of areas (SMSAs) to disclose annually Depository Institutions) the amount of their residential mortgage lending and the areas in which April 8, 1981—Amendment such loans were made. Recent amend- The Board amended Regulation D, ments to the act required that the effective April 30, 1981, to exempt mortgage data be disclosed by census from reserve requirements certain tract and county, rather than by cenkinds of time deposits representing sus tract and ZIP code, and the Board funds of deferred compensation plans. revised the regulation to include that requirement. The statutory amend- Votes for this action: Messrs. ments also required the establishment Volcker, Schultz, Wallich, Partee, Rice, and Gramley. Votes against of central data repositories in each this action: None. Absent and not SMSA for the collection of the re- voting: Mrs. Teeters. quired mortgage data, and the aggregation of those data by the Board into The Board determined that nontotals covering all institutions in each transferable time deposits held by an SMSA. To facilitate collection and employer as part of an unfunded deaggregation of the data, the Board is ferred compensation plan established developing a standard reporting form for employees pursuant to the Revfor use by covered institutions. enue Act of 1978 were personal time In addition to revisions prompted deposits. This determination allows by statutory amendments, the Board such funds to be exempt from reserve simplified Regulation C to make it requirements and assures more equi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 Board Policy Actions table application of reserve require- newly established institutions to phase ments to time deposits held for retire- in required reserves over two years. ment income. Recent changes in banking laws in certain states, including Delaware and South Dakota, permit out-of-state November 18, 1981— banking organizations to establish Amendments banks in those states under certain conditions. A number of large insti- The Board amended Regulation D, tutions headquartered outside of Deleffective December 18, 1981, to proaware and South Dakota either had vide a five-year exemption from reindicated intentions to establish subserve requirements for certain nonsidiaries or already had opened offices member depository institutions in in those states, and the parent organi- Hawaii. The Board also approved a zations were expected to transfer temporary amendment, effective Nosignificant amounts of deposits to vember 19, 1981, that makes instithese out-of-state subsidiaries. Betutions that began operations after cause such subsidiaries would not November 17, 1981, ineligible to have the start-up problems faced by phase in reserve requirements over a other new banks, the Board believed two-year period when their reservable they should not be eligible to phase in liabilities exceed $50 million. reserve requirements over two years. The Board, therefore, amended Regu- Votes for these actions: Messrs. Schultz, Partee, Mrs. Teeters, Messrs. lation D so that new institutions would Rice, and Gramley. Votes against no longer be eligible for the phase-in these actions: None. Absent and not after their liabilities reached a certain voting: Messrs. Volcker and Wallevel. The Board decided that instilich. tutions with less than $50 million in Nonmember depository institutions reservable liabilities are eligible for chartered under the laws of Hawaii the two-year phase-in of reserve reand operating in that state are exempt quirements; when reservable liabilities for five years from maintenance of equal or exceed that amount, institurequired reserves, pursuant to the tions are required to maintain full Monetary Control Act of 1980. De- reserves. pository institutions chartered feder- In considering this amendment, the ally or by other states and having Board recognized that extending covoffices in Hawaii were not covered by erage of the amendment to all instituthe exemption. A provision of the tions could be disruptive to existing Omnibus Budget Reconciliation Act subsidiaries, yet grandfathering such of 1981, however, extended to all operations could give those institudepository institutions with offices in tions an unfair competitive advantage. Hawaii the same five-year deferment The Board, therefore, adopted a of reserve requirements on deposits temporary amendment, applicable maintained at such offices. Accord- only to those institutions that began ingly, the Board amended Regula- operations after November 17, 1981. tion D to incorporate that change. In addition, it sought comment on a The second amendment affected a permanent amendment that would exprovision in Regulation D that allows tend coverage of this provision to all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 67 institutions, including those that be- from which cash items in the process gan operations before November 18, of collection and balances due from 1981. other institutions were deducted. The amendment, effective December 31, December 16, 1981— 1981, was applicable to reserves re- Amendment and Interpretation quired to be maintained for the period beginning January 14, 1982. The Board approved an amendment The interpretation adopted by the to Regulation D, effective Decem- Board addressed the extent to which ber 31, 1981, that increased the international banking facilities (IBFs) amount of transaction balances to may purchase assets from or sell them which the lower reserve requirement to third parties. The Board deterapplies. The Board also adopted an mined that IBFs generally may purinterpretation that explained the circhase or sell eligible assets (such as cumstances under which international loans, loan participations, securities, banking facilities may purchase or and certificates of deposit) in the secsell assets in the secondary market. ondary market, as long as the trans- Votes for these actions: Messrs. actions are at arm's length and with- Volcker, Schultz, Wallich, Partee, out recourse. Mrs. Teeters, Messrs. Rice, and Gramley. Votes against these actions: None. Regulation D (Reserve Requirements of Depository Under the Monetary Control Act Institutions) and Regulation Q of 1980, most depository institutions, (Interest on Deposits) Edge and Agreement corporations, and U.S. agencies and branches of May 13,1981 —Amendments foreign banks are subject to reserve The Board amended Regulations D requirements set by the Board. The and Q, effective May 14, 1981, to reserve requirements initially imposed subject deposits of less than $100,000 under the act were 3 percent on the held at the foreign offices of domestic first $25 million of an institution's depository institutions to reserve retransaction balances and 12 percent quirements and interest rate ceilings. on balances above that level. The act further required that the Board adjust Votes for these actions: Messrs. the minimum level annually to reflect Volcker, Schultz, Partee, Mrs. Teeters, and Mr. Rice. Votes against changes in the level of transaction these actions: None. Absent and not balances in the banking system navoting: Messrs. Wallich and Gramtionwide. Recent growth in such bal- ley. ances indicated that an increase was warranted. Accordingly, the Board The Board had become aware of amended Regulation D to increase to certain deposit arrangements that al- $26 million the amount of transaction lowed customers to deposit funds with balances subject to the lower reserve a domestic bank, which would then requirement. In taking this action, transfer the funds to its foreign office; the Board agreed that the formula the deposits were payable in the for determining the adjustment should United States and served no foreign be applied to transaction balances business purpose. By adopting these Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 Board Policy Actions amendments, the Board sought to the Board imposed a number of conprevent the proliferation of such ditions under which banks may estabarrangements, which it believed would lish IBFs, including the following: erode the effectiveness of the structure (1) only foreign residents, foreign of interest rate ceilings, disrupt the offices of U.S. companies, or other flow of funds among institutions, and IBFs may have time deposit accounts hamper the conduct of monetary at an IBF; (2) deposits received from policy. nonbanks must have a maturity, or a required notice period before with- June 9,1981—Amendments and drawal, of at least two business days; Policy Statement (3) the minimum transaction amount for deposits or withdrawals from an The Board amended Regulations D IBF time deposit held by a nonbank and Q, effective December 3, 1981, is $100,000; (4) deposits received to authorize the establishment of infrom foreign offices of U.S. depositernational banking facilities in the tory institutions or foreign banks, United States. It also issued a policy from other IBFs, or from an IBF's statement regarding the activities of parent must have a minimum one-day such facilities. (overnight) maturity; and (5) an IBF Votes for these actions: Messrs. may make loans only to foreign resi- Volcker, Schultz, Wallich, Partee, dents, to its parent, or to another IBF. Mrs. Teeters, Messrs. Rice, and Gramley. Votes against these ac- In the policy statement regarding tions: None. use of IBFs, the Board emphasized that deposit accounts and IBF loans The amendments exempt from re- may be used only to support operaserve requirements and deposit inter- tions outside the United States and est rate ceilings certain nonpersonal not to circumvent domestic regulatime deposits held at the international tions. IBFs must notify their nonbanking facilities (IBFs) of U.S. de- bank customers of this policy at the pository institutions, Edge and Agree- time a credit or deposit account is ment corporations, and U.S. agencies established; new customers who are and branches of foreign banks. IBFs nonbank foreign affiliates of U.S. resimay accept deposits and extend credit dents must acknowledge receipt of the to foreign residents or other IBFs free notice. The Board provided a model from reserve requirements and inter- notice and a model statement for acest rate limitations. Funds raised by knowledging receipt. an IBF, however, may be used only The Board delayed the effective to extend credit to foreign residents, date of the amendment until Decemto the IBF's parent, or to other IBFs. ber 3 to allow institutions to adjust With these facilities, domestic institu- to the revised settlement procedures tions will be able to compete for inter- that would be introduced in early national banking business that pre- October by the Clearing House Interviously was conducted primarily by bank Payments System (CHIPS, the foreign banks and offshore branches. payment system for international To ensure that IBFs are used solely transactions), and to allow states for international business and not for other than New York time to authoevading domestic banking regulations, rize IBFs if they so chose. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 69 Regulation £ ing the regulation of certain tender (Electronic Fund Transfers) offers and other matters. January 7, 1981—Amendment Votes for these actions: Messrs. Schultz, Wallich, Partee, Mrs. Tee- The Board amended Regulation E, ters, Messrs. Rice, and Gramley. effective January 15, 1981, to permit Votes against these actions: None. creditors to debit their customers' Absent and not voting: Mr. Volcker. accounts automatically for repayment of preauthorized overdraft credits. The amendments conforming to SEC changes provided (1) protec- Votes for this action: Messrs. Schultz, tion from liability for error in finan- Wallich, Partee, Mrs. Teeters, Messrs. cial statements that project future Rice, and Gramley. Votes against this action: None. Absent and not earnings, revenues, expenses, or simivoting: Mr. Volcker. lar items; (2) rules and scheduling requirements for shareholder partici- A section of Regulation E prohibits pation in corporate governance; (3) creditors from imposing as a condi- an exemption from the reporting and tion for granting credit a requirement liability provisions of certain acquisithat the loan be repaid by using auto- tions under dividend reinvestment matic payments from the borrower's plans; and (4) disclosure requireaccount (the compulsory-use prohibi- ments for tender offers. The other tion) . Traditionally, overdraft check- amendments were technical in nature. ing plans have included a provision The SEC also had adopted two for an automatic debiting of a miniother changes for which the Board mum payment from the customer's chose not to adopt conforming amendaccount to repay indebtedness under ments. Those changes related to (1) the plan. The Board decided to tender offers by certain publicly held exempt such payment features from corporations for their own securities, the compulsory-use prohibition beand (2) conversions from a publicly cause historically they have been inheld company to a private concern. cluded in overdraft plans. Permitting The Board issued a policy statement automatic collection of payments will that explained why it chose not to facilitate the continued provision of adopt conforming amendments and overdraft check protection. that described the procedures it would follow if a member bank proposed to Regulation F (Securities of reduce its equity securities or change Member State Banks) its structure in transactions similar to January 28, 1981—Amendments those covered by the SEC rules. and Policy Statement The Board adopted amendments to Regulation J (Collection of Regulation F similar to amendments Checks and Other Items and in comparable regulations adopted by Wire Transfers of Funds) the Securities and Exchange Commis- August 12, 1981—Amendment sion, as well as technical amendments and changes in reporting forms, effec- The Board amended Regulation J, tive March 9, 1981. The Board also effective immediately, to extend covapproved a policy statement regard- erage of the provisions governing the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 Board Policy Actions System's check collection services to related to banking; and (3) the U.S. nonmember depository institutions. banking organization owns less than 25 percent of the foreign company or Votes for this action: Messrs. Schultz, Wallich, Mrs. Teeters, Messrs. Rice, does not otherwise control it. and Gramley. Votes against this action: None. Absent and not vot- March 11, 1981—Amendment ing: Messrs. Volcker and Partee. The Board amended Regulation K, The Monetary Control Act of 1980 effective March 16, 1981, to exclude gave all depository institutions access ineligible bankers acceptances from to the System's check collection ser- the limitations on the amount of vices. The Board, therefore, approved acceptances that foreign branches of an amendment to Regulation J that U.S. banks may issue. expands the definitions of "bank" and Votes for this action: Messrs. Wallich, "sender" to include those nonmember Partee, Mrs. Teeters, and Mr. Graminstitutions. ley. Votes against this action: Messrs. Volcker and Schultz. Absent and not voting: Mr. Rice. Regulation K (International An eligible acceptance is one that Banking Operations) (1) represents a trade transaction January 14, 1981—Interpretation involving importing, exporting, storing, or domestic shipping of goods, The Board adopted an interpretation and (2) matures in 90 days or less of Regulation K, effective January 19, (180 days in the case of agricultural 1981, describing the circumstances products). Generally, all other accepunder which U.S. banking organizatances are regarded as ineligible. Elitions could invest in foreign comgible acceptances are exempt from panies that do business in the United reserve requirements; ineligible accep- States. tances are not, if payable in the Votes for this action: Messrs. Schultz, United States. Wallich, Partee, Mrs. Teeters, Messrs. Regulation K allows foreign Rice, and Gramley. Votes against branches of member banks to issue this action: None. Absent and not voting: Mr. Volcker. both types of acceptances, but limits the amount of acceptances that may The interpretation allows member be issued to 50 percent of a member banks, bank holding companies, and bank's paid-up capital and surplus Edge corporations, upon approval (100 percent with Board approval). by the Board, to invest in foreign The amendment removes ineligible companies that do business, in the acceptances from the limitations on United States, that is entirely domestic. the amount that foreign branches The Board normally will approve may issue. Removal of the restricapplications for such investments sub- tion will promote equitable treatment ject to the following conditions: of bankers acceptances issued by a (1) the foreign company's business foreign branch with those issued is predominantly abroad; (2) the domestically. It also will help memforeign company's activities in the ber banks that are near their limit to United States are banking or closely compete more effectively with foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 71 and nonmember banking organiza- Regulation M tions, which are not covered by the (Consumer Leasing) limitation. and Messrs. Volcker and Schultz dis- Regulation Z sented from this action. They were (Truth In Lending) not convinced that the amendment would promote competitive equality and they were concerned about the March 18, 1981— effects of the change on international Adoption of Regulations banking. The Board adopted a revised and July 29, 1981—Amendment simplified Regulation Z and issued a The Board amended Regulation K, new Regulation M comprising the effective immediately, to include cer- consumer leasing provisions that previtain subordinated notes and deben- ously were in Regulation Z. Both tures in the definition of capital and actions were effective April 1, 1981. surplus when determining the capital adequacy of Edge corporations. Votes for these actions: Messrs. Volcker, Schultz, Wallich, Partee, Votes for this action: Messrs. and Mrs. Teeters. Votes against Volcker, Wallich, Partee, Mrs. Tee- these actions: None. Absent and not ters, Messrs. Rice, and Gramley. voting: Messrs. Rice and Gramley. Votes against this action: None. Absent and not voting: Mr. Schultz. Regulation Z was revised pursuant Regulation K allowed Edge cor- to the Truth in Lending Simplification porations to count only their unim- and Reform Act of 1980 to emphapaired capital and surplus for purposes size disclosure of essential credit inof meeting the capital requirements of formation in a simple and direct manthe regulation. Member banks, how- ner. The restructured regulation, ever, were permitted to count certain when combined with the model dislong-term subordinated debt for capi- closure forms provided in the new tal adequacy purposes, if the debt regulation, is less complicated and instruments were not considered de- technical and hence will aid composits as defined by Regulation D pliance by creditors. It also will be (Reserve Requirements of Deposi- easier for consumers to understand. tory Institutions). The leasing provisions in the new To provide additional flexibility in Regulation M were not revised exmeeting capital requirements, the tensively. The Board suspended its Board decided to permit an Edge cor- simplification efforts pending congresporation to count subordinated notes sional action on the Board's recomor debentures in amounts not exceed- mendation that the Consumer Leasing ing 50 percent of its nondebt capital. Act be simplified. Moreover, the stipulation for member Although both regulations are effecbanks that subordinated debt cannot tive April 1, 1981, creditors have until qualify as capital without the Board's March 31, 1982, to revise their disapproval is applicable also to Edge closure forms and practices to comply corporations. with the new regulations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 Board Policy Actions Regulation Q (Interest on Deposits) the use of medical and educational facilities. May 13, 1981—Amendments The interpretation permanently grandfathers NOW accounts opened June 9, 1981—Amendments and before September 1, 1981, by those Policy Statement who are no longer eligible because of These actions are discussed under this interpretation. Regulation D. On August 31, the Board suspended the September 1 effective date of the August 12, 1981—Interpretation interpretation pending the outcome of a suit challenging the interpretation. A The Board adopted an interpretation district court upheld the Board's poof Regulation Q to clarify the types of sition, and the Board reinstated the depositors who are eligible to hold interpretation, effective September 16, negotiable order of withdrawal ac- 1981. counts. The effective date of the interpretation, September 1, was later December 16, 1981—Amendments changed to September 16, 1981, because of legal questions. The Board approved technical amendments to Regulation Q, effective im- Votes for this action: Messrs. Schultz, mediately, to incorporate changes in Wallich, Mrs. Teeters, Messrs. Rice, and Gramley. Votes against this ac- the rules governing payment of intertion: None. Absent and not voting: est on deposits that were approved by Messrs. Volcker and Partee. the Depository Institutions Deregulation Committee. Effective December 31, 1980, nonbank depository institutions were per- Votes for these actions: Messrs. Volcker, Schultz, Wallich, Partee, mitted to offer to certain depositors Mrs. Teeters, Messrs. Rice, and negotiable order of withdrawal (NOW) Gramley. Votes against these acaccounts, on which interest or divi- tions: None. dends are paid and through which customers can make third-party pay- The Depository Institutions Dements using negotiable or transfer- regulation Act of 1980 transferred to able instruments. Those eligible to the Depository Institutions Deregulahold such accounts were generally the tion Committee (DIDC) the authority same as those eligible to hold savings to prescribe rules governing the payaccounts. To promote consistency, ment of interest on deposits that to reduce confusion, and to eliminate previously had been held by the Board the need to make determinations of and the other federal regulators of eligibility in individual cases, the financial institutions. During 1981, Board issued an interpretation speci- the DIDC issued final rules affecting fying that the following classes of de- 26-week money market certificates, positors are eligible to hold NOW time deposits of less than $100,000 accounts: (1) individuals, including with maturities of 2Vi years to 4 sole proprietorships; (2) specific types years, qualified tax-exempt savings of nonprofit organizations described in certificates, and time deposits for the Internal Revenue Code; and (3) individual retirement accounts and governmental units holding funds for Keogh plans. The Board amended Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 73 Regulation Q to conform with those Votes for this action: Messrs. Volcker, Schultz, Partee, Mrs. Teenew rules. ters, Messrs. Rice, and Gramley. Votes against this action: None. Regulation T Absent and not voting: Mr. Wallich. (Credit by Brokers and Dealers) The amendment to Regulation T June 9, 1981—Amendment provides separate margin requirements for options on debt securities issued The Board amended Regulation T, or guaranteed by government entities. effective July 13, 1981, to delete a Such securities are exempt by statute provision that permitted the use of from the Board's margin regulations. foreign currency in a margin account. For uncovered options written on Votes for this action: Messrs. exempted securities that are traded on Volcker, Schultz, Wallich, Partee, a national exchange, the initial mar- Mrs. Teeters, Messrs. Rice, and gin requirement is determined by the Gramley. Votes against this action: rules of the exchange on which the None. option is traded, provided such rules On December 12, 1980, the Board have been approved by the Securities determined that bank depository re- and Exchange Commission. Options ceipts for gold could not act as a on exempted debt securities traded substitute for cash in a margin ac- over the counter have margins simicount. At the same time, the Board lar to those for comparable options published for comment a proposed that are traded on an exchange. amendment on the related question of Covered options, that is, those for whether foreign currency could be which the investor also owns the used to meet margin requirements. exempted securities against which the Both actions were prompted by ques- options are written, have no initial tions that indicated some confusion margin requirements. about the meaning of a provision of The amendment does not affect the Regulation T (section 220.6(j)). prohibition against using options as After reviewing the comments, the collateral for securities credit. Board deleted section 220.6(j) to clarify that Regulation T does not Regulation 1 permit the speculative holding of (Bank Holding Companies and foreign currency and securities in the Change in Bank Control) same account. The amendment does not preclude the acceptance of foreign July 15, 1981—Amendments currency in a margin account if it is The Board amended Regulation Y immediately converted into U.S. cur- and a related interpretation, effective rency. September 1, 1981, to reflect decisions by a court of appeals that October 2, 1981—Amendment limited the insurance agency activities The Board amended Regulation T, of bank holding companies and their effective October 26, 1981, to estab- nonbank subsidiaries. lish margin requirements for options Votes for these actions: Messrs. on "exempted debt" securities. Volcker, Partee, and Gramley. Votes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 Board Policy Actions against these actions: None: Absten- if the Board determines that the action: Mr. Wallich. Absent and not tivity is closely related to banking and voting: Mr. Schultz, Mrs. Teeters, a proper incident thereto. In midand Mr. Rice. 1981, after considering requests by The U.S. Court of Appeals for the several holding companies to sell Fifth Circuit had determined that the traveler's checks, the Board published provision in Regulation Y that per- for comment a proposal to permit mitted bank holding companies to sell holding companies to engage in that insurance to the public as a matter of activity. (Previously, the Board had convenience exceeded the intent of permitted the activity for specific the Bank Holding Company Act. The organizations on a case-by-case basis.) Board, therefore, deleted that provi- After a review of the comments resion. ceived, the Board determined that the The court also invalidated a pro- issuance of traveler's checks was an vision governing nonbank activities activity closely related to banking and that permitted holding companies to a proper incident thereto and should sell certain types of insurance to be authorized generally for bank themselves and their nonbank sub- holding companies. The Board noted sidiaries. Although the Board deleted that such action should stimulate comthis provision from the section on petition in the traveler's check indusnonbanking activities, it determined try. that the activity was permissible under other provisions of the act. The Board Regulation Z (Truth in Lending) also revised a related interpretation to make it consistent with the March 18, 1981— amended regulation. Adoption of Regulation These actions did not affect the This action is discussed under Reguauthority of a holding company to lation M. act as agent for the sale of insurance directly related to extensions of Policy Statements and credit by its bank subsidiaries. Other Actions April 23, 1981—Disposition of November 18, 1981—Amendment Insurance Income The Board amended Regulation Y, effective December 21, 1981, to make The Board adopted a policy statethe issuance of traveler's checks a ment, effective May 1, 1981, regardpermissible nonbanking activity for ing the disposition of income derived bank holding companies. from the sale of credit-related life insurance. Votes for this action: Messrs. Schultz, Partee, Mrs. Teeters, Messrs. Rice, Votes for this action: Messrs. and Gramley. Votes against this ac- Volcker, Schultz, Partee, and Mrs. tion: None. Absent and not voting: Teeters. Votes against this action: Messrs. Volcker and Wallich. None. Absent and not voting: Messrs. Wallich, Rice, and Gramley. The Bank Holding Company Act provides that banking organizations The Board adopted a policy statemay engage in a nonbanking activity ment that restricts employees, officers, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 75 directors, and principal shareholders guidelines are designed to minimize of state member banks from profiting the danger that a bank selling compersonally from the sale of life insur- mercial paper of an issuer would make ance sold in connection with loans an unsound loan to that issuer. The made by the bank. Income from such guidelines also will prevent other poinsurance should be credited to the tential conflicts of interest and unbank; or it may be credited to the sound banking practices. holding company or other affiliate of The Board indicated that it would the bank, so long as the bank receives monitor sales by state member banks reasonable compensation for its role of such third-party commercial paper in selling the insurance. Officers and and would supplement or modify the employees of the bank may partici- guidelines as appropriate. Although pate in that income under an incentive the policy was effective immediately, or bonus plan, provided such partici- the Board accepted comment on the pation does not exceed 5 percent of statement from affected institutions the recipient's annual salary. and organizations for two months The statement, which was adopted after adoption. jointly by the agencies represented on the Federal Financial Institutions October 7, 1981—Enforcement of Examination Council, indicated that Consumer Credit Acts institutions are allowed up to two The Board, on the recommendation years to amend their procedures to of the Federal Financial Institutions comply with the new policy. Examination Council, adopted a policy statement and a supervisory May 26, 1981—Sale of guide regarding enforcement of the Third-Party Commercial Paper Equal Credit Opportunity Act and The Board issued a policy statement, the Fair Housing Act. effective immediately, to provide Votes for this action: Messrs. Schultz, guidelines for the sale by state mem- Partee, Mrs. Teeters, Messrs. Rice, ber banks of third-party commercial and Gramley. Vote against this acpaper. tion: Mr. Wallich. Absent and not voting: Mr. Volcker. Votes for this action: Messrs. Volcker, Wallich, Partee, Mrs. Tee- The policy statement reminded state ters, Messrs. Rice, and Gramley. member banks of their responsibilities Votes against this action: None. Absent and not voting: Mr. Schultz. under the Equal Credit Opportunity and the Fair Housing Acts and in- In order to promote safe banking formed them of the Board's intention practices by state member banks, the to enforce those acts vigorously. The Board provided guidelines for the sale statement indicated that member of commercial paper issued by a com- banks are required to institute propany unrelated to the bank. The cedures to prevent recurrence of any guidelines specify the type and mini- violations of those acts. It also inmum denomination of such instru- formed banks that the Board will ments that may be sold, the records regard failure to comply with certain that should be maintained for such specified provisions of the acts as sales, and the type of purchasers to particularly serious and normally will whom such paper may be sold. The require retroactive corrections. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 Board Policy Actions The Board also adopted a state- The Board and the Office of the ment of supervisory enforcement Comptroller of the Currency jointly policy for use by the Federal Reserve adopted guidelines on capital adethat provides guidance on the types quacy for use in examining and superof actions to be taken to correct vio- vising well-managed national banks, lations. The statement identified six state member banks, and bank holdtypes of conduct, involving inadequate ing companies. (Organizations that disclosures or discriminatory lending are less than two years old or that are practices, that are considered to be in unsatisfactory condition will be serious violations. Institutions will be subject to individual monitoring and required to take corrective action supervision.) The guidelines are inretroactively for serious violations tended to correct the long-term decline discovered within 24 months, except in capital ratios, to reduce disparities for violations of the notice require- in capital levels among banking orments for which the retroactive cor- ganizations of different size, to prorection is limited to 6 months. mote greater uniformity and consis- Governor Wallich opposed this ac- tency between the two agencies in tion because he believed it was con- supervising banking organizations, trary to the federal government's and to help banking organizations in goals of deregulation and reduction in their financial planning. paperwork. He noted that retroactive The guidelines divide institutions correction was not required by either into three categories based on total act, and he believed that the cost to assets: community banks, regional an institution of correcting past vio- banks, and multinational banks. Spelations would probably exceed the cific capital ratios, comparing two benefits that aggrieved consumers measurements of capital to total would receive. The other Board assets, were established for commembers, however, believed the policy munity and regional banking organistatements were necessary to protect zations. Capital ratios for multinathe rights of credit applicants and to tional organizations (in general, those ensure that creditors correct more with more than $15 billion in assets) serious violations so that their credit will be established and monitored on practices are in compliance with the an individual basis, in recognition of consumer credit acts. the differences in method of operation and risk exposure of each. The Board stressed that its assessment of capital November 25, 1981— levels will take into account the unique Capital Adequacy Guidelines qualitative factors of individual organizations. The Board adopted guidelines for assessing the capital adequacy of certain member banks and bank holding 1981—Discount Rates companies. The Board approved three changes in Votes for this action: Messrs. the basic discount rate during 1981. Volcker, Schultz, Wallich, Partee, Each change involved a full percent- Mrs. Teeters, Messrs. Rice, and Gramley. Votes against this action: age point: an increase from 13 per- None. cent to 14 percent in early May and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 77 reductions from 14 percent to 13 per- rate from 13 percent, the level in cent in late October and to 12 percent effect since early December 1980, to in early December. The Board voted 14 percent. The other eleven Banks on four other occasions to turn down had proposed that the current rate be requests for changes in the basic rate maintained. At the time of the submitted by individual Federal Re- Board's action, most short-term marserve Banks. ket rates were considerably above the During the year the Board also basic discount rate and some of those approved four changes in the sur- rates, notably the federal funds rate, charge above the basic discount rate were also above the surcharge rate on frequent borrowings by institutions of 16 percent. The Board decided, with deposits of $500 million or however, that a rise in the discount more. These changes included an in- rate would not be desirable in the crease from 3 percentage points to circumstances prevailing early in the 4 percentage points in May and sub- year. Short-term market rates, alsequent reductions to 3 percentage though still relatively high, had depoints in September and to 2 per- clined appreciably from their peaks centage points in October. The sur- in December, and little or no growth charge was removed entirely in No- had occurred in key measures of vember. money over the course of recent In August the Board approved the weeks. In reaching its decision the establishment of a new rate schedule Board also gave weight to uncertainfor credit advanced over an extended ties regarding the outlook for fiscal period to banks and thrift institutions policy and economic activity. that are under sustained liquidity Short-term interest rates fell subpressure. The new schedule provided stantially over the balance of the for a rate equal to the basic discount first quarter, and in early April the rate for the first 60 days of borrow- Board considered requests by three ing, 1 percentage point above the Federal Reserve Banks to lower or basic rate for the next 90 days, and eliminate the surcharge of 3 percent- 2 percentage points above the basic age points on frequent borrowings by rate thereafter. large depository institutions. The The specific reasons for the Board's Board disapproved those requests in decisions are reviewed below. In light of its concern that, given surreaching those decisions the Board rounding circumstances, such action also took into account the economic might give an unintended signal of and financial developments that are an easing in the general course of covered in more detail elsewhere in monetary policy. In the latter conthis REPORT. A listing of the Board's nection, the Board took account of discount rate actions during 1981, decisions at a recent meeting of the including the votes on the actions, Federal Open Market Committee refollows this review. lating to the continuing objective of restraining the growth of money and January to Early May: No Change credit. Later in April the Board for In mid-January the Board turned similar reasons turned down another down a request by one Federal Re- request by one Federal Reserve Bank serve Bank to raise the basic discount to eliminate the surcharge. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 Board Policy Actions Early May: Increase in ment borrowing by depository insti- Basic Discount Rate and Surcharge tutions remained relatively high. During the summer months most By late April and early May the short-term market rates fluctuated money market had come under subin a range somewhat below their May stantial pressure and short-term marpeaks, and then they began to trend ket rates had risen sharply, to levels irregularly lower during September. well above the basic discount rate. No requests to change discount rates Federal funds were trading at rates were submitted by the Federal Reconsiderably above the surcharge rate, serve Banks until the latter part of and adjustment borrowing by deposithis period, when several Banks protory institutions had jumped to relaposed reductions in the surcharge. tively high levels. Growth in Ml-B On August 20 the Board approved accelerated markedly in April, and the establishment of a rate schedule expansion in the broader measures of on borrowings for extended periods money remained rapid. In these cirby depository institutions that were cumstances the Board approved an under sustained liquidity pressure. increase of 1 percentage point in the The schedule included a rate of 14 basic discount rate to a level of 14 percent, equal to the basic rate at that percent and an increase of 1 pertime, for the first 60 days of borrowcentage point in the surcharge to 4 ing, 15 percent for the next 90 days, percentage points above the basic and 16 percent thereafter. The timrate. These actions were intended to ing of the Board's action was associunderscore the System's determinaated with the receipt of several applition to curb excessive monetary excations for borrowing under the pansion and thereby to exert a re- System's extended credit program. It straining influence on inflationary was also associated with a request by expectations. the Federal Home Loan Bank Board that, in light of market conditions Mid-May to Mid-September: existing then, the Federal Reserve No Change provide supplemental funding to help During the latter part of May the meet the liquidity needs of the mem- Board disapproved two requests to ber institutions of the Federal Home raise the basic discount rate further Loan Bank System. The extended to 15 percent. In reaching these de- credit program had been developed cisions the Board took account of earlier by the Federal Reserve in conindications that monetary growth had formance with the provisions of the weakened markedly in previous Monetary Control Act of 1980. Its weeks. The Board also noted that purpose was to help all types of most short-term market rates had depository institutions—commercial edged down from peaks reached ear- banks, savings and loan associations, lier in the month. In those circum- mutual savings banks, and credit stances, the Board concluded that a unions—to adjust to sustained liquidhigher basic rate was not desirable ity pressures. even though the basic rate at that In reaching its decision on the new time was considerably below most rate schedule the Board emphasized short-term market rates and adjust- the need, for monetary policy reasons, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 79 to discourage an unduly large and per- The Board approved another resisting expansion in extended borrow- duction in the surcharge during the ings by banks and thrift institutions. first part of October—from 3 per- The expansion in reserves associated centage points to 2 percentage points with such borrowing is similar to —following further declines in the System open market purchases in federal funds rate and in other shortproviding reserves to support growth term market rates. Like the previous in the nation's money supply. A ris- reduction, this action was a technical ing schedule of rates based on the adjustment to money market developduration of the borrowing would help ments and was not intended to indito restrain the demand for extended cate a change in the basic monetary credit and the associated expansion policy objective of restraining growth in reserves, especially when taken in in money and credit. conjunction with a complementary In late October the Board appolicy of lending by the Federal Home proved a reduction of 1 percentage Loan Bank System to its member point in the basic discount rate to a institutions. level of 13 percent. Short-term in- The Board also approved the appli- terest rates had continued to move cation of the new schedule of rates to lower in previous weeks; Treasury bill loans extended to institutions that rates had, in fact, fallen below the were borrowing for extended periods discount rate. During its considerabecause of exceptional individual cir- tion of this action the Board reviewed cumstances. but turned down requests to reduce or eliminate the surcharge. A few Late September through December: members expressed a preference for Reduction in Basic Discount Rate; lowering the surcharge instead of the Reduction and Removal of basic rate, but no member favored Surcharge reducing both rates at the same time. During the latter part of September It was felt that under immediately the Board approved a reduction in the prevailing circumstances the two acsurcharge from 4 percentage points tions together might generate unwarto 3 percentage points above the basic ranted expectations of an easier discount rate. This action was taken monetary policy. in recognition of the sizable declines In mid-November, following furin short-term rates during previous ther declines in short-term market weeks, including a decline in the fed- rates, the Board voted to eliminate eral funds rate to levels below the the remaining surcharge of 2 persurcharge rate. Borrowings by de- centage points. Federal funds were pository institutions for short-term trading at levels well below the suradjustment purposes had also fallen charge rate, and no borrowings were substantially on average. The Board currently outstanding at that rate. emphasized that the action was a tech- In these circumstances, the Board nical response to developments in the concluded that the surcharge was no money market and that it did not longer necessary. signal a change in the continuing In early December the Board appolicy of the Federal Reserve to re- proved a reduction from 13 percent strain growth in money and credit. to 12 percent in the basic discount Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 Board Policy Actions rate. The purpose of this action was ment purposes by institutions with to bring the basic rate into better deposits of $500 million or more. alignment with short-term market Frequent borrowings were redefined rates. The Board noted that federal during the year as those that occur in funds had been trading below the successive statement weeks or in more basic discount rate and adjustment than 4 weeks in a moving 13-week borrowings had fallen to low levels, period that includes the current week especially since mid-November. and the 12 preceding weeks. Other Over the balance of the year, the categories of discount window credit Board considered but took no action include advances made over extended on a request from one Federal Re- periods to depository institutions that serve Bank to reduce the basic dis- are under sustained liquidity pressure. count rate by an additional percentage Such extended credit may also be propoint. Monetary growth had accel- vided when exceptional circumstances erated over the course of previous or practices adversely affect a particuweeks and short-term market rates lar depository institution. Finally, sohad risen somewhat since early De- called seasonal credit may be provided cember. However, the current slow- for periods longer than those perdown in business activity was continu- mitted under adjustment credit to ing and its extent and duration were assist smaller institutions in meeting subject to a great deal of uncertainty. regular needs for funds arising from In these circumstances the Board certain expected movements in their decided to defer a decision on the deposits and loans. pending action. As of December 31, 1981, the structure of rates was as follows: a Votes on Reserve Bank Actions basic rate of 12 percent for shortto Change the Discount Rate term adjustment credit; a rate for Under the provisions of the Federal seasonal credit of 12 percent; and Reserve Act, the boards of directors rates on extended credit of 12 percent of the Federal Reserve Banks are for the first 60 days of borrowing, required to establish rates on dis- 13 percent for the next 90 days of counts for and advances to depository borrowing, and 14 percent after 150 institutions at least every 14 days and days. No surcharge was in effect at to submit such rates to the Board for year-end 1981. review and determination. The Board January 12, 1981 votes listed below are those that involved approval or disapproval of The Board disapproved an action actions to establish new rates or to taken by the directors of the Federal change existing rates. Reserve Bank of St. Louis on Janu- Reference is made in this report to ary 8, 1981, to increase the basic the basic discount rate, which is the discount rate from 13 percent to rate on discounts and advances to 14 percent. depository institutions for short-term Votes for this action: Messrs. Schultz, adjustment credit. A surcharge rate, Partee, Mrs. Teeters, and Mr. Rice. ranging up to 4 percentage points, Votes against this action: None. Abwas imposed during much of the year sent and not voting: Messrs. Volcker, on frequent borrowings for adjust- Wallich, and Gramley. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 81 April 1, 1981 Mrs. Teeters, Messrs. Rice, and Gramley. Votes against these actions: The Board disapproved actions taken None. by the directors of the Federal Reserve Banks of Chicago and St. Louis The Board subsequently approved on March 26 to reduce the surcharge similar actions taken by the directors imposed on large depository institu- of the Federal Reserve Bank of tions that borrow frequently from the Chicago, effective May 8, 1981. Federal Reserve from 3 percentage points above the basic discount rate May 20, 1981 to W2 and 1 percentage points re- The Board disapproved an action spectively; and by the directors of taken by the directors of the Federal the Federal Reserve Bank of Atlanta Reserve Bank of San Francisco on on March 27 to eliminate the sur- May 14, 1981, to increase the basic charge. discount rate to 15 percent. Votes for this action: Messrs. Volcker, Votes for this action: Messrs. Schultz, Schultz, Wallich, Partee, and Rice. Partee, Mrs. Teeters, Messrs. Rice, Votes against this action: None. Aband Gramley. Votes against this acsent and not voting: Mrs. Teeters and tion: None. Absent and not voting: Mr. Gramley. Messrs. Volcker and Wallich. April 20, 1981 May 26, 1981 The Board disapproved an action The Board disapproved an action taken by the directors of the Federal taken by the directors of the Federal Reserve Bank of Atlanta on April 10 Reserve Bank of Atlanta on May 22, to eliminate the 3-percentage-point 1981, to increase the basic discount surcharge on frequent borrowings by rate to 15 percent. large depository institutions. Votes for this action: Messrs. Volcker, Votes for this action: Messrs. Volcker, Wallich, Partee, Mrs. Teeters, Messrs. Schultz, Wallich, Partee, Mrs. Teeters, Rice, and Gramley. Votes against Messrs. Rice, and Gramley. Votes this action: None. Absent and not against this action: None. voting: Mr. Schultz. May 4, 1981 August 20, 1981 Effective May 5, 1981, the Board Effective August 20, 1981, the Board approved actions taken by the direc- approved actions taken by the directors of the Federal Reserve Banks of tors of the Federal Reserve Banks of Boston, New York, Philadelphia, New York, Philadelphia, and Dallas Cleveland, Richmond, Atlanta, St. to establish a structure of rates for Louis, Minneapolis, Kansas City, extended credit to banks and thrift Dallas, and San Francisco to increase institutions under sustained liquidity the basic discount rate from 13 per- pressure as follows: 14 percent for cent to 14 percent and to raise the the first 60 days of borrowing, 15 persurcharge from 3 percentage points cent for the next 90 days, and 16 perto 4 percentage points. cent thereafter. The basic discount rate of 14 percent and the 4-percent- Votes for these actions: Messrs. Volcker, Schultz, Wallich, Partee, age-point surcharge were left un- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 Board Policy Actions changed by this action. The Board Effective October 1, 1981, the also decided that it would be appro- Board also approved a modification priate to establish a conforming struc- of the rules governing the surcharge; ture of rates for extended credit to specifically the surcharge would apply individual institutions when excep- to institutions with deposits of $500 tional circumstances or practices in- million or more that borrowed in volve only that institution. successive statement weeks or in more than 4 weeks during a moving 13-week Votes for these actions: Messrs. Volcker, Schultz, Wallich, Partee, period that included the current week and Gramley. Votes against these and the 12 preceding weeks. actions: None. Absent and not voting: Mrs. Teeters and Mr. Rice. Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Votes The Board subsequently approved against this action: None. actions to establish the above rate structures taken by the directors of October 9, 1981 the other Federal Reserve Banks, effective on the dates indicated: Rich- Effective October 12, 1981, the Board mond, Atlanta, and Minneapolis, Au- approved actions taken by the direcgust 21; San Francisco, August 24; tors of the Federal Reserve Banks of Cleveland and St. Louis, August 25; Philadelphia, Richmond, Atlanta, Chicago, August 27; Dallas (rate for Chicago, Dallas, and San Francisco, extended credit to particular institu- and effective October 13, 1981, the tions in special circumstances) and Federal Reserve Banks of Boston, Kansas City, August 28; and Boston, New York, Cleveland, St. Louis, Min- September 4, 1981. neapolis, and Kansas City to reduce the surcharge to 2 percentage points September 21, 1981 (from 3 percentage points) above the basic discount rate of 14 percent. The Effective September 22, 1981, the variation in effective dates resulted Board approved actions taken by the from differences in observance of the directors of all of the Federal Reserve Columbus Day holiday. Banks to reduce the surcharge from 4 percentage points to 3 percentage Votes for this action: Messrs. Volcker, points above the basic discount rate Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Gramley. Votes against this of 14 percent. action: None. Absent and not vot- Votes for this action: Messrs. Volcker, ing: Mr. Rice. Schultz, Partee, Mrs. Teeters, Messrs. Rice, and Gramley. Vote against this October 30, 1981 action: Mr. Wallich. Effective November 2, 1981, the Mr. Wallich voted against this ac- Board approved actions taken by the tion because he felt that, given pre- directors of the Federal Reserve vailing economic and financial condi- Banks of Boston, New York, Philations, a reduction might convey a delphia, Cleveland, Richmond, Chimisleading signal regarding the out- cago, St. Louis, Minneapolis, and look for monetary policy. San Francisco to reduce the basic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 83 discount rate from 14 percent to olis, Dallas, and San Francisco to 13 percent. remove the surcharge on borrowings by large depository institutions. Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, Votes for this action: Messrs. Volcker, Messrs. Rice, and Gramley. Votes Schultz, Wallich, Partee, Mrs. Teeters, against this action: None. Messrs. Rice, and Gramley. Votes against this action: None. The Board subsequently approved similar actions taken by the directors The Board subsequently approved of the Federal Reserve Banks of similar actions taken by the directors Atlanta and Kansas City, effective of the Federal Reserve Banks of Bos- November 3, and the Federal Reserve ton and New York, effective Novem- Bank of Dallas, effective November 6, ber 18, and the Federal Reserve 1981. Banks of Philadelphia and Kansas City, effective November 20, 1981. Also on October 30, the Board disapproved actions taken by the Also on November 16, the Board directors of the Federal Reserve Bank disapproved actions taken by the of San Francisco on October 22 to directors of the Federal Reserve eliminate the 2-percentage-point sur- Banks of Richmond and San Francharge on frequent borrowings by cisco to reduce the basic discount rate large depository institutions; and by from 13 percent to 12 percent. the directors of the Federal Reserve Votes for this action: Messrs. Volcker, Bank of St. Louis on October 27 to Schultz, Wallich, Partee, Mrs. Teeters, reduce the surcharge to 1 percentage Messrs. Rice, and Gramley. Votes point. against this action: None. Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee, Mrs. Teeters, December 3, 1981 Messrs. Rice, and Gramley. Votes Effective December 4, 1981, the against this action: None. Board approved actions taken by the directors of all of the Federal Reserve November 16, 1981 Banks to reduce the basic discount Effective November 17, 1981, the rate from 13 percent to 12 percent. Board approved actions taken by the Votes for this action: Messrs. Volcker, directors of the Federal Reserve Schultz, Wallich, Partee, Mrs. Teeters, Banks of Cleveland, Richmond, At- Messrs. Rice, and Gramley. Votes lanta, Chicago, St. Louis, Minneap- against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 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 1981 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 1981, 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 resume 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 1981. 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 favor of a general policy was by a In Effect January 1, 1981 large majority, or even that it was by 1. The Federal Open Market Com- Digitized for FRASER unanimous vote, does not necessarily mittee authorizes and directs the Federal http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 85 Reserve Bank of New York, to the (c) To buy U.S. Government seextent necessary to carry out the most curities, obligations that are direct oblirecent domestic policy directive adopted gations of, or fully guaranteed as to at a meeting of the Committee: principal and interest by, any agency of (a) To buy or sell U.S. Govern- the United States, and prime bankers ment securities, including securities of acceptances of the types authorized for the Federal Financing Bank, and securi- purchase under l(b) above, from ties that are direct obligations of, or fully dealers for the account of the Federal guaranteed as to principal and interest Reserve Bank of New York under by, any agency of the United States in agreements for repurchase of such sethe open market, from or to securities curities, obligations, or acceptances in dealers and foreign and international 15 calendar days or less, at rates that, accounts maintained at the Federal unless otherwise expressly authorized Reserve Bank of New York, on a cash, by the Committee, shall be determined regular, or deferred delivery basis, for by competitive bidding, after applying the System Open Market Account at reasonable limitations on the volume of market prices and, for such Account, to agreements with individual dealers; proexchange maturing U.S. Government vided that in the event Government and Federal agency securities with the securities or agency issues covered by Treasury or the individual agencies or any such agreement are not repurchased to allow them to mature without re- by the dealer pursuant to the agreement placement; provided that the aggregate or a renewal thereof, they shall be sold amount of U.S. Government and Fed- in the market or transferred to the Syseral agency securities held in such tem Open Market Account; and pro- Account (including forward commit- vided further that in the event bankers ments) at the close of business on the acceptances covered by any such agreeday of a meeting of the Committee at ment are not repurchased by the seller, which action is taken with respect to a they shall continue to be held by the domestic policy directive shall not be Federal Reserve Bank or shall be sold increased or decreased by more than in the open market. $3.0 billion during the period commenc- 2. The Federal Open Market Coming with the opening of business on the mittee authorizes and directs the Federal day following such meeting and ending Reserve Bank of New York (or, under with the close of business on the day of special circumstances, such as when the the next such meeting; New York Reserve Bank is closed, any (b) When appropriate, to buy or other Federal Reserve Bank) (a) to sell in the open market, from or to lend to the Treasury such amounts of acceptance dealers and foreign accounts securities held in the System Open Marmaintained at the Federal Reserve ket Account as may be necessary from Bank of New York, on a cash, regular, time to time for the temporary accomor deferred delivery basis, for the ac- modation of the Treasury, under such count of the Federal Reserve Bank of conditions as the Committee may specify; New York at market discount rates, and (b) to purchase directly from the prime bankers acceptances with ma- Treasury for renewable periods not to turities of up to 9 months at the time exceed 30 days, when authorized by the of acceptance that (1) arise out of cur- Board of Governors of the Federal Rerent shipment of goods between coun- serve System pursuant to an affirmative tries or within the United States, or vote of not less than five members, for (2) arise out of the storage within the its own account (with discretion, in United States of goods under contract cases where it seems desirable, to issue of sale or expected to move into the participations to one or more Federal channels of trade within a reasonable Reserve Banks) such amounts of special time and that are secured throughout short-term certificates of indebtedness as their life by a warehouse receipt or may be necessary from time to time for similar document conveying title to the the temporary accommodation of the underlying goods; provided that the Treasury, provided that the rate charged aggregate amount of bankers accep- on such certificates shall be a rate of tances held at any one time shall not V* of 1 percent below the discount rate Digitized e fo x r c F e R ed A S $ E 1 R 0 0 million; of the Federal Reserve Bank of New http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 FOMC Policy Actions York at the time of such purchases and while prices on the average continue to provided that the total amount of such rise rapidly. In October industrial procertificates held at any one time by the duction and nonfarm payroll employ- Federal Reserve Banks shall not exceed ment expanded substantially for the $2 billion. third consecutive month, and the un- 3. In order to ensure the effective employment rate remained around IVi conduct of open market operations, the percent. The value of retail sales Federal Open Market Committee changed little, following four months of authorizes and directs the Federal Re- recovery. The rise in the index of averserve Banks to lend U.S. Government age hourly earnings over the first ten securities held in the System Open Mar- months of 1980 was somewhat more ket Account to Government securities rapid than in 1979. dealers and to banks participating in The weighted average value of the Government securities clearing arrange- dollar in exchange markets on balance ments conducted through a Federal has risen further over the past month. Reserve Bank, under such instructions The U.S. trade deficit was essentially as the Committee may specify from unchanged in September, and the rate time to time. in the third quarter was sharply lower 4. In order to ensure the effective than that in the first half. conduct of open market operations, while Growth in Ml-A and Ml-B moderassisting in the provision of short-term ated further in October but was still investments for foreign and international relatively rapid; growth in M2 acceleraccounts maintained at the Federal Re- ated slightly, reflecting a pickup in exserve Bank of New York, the Federal pansion of its nontransactions com- Open Market Committee authorizes and ponent. From the fourth quarter of directs the Federal Reserve Bank of 1979 to October, growth of Ml-A was New York (a) for System Open Mar- in the upper part of the range set by the ket Account, to sell U.S. Government Committee for growth over the year securities to such foreign and inter- ending in the fourth quarter of 1980, national accounts on the basis set forth while growth of Ml-B and M2 was in paragraph 1 (a) under agreements somewhat above the upper limits of their providing for the resale by such accounts ranges. Expansion in commercial bank of those securities within 15 calendar credit was rapid in October, although days on terms comparable to those avail- not so rapid as in August and Septemable on such transactions in the market; ber. Market interest rates have risen and (b) for New York Bank account, sharply in recent weeks; average rates on when appropriate, to undertake with new home mortgage commitments have dealers, subject to the conditions im- continued upward. On November 14 posed on purchases and sales of securi- the Board of Governors announced an ties in paragraph 1 (c), repurchase increase in Federal Reserve discount agreements in U.S. Government and rates from 11 to 12 percent and a suragency securities, and to arrange corcharge of 2 percentage points on freresponding sale and repurchase agreequent borrowing of large member banks ments between its own account and from Federal Reserve Banks. foreign and international accounts main- The Federal Open Market Committee tained at the Bank. Transactions underseeks to foster monetary and financial taken with such accounts under the proconditions that will help to reduce inflavisions of this paragraph may provide tion, encourage economic recovery, and for a service fee when appropriate. contribute to a sustainable pattern of international transactions. At its meeting in July, the Committee agreed that these objectives would be furthered by Domestic Policy Directive growth of Ml-A, Ml-B, M2, and M3 In Effect January 1, 1981 from the fourth quarter of 1979 to the fourth quarter of 1980 within ranges of The information reviewed at this meet- 3Vi to 6 percent, 4 to 6Vi percent, 6 to ing suggests that real GNP is recovering 9 percent, and 6Vi to 9Vi percent refurther in the fourth quarter from the spectively. The associated range for Digitized for FRASER sharp contraction in the second quarter, bank credit was 6 to 9 percent. For http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 87 the period from the fourth quarter of Austrian schillings Italian lire 1980 to the fourth quarter of 1981, Belgian francs Japanese yen the Committee looked toward a reduc- Canadian dollars Mexican pesos tion in the ranges for growth of Ml-A, Danish kroner Netherlands guilder Ml-B, and M2 on the order of Vi per- Pounds sterling Norwegian kroner centage point from the ranges adopted French francs Swedish kronor for 1980, abstracting from institutional German marks Swiss francs influences affecting the behavior of the aggregates. These ranges will be recon- B. To hold balances of, and to sidered as conditions warrant. have outstanding forward contracts to In the short run, the Committee receive or to deliver, the foreign curseeks behavior of reserve aggregates rencies listed in paragraph A above. consistent with growth of Ml-A, Ml-B, C. To draw foreign currencies and and M2 over the period from September to permit foreign banks to draw dollars to December at annual rates of about under the reciprocal currency arrange- IVi percent, 5 percent, and 13A percent ments listed in paragraph 2 below, prorespectively, or somewhat less, provided vided that drawings by either party to that in the period before the next regular any such arrangement shall be fully meeting the weekly average federal liquidated within 12 months after any funds rate remains within a range of 13 amount outstanding at that time was to 17 percent. first drawn, unless the Committee, be- If it appears during the period before cause of exceptional circumstances, the next meeting that the constraint on specifically authorizes a delay. the federal funds rate is inconsistent D. To maintain an overall open with the objective for the expansion of position in all foreign currencies not reserves, the Manager for Domestic exceeding $1.0 billion, unless a larger Operations is promptly to notify the position is expressly authorized by the Chairman, who will then decide whether Committee. [Note. An overall open the situation calls for supplementary position not exceeding $8.9 billion had instructions from the Committee. been expressly authorized by the Committee on December 19, 1978, and was in effect as of January 1, 1981.] For Authorization for Foreign this purpose, the overall open position in Currency Operations all foreign currencies is defined as the sum (disregarding signs) of net posi- In Effect January 1, 1981 tions in individual currencies. The net 1. The Federal Open Market Com- position in a single foreign currency is mittee authorizes and directs the Fed- defined as holdings of balances in that eral Reserve Bank of New York, for currency, plus outstanding contracts for System Open Market Account, to the future receipt, minus outstanding conextent necessary to carry out the Com- tracts for future delivery of that curmittee's foreign currency directive and rency, i.e., as the sum of these elements express authorizations by the Committee with due regard to sign. pursuant thereto, and in conformity with 2. The Federal Open Market Comsuch procedural instructions as the Com- mittee directs the Federal Reserve Bank mittee may issue from time to time: of New York to maintain reciprocal cur- A. To purchase and sell the follow- rency arrangements ("swap" arrangeing foreign currencies in the form of ments) for the System Open Market cable transfers through spot or forward Account for periods up to a maximum transactions on the open market at home of 12 months with the following foreign and abroad, including transactions with banks, which are among those desigthe U.S. Treasury, with the U.S. Ex- nated by the Board of Governors of the change Stabilization Fund established Federal Reserve System under Section by Section 10 of the Gold Reserve Act 214.5 of Regulation N, Relations with of 1934, with foreign monetary authori- Foreign Banks and Bankers, and with ties, with the Bank for International the approval of the Committee to renew Settlements, and with other international such arrangements on maturity: Digitized f f i o n r a F n R ci A a S l E i R n stitutions: Any changes in the terms of existing http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 FOMC Policy Actions for review and approval to the Com- Amount of arrangement Foreign bank (millions of mittee. dollars equivalent) 5. Foreign currency holdings shall be invested insofar as practicable, con- Austrian National Bank 250 National Bank of Belgium 1,000 sidering needs for minimum working Bank of Canada 2,000 balances. When appropriate in connec- National Bank of Denmark 250 tion with arrangements to provide invest- Bank of England 3,000 ment facilities for foreign currency hold- BankofFrance 2,000 German Federal Bank 6,000 ings, U.S. Government securities may be Bank of Italy 3,000 purchased from foreign central banks Bank of Japan 5,000 under agreements for repurchase of Bank of Mexico 700 Netherlands Bank 500 such securities within 30 calendar days. Bank of Norway 250 6. All operations undertaken pur- Bank of Sweden 500x suant to the preceding paragraphs shall Swiss National Bank 4,000 Bank for International Settlements: be reported daily to the Foreign Cur- Dollars against Swiss francs 600 rency Subcommittee. The Foreign Cur- Dollars against authorized European rency Subcommittee consists of the currencies other than Swiss francs 1,250 Chairman and Vice Chairman of the 1. Pursuant to an action taken by the Com- Committee, the Vice Chairman of the mittee on May 20, 1980, the amount of the Board of Governors, and such other reciprocal currency arrangement with the Bank members of the Board as the Chairman of Sweden was raised to $500 million, effective may designate (or in the absence of May 23, 1980, for a period of one year, after members of the Board serving on the which it will revert to its former level of Subcommittee, other Board Members $300 million. designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his alterswap arrangements, and the proposed nate). Meetings of the Subcommittee terms of any new arrangements that may shall be called at the request of any be authorized, shall be referred for member, or at the request of the Manreview and approval to the Committee. ager for Foreign Operations, for the 3. Currencies to be used for liquidapurposes of reviewing recent or contion of System swap commitments may templated operations and of consulting be purchased from the foreign central with the Manager on other matters rebank drawn on, at the same exchange lating to his responsibilities. At the rate as that employed in the drawing to request of any member of the Subbe liquidated. Apart from any such committee, questions arising from such purchases at the rate of the drawing, all reviews and consultations shall be retransactions in foreign currencies underferred for determination to the Federal taken under paragraph 1(A) above Open Market Committee. shall, unless otherwise expressly authorized by the Committee, be at prevailing 7. The Chairman is authorized: market rates. A. With the approval of the Com- 4. It shall be the normal practice to mittee, to enter into any needed agreearrange with foreign central banks for ment or understanding with the Secretary the coordination of foreign currency of the Treasury about the division of transactions. In making operating responsibility for foreign currency oparrangements with foreign central banks erations between the System and the of System holdings of foreign curren- Treasury; cies, the Federal Reserve Bank of New B. To keep the Secretary of the York shall not commit itself to main- Treasury fully advised concerning Systain any specific balance, unless autho- tem foreign currency operations, and rized by the Federal Open Market to consult with the Secretary on policy Committee. Any agreements or under- matters relating to foreign currency standings concerning the administration operations; of the accounts maintained by the Fed- C. From time to time, to transmit eral Reserve Bank of New York with appropriate reports and information to the foreign banks designated by the the National Advisory Council on Inter- Board of Governors under Section national Monetary and Financial Digitized2 f1o4r .F5R AoSf ERRe gulation N shall be referred Policies. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 89 8. Staff officers of the Committee foreign central banks and with the Bank are authorized to transmit pertinent for International Settlements. information on System foreign currency C. Cooperate in other respects operations to appropriate officials of the with central banks of other countries Treasury Department. and with international monetary insti- 9. All Federal Reserve Banks shall tutions. participate in the foreign currency op- 3. Transactions may also be undererations for System Account in accor- taken : dance with paragraph 3G(1) of the A. To adjust System balances in Board of Governors' Statement of Pro- light of probable future needs for curcedure with Respect to Foreign Relation- rencies. ships of Federal Reserve Banks dated B. To provide means for meeting January 1, 1944. System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabiliza- Foreign Currency Directive tion Fund. C. For such other purposes as may In Effect January 1, 1981 be expressly authorized by the Com- 1. System operations in foreign cur- mittee. rencies shall generally be directed at 4. System foreign currency operacountering disorderly market conditions, tions shall be conducted: provided that market exchange rates for A. In close and continuous conthe U.S. dollar reflect actions and be- sultation and cooperation with the havior consistent with the IMF Article United States Treasury; IV, Section 1. B. In cooperation, as appropriate, 2. To achieve this end the System with foreign monetary authorities; and shall: C. In a manner consistent with the A. Undertake spot and forward obligations of the United States in the purchases and sales of foreign exchange. International Monetary Fund regarding B. Maintain reciprocal currency exchange arrangements under the IMF ("swap") arrangements with selected Article IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 FOMC Policy Actions Meeting Held suggested that expenditures for plant on February 2-3, 1981 and equipment would rise about \0% percent in 1981, following an expan- Domestic Policy Directive sion of about 83/ percent in 1980. 4 The information reviewed at this After allowance for respondents' exmeeting indicated that real gross na- pectations for price increases, howtional product expanded at a 5 per- ever, the survey results implied no cent annual rate in the fourth quar- increase in real outlays for 1981. ter. Average prices, as measured by In December private housing the fixed-weight price index for starts remained at the annual rate of gross domestic business product, in- about lV million units recorded in 2 creased at an annual rate of about the previous three months. Newly 9l/ percent. Over the year ending in issued permits for residential con- 2 the fourth quarter of 1980, real GNP struction declined, and sales of both was unchanged and nominal GNP new and existing houses fell somerose about 93/ percent. what. 4 The index of industrial production Producer prices of finished goods rose an estimated 1 percent in De- continued to rise at a rapid pace in cember, following substantial gains December, but the rate of increase in each of the four preceding over the fourth quarter was considmonths. By December, the index erably below the exceptional pace in had regained much of the ground lost the third quarter. Consumer prices earlier in the year. Capacity utiliza- also rose at a rapid pace in Decemtion in manufacturing increased fur- ber, reflecting not only continued ther in December to 79.8 percent, sharp advances in food prices and a 4.9 percentage points above its July renewed upsurge in energy prices, trough but well below earlier peaks. but sizable increases in most other Nonfarm payroll employment ex- categories as well. Over the year panded substantially in December ending in December 1980, producer for the fifth consecutive month, and prices of finished goods and consumthe unemployment rate was essen- er prices rose about H3/ and 12V2 4 tially unchanged at about 7V per- percent respectively, compared with 2 cent. Growth in manufacturing em- increases of about 12V and I3V4 2 ployment slowed in December, but percent over the preceding year. the average workweek lengthened Over the last few months of 1980, 0.3 hour to 40.2 hours. the rise in the index of average hour- The dollar value of retail sales ly earnings was at about the rapid declined in December, according to pace recorded earlier in the year. the advance report, after a sizable Over the year 1980 the index was up gain over the preceding six months. 9V2 percent compared with a rise of Sales of new automobiles were at an about 8 percent over 1979. annual rate of 9 million units in De- In foreign exchange markets the cember, virtually unchanged from trade-weighted value of the dollar the rate in the preceding five against major foreign currencies had months. risen about 3!/ percent over the in- 2 The Department of Commerce terval since the Committee's meetsurvey of business spending plans ing in December. There were divertaken in November and December gent changes against individual cur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 91 rencies: the dollar appreciated sub- in the money market. If it appeared stantially against the German mark during the period before the next and other continental European cur- regular meeting that fluctuations in rencies, and depreciated somewhat the federal funds rate, taken over a against the pound sterling, the Japa- period of time, within a range of 15 nese yen, and the Canadian dollar. to 20 percent were likely to be incon- The U.S. trade deficit in the fourth sistent with the monetary and relatquarter of 1980 widened from the ed reserve paths, the Manager for exceptionally low rate in the third Domestic Operations was promptly quarter but remained substantially to notify the Chairman, who would less than the rate in the first half. then decide whether the situation The value of exports rose slightly in called for supplementary instructhe fourth quarter, but the value of tions from the Committee. imports increased by a larger During the course of the interamount, mainly as a result of higher meeting period, incoming data for oil imports. the latter part of December and sub- At its meeting on December 18- sequent weeks indicated that a 19, the Committee had decided that shortfall in growth of the monetary open market operations in the period aggregates, after adjustment for the until this meeting should be directed estimated effects of shifts into NOW toward expansion of reserve aggre- accounts, had developed from the gates associated with growth of short-run objectives set forth by the M-1A, M-1B, and M-2 over the first Committee. Required reserves conquarter along a path consistent with tracted in relation to the supply of the ranges for growth in 1981 con- reserves being made available templated in July 1980, abstracting through open market operations. Affrom the effects of shifts into NOW ter the turn of the year, member accounts; the midpoints of those bank borrowings declined; they avranges were 4l/ percent, 43/ per- eraged about $1.2 billion in the two 4 4 cent, and 7 percent respectively.1 weeks ending January 14, compared The members agreed that some with about $1.6 billion in the precedshortfall in growth would be accept- ing four weeks. Nevertheless, the able in the near term if it developed federal funds rate remained in a in the context of reduced pressures range of 19 to 20 percent, perhaps in part because of unusually strong demands for excess reserves and an 1. M-1A comprises demand deposits at inclination of some banks to increase commercial banks plus currency in circulatheir overnight borrowings in the tion. M-1B comprises M-1A plus negotiable order of withdrawal (NOW) and automatic funds market in expectation of neartransfer service (ATS) accounts at banks and term declines in interest rates. Borthrift institutions, credit union share draft rowings moved up to an average of accounts, and demand deposits at mutual $1.8 billion in the statement week savings banks. M-2 contains M-1B and savings and small-denomination time deposits at ending January 28, while the funds all depository institutions, overnight repur- rate declined to a range of 17 to 18 chase agreements (RPs) at commercial banks, percent in the days preceding this overnight Eurodollars held at Caribbean meeting. branches of member banks by U.S. residents M-1A and M-1B declined in Deother than banks, and money market mutual fund shares. cember at annual rates of about 11 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 FOMC Policy Actions percent and 9 percent respectively. to 9 percent range adopted by the Growth in these aggregates in Janu- Committee for the year. ary was affected greatly by the intro- Market interest rates fluctuated duction of NOW accounts on a na- considerably over the intermeeting tionwide basis as of December 31, period but declined on balance from 1980. It had been anticipated that their mid-December highs. At the shifts into NOW accounts would sig- time of this meeting, short-term nificantly retard the growth of M-1A rates were down about 2l/ to 4V 4 2 and enhance the growth of M-1B percentage points and long-term during 1981. Such shifts during the rates about V to 1 percentage point 2 first few weeks of the year were from their December peaks. During much larger than generally had been the intermeeting interval, the prime expected, and available data sug- rate charged by commercial banks gested a very sharp decline in M-1A on short-term business loans was in January and a substantial rise in raised to a record 2iy percent and 2 M-1B. However, after adjustment subsequently reduced to 20 percent. for shifts into NOW accounts based In home mortgage markets, average on surveys of commercial banks and rates on new commitments for fixedother data, both M-1A and M-1B rate loans at savings and loan associwere estimated to have risen moder- ations reached 14.95 percent in the ately in January. latter part of December and edged Growth in M-2 slowed markedly off slightly in subsequent weeks. in December to an annual rate of The staff projections presented at about 23/ percent. Growth apparent- this meeting suggested that the 4 ly accelerated to a relatively rapid buoyancy of economic activity in the rate in January, however, as money final quarter of 1980 would extend market mutual fund shares posted a into the first quarter of the new year sizable increase and growth in small- but that over the four quarters of and large-denomination time depos- 1981 real GNP would change little its remained substantial. for the second consecutive year. Growth in total credit outstanding Such a sluggish performance of the at U.S. commercial banks slowed economy would be associated with somewhat in December from the an increase in the rate of unemployrapid pace of other recent months. ment during 1981. The rise in the The slowing reflected a deceleration fixed-weight price index for gross in the pace of investment acquisi- domestic business product was protions and in expansion of loans, in- jected to remain rapid, although not cluding business loans. However, quite so rapid in the second half of the moderation in the growth of busi- the year as in the first half. ness loans at commercial banks was In the Committee's discussion of accompanied by stepped-up issu- the economic situation and outlook, ance of commercial paper and long- members continued to stress the difer-run debt instruments by nonfinan- ficulties of forecasting output and cial businesses. For the period from prices in the current environment of the fourth quarter of 1979 to the high inflation and volatile expectafourth quarter of 1980 total commer- tions, and they recognized also the cial bank credit grew at an annual uncertainties surrounding the implerate of 7.9 percent, well within the 6 mentation of the fiscal and other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 93 economic policies soon to be an- !/ percentage point in the ranges for 2 nounced by the new administration growth of M-1A, M-1B, and M-2, inaugurated on January 20. In re- abstracting from institutional influsponse to a request to set forth their ences affecting the behavior of the views concerning the outlook, a aggregates. number of members expressed the In reviewing the ranges for moneopinion that the most likely outcome tary growth in 1981, the Committee for the period through the fourth noted that from the fourth quarter of quarter of 1981 was little change in 1979 to the fourth quarter of 1980, real GNP with a significant increase M-1A grew 5 percent; M-1B, 1% in the unemployment rate, as pro- percent; M-2, 9/ percent; and M-3, 4 jected by the staff. Other members 10 percent. For M-1A and M-1B, anticipated a small rise in real GNP however, actual growth in 1980 was over the year, generally with some- not comparable to the Committee's what less increase in unemployment, ranges for the year. The ranges had and two members projected a small been established on the assumption decline in real GNP with a larger of virtually no further shifts into increase in unemployment. All of the ATS-NOW accounts from demand members expected continuation of a and other accounts; but as the year high rate of inflation over the year, progressed, and particularly after although the anticipated rates of in- passage of the Monetary Control crease differed. Act, further significant shifts be- At this meeting, the Committee came apparent. Taking account of completed the review, begun at the the estimated effects of such shifts, meeting in December 1980, of the which have no significance for monranges for growth of monetary ag- etary policy, the basic range for gregates over the period from the growth of M-1B in 1980 could be fourth quarter of 1980 to the fourth adjusted upward by about !/ per- 2 quarter of 1981 within the frame- centage point and the range for work of the Full Employment and M-1A could be adjusted downward Balanced Growth Act of 1978. At its by about ll/ percentage points. 4 meeting in July 1980, the Committee Alternatively, measured growth of had reaffirmed ranges for growth M-1A could be adjusted upward to over the year ending in the fourth 6!/ percent and that of M-1B adjust- 4 quarter of 1980 of 3 V to 6 percent fored downward to 63/ percent. With 2 4 M-1A, 4 to 6V percent for M-1B, 6 either method of adjustment, growth 2 to 9 percent for M-2, and 6l/ to 9l/ of each aggregate marginally exceed- 2 2 percent for M-3, with an associated ed the upper bound of its range. range of 6 to 9 percent for growth of In contemplating ranges for 1981, commercial bank credit.2 For the the Committee continued to face unyear ending in the fourth quarter of usual uncertainties concerning the 1981, the Committee had tentatively forces affecting monetary growth, in indicated reductions on the order of part because of sizable variations evident in the demand for both narrowly and broadly defined money in 2. M-3 is M-2 plus large-denomination time relation to nominal GNP. In the curdeposits at all depository institutions and term rent year, moreover, relationships RPs at commercial banks and savings and loan associations. among the measured rates of growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 FOMC Policy Actions for the monetary aggregates were deposits more attractive relative to subject to large changes resulting market instruments and as money from the introduction of NOW ac- market mutual funds have become counts on a nationwide basis as au- more popular. thorized by the Monetary Control In the Committee's discussion of Act of 1980. Specifically, shifts into its objectives for 1981, the members NOW accounts from demand depos- agreed that some further reduction its were expected to retard growth of in the ranges for monetary growth, M-1A significantly while shifts from abstracting from the effects of shifts savings deposits and other interest- into NOW accounts, was appropribearing assets would enhance ate in line with the longstanding goal growth of M-1B. However, esti- of contributing to a reduction in the mates of the impact of such shifts on rate of inflation and providing the measured growth of the two aggre- basis for restoration of economic gates could only be tentative, be- stability and sustainable growth in cause of the overall size of the shift output of goods and services. The and uncertainty about the ultimate members differed somewhat in their sources of the funds. In January, the views concerning the extent of the first month after their nationwide reductions that might be made and authorization, NOW accounts ex- also about the particular aggregates panded far more than had been an- for which longer-run ranges should ticipated. It was expected that the be specified. flow of funds into NOW accounts For M-1A and M-1B, most memwould subside in coming months, bers favored specification of ranges, and also that the proportion of the abstracting from the NOW account funds representing shifts from de- effect, that were V percentage point 2 mand deposits would be gradually lower than the ranges for 1980. One reduced. member advocated a reduction of 1 Shifts of funds into NOW ac- percentage point, particularly becounts were not expected to affect cause growth over 1980 had appregrowth of the broader monetary ag- ciably exceeded the midpoints of the gregates significantly, because virtu- adjusted ranges for that year. Anothally all of the funds likely to be er member preferred not to specify shifted into such accounts are al- ranges for the narrower monetary ready included in M-2. It was antici- aggregates at all, because he bepated, however, that growth of both lieved that the NOW account effects M-2 and M-3 would be somewhat could not be reliably estimated. In stronger in relation to growth of the the view of one other member, connarrower aggregates, adjusted for fusion could be lessened by focusing the flows into NOW accounts, than attention entirely on M-1B, because projected in July 1980, when ranges it would be less subject than M-l A to for 1981 were first considered. The the distorting effects of the flows public has shown an increased pref- into NOW accounts. erence for holding savings in depos- Members differed somewhat more its included in the nontransaction in their views concerning the broadcomponent of M-2, as changes in er monetary aggregates, in part beregulatory ceilings on interest rates cause of uncertainty about the pohave made small time and savings tential effects of interest rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 95 relationships on the behavior of the mercial bank credit was 6 to 9 pernontransaction component. Reflect- cent. It was emphasized that at an ing an expectation that growth of the early date the Committee might wish broader aggregates would increase to reconsider the longer-run ranges relative to that of the narrower ag- in the light of developing conditions gregates adjusted for expansion of and that in any case it would recon- NOW accounts, a number of mem- sider them in July within the framebers favored specification of ranges work of the Full Employment and slightly higher than those for 1980. Balanced Growth Act of 1978. It was However, most members believed understood, moreover, that the disthat sufficient allowance for the pos- torting effects of shifts into NOW sibility of relatively stronger growth accounts would change during the of the broader aggregates would be year and that other short-run factors made by reiterating the 1980 ranges might cause considerable variation for them in association with ranges in annual rates of growth from one for the narrower aggregates that month to the next and from one were V percentage point lower than quarter to the next. The Committee 2 those for 1980. In this connection, it planned that periodically the staff was stressed that specification of would provide estimates of the efranges rather than precise rates for fects that shifts into ATS-NOW acgrowth over the year inherently pro- counts were having on the reported vided for some change in relative data. rates of growth among the monetary The Committee adopted the following aggregates, and that growth of both ranges for growth in monetary aggre- M-2 and M-3 might well be in the gates for the period from the fourth quarupper portions of their ranges. Even ter of 1980 to the fourth quarter of 1981, so, growth of the broader aggregates abstracting from the impact of introduction of NOW accounts on a nationwide would be less than actual growth in basis: M-1A, 3 to 5V percent; M-1B, 31/, 1980. One member preferred to fo- to 6 percent; M-2, 6 2 to 9 percent; and cus exclusively on the narrower ag- M-3, 6l/ to 9l/ percent. The associated 2 2 gregates, not specifying ranges for range for bank credit is 6 to 9 percent. the broader aggregates. Votes for this action: Messrs. At the conclusion of the discus- Volcker, Gramley, Guffey, Morris, sion, the Committee decided to Partee, Rice, Roos, Schultz, Solomon, Mrs. Teeters, and Mr. Winn. specify ranges for growth of M-1A Vote against this action: Mr. Wallich. and M-1B, adjusted for the effects of flows into NOW accounts, that were Mr. Wallich dissented from this !/ percentage point lower than those action because he thought that the 2 for 1980 and to retain the 1980 ranges ranges adopted for growth of M-1A for M-2 and M-3. Thus, the Commit- and M-1B were too high. He betee adopted the following ranges for lieved that somewhat lower ranges growth of the monetary aggregates would provide for adequate moneover the period from the fourth quar- tary growth in 1981, because he exter of 1980 to the fourth quarter of pected a further downward shift in 1981: M-1A, 3 to 5l/ percent; M-1B, money demand and also because 2 3l/ to 6 percent; M-2, 6 to 9 percent; growth of the monetary aggregates 2 and M-3, 6V to 9l/ percent. The over the past year generally had ex- 2 2 associated range for growth of com- ceeded the specified ranges. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 FOMC Policy Actions In reviewing its objectives for ranges adopted for 1981, several monetary growth from December members commented on the danger 1980 to March 1981 in light of the of potentially confusing interpretaranges adopted for the year from the tions of policy intentions and also of fourth quarter of 1980 to the fourth possible instability in financial marquarter of 1981, the Committee took kets. It was observed, for example, note of the recent behavior of the that efforts to raise monetary growth monetary aggregates. Specifically, promptly toward the longer-run growth of the aggregates in both the paths could have the undesirable third and the fourth quarters of 1980 consequences of encouraging first (quarterly average basis) had been relatively rapid growth and then an strong, more than compensating for abrupt deceleration. A few members the weakness earlier in the year. also suggested that the gradual ap- From the fourth quarter to January proach to making up the shortfall 1981, however, the annual rates of would be acceptable provided that it growth of M-1A and M-1B had fallen proved to be compatible with relabelow the lower ends of the ranges tive stability or some easing in monfor 1981, reflecting the sharp de- ey market pressures. clines in those aggregates in Decem- At the conclusion of the discusber and the only partial recovery in sion, the Committee decided to seek January. behavior of reserve aggregates asso- In that light, the members in gen- ciated with growth of M-1A and eral agreed that operations in the M-1B over the period from Decemperiod before the next regular meet- ber to March at annual rates of 5 to 6 ing scheduled for March 31 should percent and in M-2 of about 8 perbe directed toward a gradual restora- cent, abstracting from the impact of tion of growth of M-1A and M-1B flows into NOW accounts. Those (adjusted for NOW account effects) rates were associated with growth of to rates consistent with their longer- M-1A, M-1B, and M-2 from the run ranges. Almost all members fourth quarter of 1980 to the first were willing to accept continuation quarter of 1981 at annual rates of of relatively slow growth in relation about 2 percent, 23/ percent, and 7 4 to the ranges for 1981 at least percent respectively. The members through March in recognition that it recognized that shifts into NOW acwould generally compensate for the counts would continue to distort rapid growth during the fourth quar- measured growth in M-1A and M-1B ter of 1980, which carried growth for to an unpredictable extent and that the year slightly above the upper operational paths would have to be bounds of the ranges for the year. developed in the light of evaluation They differed somewhat over the of those distortions. If it appeared acceptable amount of growth. One during the period before the next member preferred to direct opera- regular meeting that fluctuations in tions toward raising growth of the the federal funds rate, taken over a aggregates to the midpoints of their period of time, within a range of 15 1981 ranges by March. to 20 percent were likely to be incon- In accepting the gradual approach sistent with the monetary and relattoward encouraging rates of mone- ed reserve paths, the Manager for tary growth consistent with the Domestic Operations was promptly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 97 to notify the Chairman, who would M-2, and M-3 from the fourth quarter of then decide whether the situation 1980 to the fourth quarter of 1981 within ranges of 3 to 5/ percent, 3>x/ to 6 called for supplementary instruc- 2 2 percent, 6 to 9 percent, and 6l/ to 9l/ tions from the Committee. 2 2 percent respectively, abstracting from The following domestic policy di- the impact of introduction of NOW acrective was issued to the Federal counts on a nationwide basis. The asso- Reserve Bank of New York: ciated range for bank credit was 6 to 9 percent. These ranges will be reconsidered as conditions warrant. The information reviewed at this meet- In the short run the Committee seeks ing suggests that real GNP expanded behavior of reserve aggregates consissubstantially in the fourth quarter of 1980 tent with growth in M-1A and M-1B from and that prices on the average continued December to March at annual rates of 5 to rise rapidly. In December industrial to 6 percent and in M-2 at a rate of about production and nonfarm payroll employ- 8 percent, abstracting from the impact of ment expanded further, and the unem- flows into NOW accounts. These rates ployment rate was essentially unchanged are associated with growth of M-1A, at about 7l/ percent. Retail sales de- M-1B, and M-2 from the fourth quarter 2 clined, however, following a sizable gain of 1980 to the first quarter of 1981 at over the preceding six months. Housing annual rates of about 2 percent, 23/ 4 starts were about unchanged for the third percent, and 7 percent respectively. It is month. Over the last few months of 1980, recognized that shifts into NOW acthe rise in the index of average hourly counts will continue to distort measured earnings was at about the rapid pace growth in M-1A and M-1B to an unprerecorded earlier in the year. dictable extent, and operational reserve The weighted average value of the paths will be developed in the light of dollar in exchange markets has risen evaluation of those distortions. If it apfurther over the past six weeks. The pears during the period before the next U.S. trade deficit in the final quarter of meeting that fluctuations in the federal 1980 widened from the exceptionally low funds rate, taken over a period of time, rate in the third quarter but remained within a range of 15 to 20 percent are substantially less than the rate in the first likely to be inconsistent with the monehalf. tary and related reserve paths, the Manager for Domestic Operations is prompt- M-1A and M-1B declined sharply in ly to notify the Chairman, who will then December; in January, after adjustment decide whether the situation calls for of the actual figures for the estimated supplementary instructions from the effects of shifts into NOW accounts, Committee. these aggregates recovered in part. Growth in M-2 slowed markedly in De- Votes for this action: Messrs. cember but accelerated in January. Volcker, Gramley, Guffey, Morris, Some moderation of the expansion in Partee, Rice, Roos, Schultz, Solocommercial bank credit in December and mon, and Winn. Votes against this early January was accompanied by action: Mrs. Teeters and Mr. Wallich. stepped-up financing of nonfinancial businesses through issuance of commercial paper and longer-term debt instru- Mrs. Teeters dissented from this ments. Market interest rates have de- action because she believed that the clined on balance from their highs of specifications adopted for monetary mid-December. growth over the first quarter were The Federal Open Market Committee seeks to foster monetary and financial unduly restrictive. She preferred conditions that will help to reduce infla- specification of higher rates for montion, encourage economic recovery, and etary growth over the first quarter, contribute to a sustainable pattern of consistent with the ranges adopted international transactions. The Commitfor monetary growth over the whole tee agreed that these objectives would be furthered by growth of M-1A, M-1B, year, in association with a lower Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 FOMC Policy Actions intermeeting range for the federal Votes for this action: Messrs. funds rate. Volcker, Gramley, Guffey, Morris, Mr. Wallich dissented from this Partee, Rice, Schultz, Mrs. Teeters, and Mr. Winn, Vote against this acaction because he preferred to set a tion: Mr. Roos. Absent: Messrs. Solhigher range for the federal funds omon and Wallich. rate in order to help avoid a repeti- Mr. Roos dissented from this action of the sharp drop in interest tion because he believed that it rate§ that had occurred in the second would tend to prolong unduly the quarter of 1980. shortfall in growth of M-l A and In late February, incoming data M-1B from the Committee's ranges indicated that M-l A and M-1B, after for the year. In the circumstances, adjustment for the estimated effects he preferred to reduce the lower of shifts into NOW accounts, were limit of the intermeeting range for growing at rates well below those the federal funds rate in order to consistent with the Committee's obencourage a more prompt pickup in jectives for the period from Decemgrowth of the narrowly defined monber to March. Consequently, memetary aggregates. ber bank demands for reserves had eased in relation to the supply of reserves being made available Meeting Held on March 31, 1981 through open market operations, 1. Domestic Policy Directive and member bank borrowings had fallen appreciably. At the same time, The information reviewed at this growth of M-2 and M-3 appeared to meeting suggested that real gross be strong. These developments were national product expanded substanassociated with a decline in the fed- tially in the first quarter of 1981, but eral funds rate to around 15 percent, there were signs of a slowing of the the lower end of the range of 15 to 20 expansion in economic activity durpercent specified by the Committee, ing the quarter. Average prices, as raising the question of whether the measured by the fixed-weight price situation called for supplementary index for gross domestic business instructions from the Committee. product, continued to rise rapidly. In a telephone conference on Feb- The dollar value of retail sales ruary 24, the Committee adopted the advanced appreciably further over following modification of the domes- the first two months of the year, tic policy directive adopted on Feb- following a sizable gain over the ruary 3: second half of 1980. Increases in the value of sales in the two-month peri- In light of the relatively strong growth od were fairly widespread and were of M-2 and M-3 and the substantial eas- especially strong in the automotive ing recently in money market conditions, group, at general merchandise as well as uncertainties about the interstores, and at gasoline service stapretation of the behavior of M-l, the tions. Unit sales of new domestic Committee on February 24 agreed to accept some shortfall in growth of M-l A automobiles surged in late February and M-1B from the specified rates in the and remained strong through the domestic policy directive adopted on first 20 days of March, largely be- February 3 as consistent with developcause of price concessions. ments in the aggregates generally and the objectives for the year. The index of industrial production Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 99 declined an estimated 0.5 percent in percent but accelerated in February February, after three months of di- to a rate of 11V2 percent. Over the minishing gains. Capacity utilization two-month period food prices rose in manufacturing edged up in Janu- only slightly on balance, and the rise ary but declined 0.7 percentage point in homeownership costs slowed subin February to 79.3 percent. stantially. But prices of energy items Private housing starts dropped in surged, reflecting in large part the February to an annual rate of about effects of decontrol of oil prices. The 1.2 million units; during the preced- rise in the index of average hourly ing six months housing starts had earnings of private nonfarm producbeen in a range of 1.4 million to 1.6 tion workers was little changed from million units. Newly issued permits the pace recorded during 1980. for residential construction edged In foreign exchange markets the down in January and declined sharp- trade-weighted value of the dollar ly in February. Combined sales of against major foreign currencies rose new and existing homes fell in Janu- further following the Committee's ary for the fourth consecutive meeting in early February to a peak month. at midmonth. Subsequently, the dol- Nonfarm payroll employment lar declined somewhat on balance, changed little in February following as short-term interest rates in contia large increase in January, and the nental European countries rose apunemployment rate, at 7.3 percent, preciably, both in absolute terms was essentially unchanged. Employ- and relative to interest rates on dolment continued to expand in trade lar-denominated assets. In the days and service establishments but de- immediately preceding this meeting clined sharply in construction. In the dollar traded at rates somewhat manufacturing, employment growth above the level prevailing at the time slowed further and the average of the last meeting. The U.S. trade workweek fell 0.6 hour to 39.8 deficit in January and February was hours. at about the average monthly rate of The Department of Commerce the final quarter of 1980. The value survey of business spending plans of imports rose substantially, in astaken in January and February sug- sociation with the expansion in U.S. gested that current-dollar expendi- economic activity, and the value of tures for plant and equipment would exports also rose markedly. rise about 10!/4 percent in 1981, fol- At its meeting on February 2-3, lowing an expansion of about 9Vi the Committee had decided that percent in 1980. The survey results open market operations in the period implied that constant-dollar outlays until this meeting should be directed would change little in 1981 from their toward expansion of reserve aggrelevel in 1980. gates associated with growth in Producer prices of finished goods M-1A and M-1B over the period rose at an annual rate of about IOVA from December to March at annual percent in January and February, rates of 5 to 6 percent and in M-2 of close to the average rate in the sec- about 8 percent, abstracting from the ond half of 1980. The rise in the impact of flows into NOW accounts. consumer price index slowed in Jan- Those rates were associated with uary to an annual rate of about 83/4 growth of M-1A, M-1B, and M-2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 FOMC Policy Actions from the fourth quarter of 1980 to the M-1A and M-1B from the rates specfirst quarter of 1981 at annual rates ified in the directive adopted on Febof about 2 percent, 23/4 percent, and ruary 3, in light of indications of 7 percent respectively. If it appeared relatively strong growth of M-2 and during the period before the next M-3 and the substantial easing that regular meeting that fluctuations in had occurred in money market conthe federal funds rate, taken over a ditions, as well as of uncertainties period of time, within a range of 15 about the interpretation of the beto 20 percent were likely to be incon- havior of M-l. It was recognized that sistent with the monetary and relat- the operational path for nonbored reserve paths, the Manager for rowed reserves consistent with the Domestic Operations was promptly Committee's decision might lead to to notify the Chairman, who would some further easing in money marthen decide whether the situation ket conditions, depending upon rates called for supplementary instruc- of growth in the monetary aggretions from the Committee. gates. In fact, member bank borrow- Early in the intermeeting period, ings declined in early March, and the incoming data for the latter part of federal funds rate eased for a while January and the early weeks of Feb- in mid-March to about 13 percent. ruary indicated that a shortfall in Subsequently, however, demands growth of the narrowly defined mon- for reserves strengthened, and in the etary aggregates (M-1A and M-1B), days immediately preceding this after adjustment for the estimated meeting, the federal funds rate was effects of shifts into NOW accounts, around 15 percent. had developed from the short-run M-1A and M-1B, adjusted for the objectives set forth by the Commit- estimated effects of shifts into NOW tee. Required reserves and the de- accounts, declined somewhat in mand for reserves contracted in rela- February and changed little on baltion to the supply of reserves being ance over the first two months of the made available through open market year. The narrower aggregates exoperations, and member bank bor- panded substantially, however, in rowings declined to an average of the first half of March. Growth in about $1.2 billion in the three state- M-2 picked up to an annual rate of ment weeks ending February 18 about IVi percent in February from from an average of about $1.5 billion 53/4 percent in January; and it apparin the preceding three weeks. The ently accelerated considerably in federal funds rate fell to an average March, because of large flows into of about 153/4 percent in the week money market mutual funds and ending February 18, from about 17!/4 some strengthening in the total of percent at the time of the Commit- small-denomination time and savtee's meeting in early February; and ings deposits in addition to the exit declined further in subsequent pansion in the narrower aggregates. days to around the lower end of the Expansion in total credit outstandrange of 15 to 20 percent that had ing at U.S. commercial banks been specified by the Committee. slowed substantially in February to In a telephone conference on Feb- an annual rate of 8V4 percent, about ruary 24, the Committee agreed to one-half the pace recorded in Januaccept some shortfall in growth of ary. The deceleration reflected a re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 101 duced pace of investment acquisi- weight price index for gross domestions and weakness in loans, tic business product was projected particularly security loans and busi- to remain rapid, although somewhat ness loans. The moderation in less so in the latter part of the year growth of business loans at commer- than in the first half. cial banks was accompanied by In the Committee's discussion of stepped-up issuance of publicly of- the economic situation and outlook, fered bonds and continued heavy net members noted the unanticipated issuance of commercial paper by strength in activity in the autumn nonfinancial corporations. In addi- and winter, and they continued to tion, U.S. nonbank residents ex- stress the difficulties of forecasting panded their outstanding loans from output and prices in the current enviforeign branches of U.S. banks. ronment. A number of members ex- Short-term market interest rates pressed the view that little change in declined substantially on balance real GNP over the balance of 1981 over the intermeeting interval: in pri- was an improbable development; vate short-term markets, yields fell 2 and of these, all but one thought that to 3^percentage points; in the Trea- a stronger performance was more sury bill market, yields fell some- likely than a weaker one. While no what less, about 3A to 2 percentage member voiced disagreement with points, as the Treasury raised large the staff projection of continuation amounts of new money through bill of a rapid rise in overall prices, it auctions and heavy seasonal issu- was suggested that inflationary exance of cash management bills. Most pectations might be moderating a bit long-term interest rates rose lA to Vi and also that toward the end of the percentage point during the inter- year the rise in the consumer price meeting period. The prime rate index might be lessening. charged by commercial banks on At its meeting on February 2-3, short-term business loans was re- the Committee had adopted the folduced in steps to YIV2 percent from lowing ranges for growth of the monthe level of \9Vi to 20 percent pre- etary aggregates over the period vailing at the time of the last Com- from the fourth quarter of 1980 to the mittee meeting. In home mortgage fourth quarter of 1981: M-1A and markets, average rates on new com- M-1B, 3 to 5Vi percent and V/2 to 6 mitments for fixed-rate loans at sav- percent respectively, after adjustings and loan associations rose about ment for the effects of flows into 40 basis points to 15.40 percent. NOW accounts; M-2, 6 to 9 percent; The staff projections presented at and M-3, 6V2 to 9Vi percent. The this meeting suggested that econom- associated range for growth of comic activity, even while expanding mercial bank credit was 6 to 9 persubstantially in the first quarter, had cent. It was understood that the disbeen losing its upward momentum, torting effects of shifts into NOW and that real GNP was likely to accounts would change during the change little over the period ahead. year and that other short-run factors Such a sluggish performance of the might cause considerable variation economy would be accompanied by in annual rates of growth from one a small increase in the unemploy- month to the next and from one ment rate. The rise in the fixed- quarter to the next. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 FOMC Policy Actions In the Committee's discussion of general focused on the interrelated policy for the period immediately issues of the desirable speed of ahead, it was noted that growth of growth of narrowly defined money, the narrowly defined monetary ag- consistent with the range for the gregates (adjusted for the effects of year, and the weight that should be NOW accounts) was slow over the given to M-2. In the interest of simfirst three months of 1981 as a plification, the Committee decided whole, despite the strength that had to focus on M-1B as the measure of developed in early March. It was transaction balances and to omit any pointed out that the slow growth reference to M-1A in its statement of during the first quarter could be wel- monetary objectives for the short comed as an offset to the rapid run. After adjustment for the effects growth in the fourth quarter of 1980. of shifts into NOW accounts, growth Growth of M-2, in contrast, appar- in the two would be similar. ently had been fairly rapid; its non- Concerning operations in the peritransaction component had been od before the next regular meeting, buoyed by record expansion in mon- scheduled for mid-May, the view ey market mutual funds, which had was expressed that the demand for more than offset weakness in small- money could well be expanding subdenomination time and savings de- stantially but that it would be approposits. priate to establish a reserve path A staff analysis suggested that the consistent with growth at a relatively sluggish growth in the narrowly de- modest pace. It was also suggested fined money supply in the first quar- that the weakness in growth of ter, and the extraordinary increase adjusted M-1B in the early months of in the velocity of money, might have the year might be a misleading indibeen related to the high interest rates cator of the behavior of transaction in the fourth quarter of 1980 and to balances, mainly because of the rapthe year-end introduction of NOW id growth of money market mutual accounts on a nationwide basis, funds; some part of the large flows which together might have led to into th^se funds might also be reintensive reconsideration of cash garded as transaction balances. management techniques. Looking to Thus, it was argued that some greatthe second quarter, another sharp er weight than previously should be increase in the velocity of narrowly given to the behavior of M-2 in apdefined money appeared unlikely, praising the behavior of the moneand demands for transaction bal- tary aggregates. On the other hand, ances were expected to expand sub- it was observed that the weight given stantially in association with growth to M-2 should not be increased beof nominal GNP. It was anticipated cause the ranges for 1981 adopted at that the nontransaction component the Committee's meeting in early of M-2 would remain strong and that February might not allow sufficientthe pickup in the demand for trans- ly for the expectation that growth of action balances would contribute to the broader aggregate in 1981 would rapid growth of M-2. tend to increase relative to that of In considering objectives for mon- M-1B. etary growth over the second quar- With respect to the federal funds ter, members of the Committee in rate, it was stressed that the Com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 103 mittee specified an intermeeting percent were likely to be inconsisrange for fluctuations over a period tent with the monetary and related of time to provide a mechanism for reserve paths, the Manager for Doinitiating timely consultations be- mestic Operations was promptly to tween regularly scheduled meetings notify the Chairman, who would whenever it appeared that fluctua- then decide whether the situation tions within the specified range were called for supplementary instrucproving to be inconsistent with the tions from the Committee. objectives for the behavior of re- The following domestic policy diserve and monetary aggregates. rective was issued to the Federal Thus, the limits of the range were Reserve Bank of New York: indicative of the conditions under which the Committee would wish to The information reviewed at this meetconsult to reexamine its short-run ing suggests that real GNP expanded substantially in the first quarter of 1981, objectives and were not intended as but there were signs of a slowing of the binding constraints on System oper- expansion in economic activity during ations pending such consultations. the quarter; prices on the average contin- For the coming intermeeting period, ued to rise rapidly. While retail sales various proposals were made for the advanced appreciably over the first two months of the year, industrial production range, all of them more or less cendeclined in February after three months tered on the rate of 15 percent that of diminishing gains, and housing starts had prevailed in the market most dropped from the moderate pace that recently. had prevailed during the preceding six months. Nonfarm payroll employment At the conclusion of the discus- changed little in February following a sion, the Committee decided to seek large increase in January; the unemploybehavior of reserve aggregates asso- ment rate, at 7.3 percent, was essentially unchanged. Over the first two months of ciated with growth of M-1B over the 1981, the rise in the index of average period from March to June at an hourly earnings was little changed from annual rate of Slh percent or some- the rapid pace recorded during 1980. what less, after allowance for the The weighted average value of the impact of flows into NOW accounts, dollar against major foreign currencies and growth in M-2 at an annual rate rose further following the Committee's meeting in early February to a peak at of about IOV2 percent. In evaluating midmonth but subsequently declined the behavior of the aggregates, it somewhat on balance. Short-term interwas agreed that greater weight than est rates in continental European counbefore would be given to the behav- tries have risen appreciably since mid- February, absolutely and in relation to ior of M-2. The members recognized interest rates on dollar-denominated asthat shifts into NOW accounts sets. The U.S. trade deficit in January would continue to distort measured and February was at about the average growth in M-1B to an unpredictable monthly rate of the final quarter of 1980. extent and that operational paths M-1A and M-1B, adjusted for the estimated effects of shifts into NOW acwould have to be developed in the counts, changed little over the first two light of evaluation of those distor- months of the year but expanded subtions. If it appeared during the peri- stantially in the first half of March. od before the next scheduled meet- Growth in M-2 accelerated in the course ing that fluctuations in the federal of the quarter, and partial data suggest considerable strength in March, in part funds rate, taken over a period of because of large flows into money martime, within a range of 13 to 18 ket mutual funds. On balance since early Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 FOMC Policy Actions February, short-term market interest action because he favored specificarates have fallen substantially while tion of lower monetary growth rates longer-term market rates have risen for the period from March to June somewhat. The Federal Open Market Committee than those adopted at this meeting seeks to foster monetary and financial along with a higher intermeeting conditions that will help to reduce infla- range for the federal funds rate. In tion, encourage economic recovery, and light of the recent strength of ecocontribute to a sustainable pattern of nomic activity, he believed that poliinternational transactions. At its meeting in early February, the Committee agreed cy had not been as restrictive as that these objectives would be furthered supposed, in part because money by growth of M-1A, M-1B, M-2, and M-3 market mutual funds and other from the fourth quarter of 1980 to the sources of liquidity had contributed fourth quarter of 1981 within ranges of 3 to an increase in the velocity of to 5Vz percent, V/i to 6 percent, 6 to 9 percent, and 6V2 to 9lA percent respec- M-1B, and that continuation of extively, abstracting from the impact of cessive strength in activity posed the introduction of NOW accounts on a na- greater danger for the period ahead. tionwide basis. The associated range for bank credit was 6 to 9 percent. These On May 6 the Committee held a ranges will be reconsidered as conditions telephone conference. Available warrant. data indicated that growth in M-1B, In the short run the Committee seeks after adjustment for shifts of funds behavior of reserve aggregates consisinto NOW accounts from other intent with growth in M-1B from March to June at an annual rate of 5!/2 percent or terest-bearing assets, had accelersomewhat less, after allowance for the ated markedly in April to an annual impact of flows into NOW accounts, and rate of about 14 percent. However, growth in M-2 at an annual rate of about in view of the very low growth of 10V2 percent. It is recognized that shifts shift-adjusted M-1B in the early into NOW accounts will continue to distort measured growth in M-1B to an months of 1981 and the sharp decline unpredictable extent, and operational re- in late 1980, the April acceleration serve paths will be developed in the light brought the level of M-1B only to of evaluation of those distortions. If it around the midpoint of the VA to 6 appears during the period before the next percent range established by the meeting that fluctuations in the federal funds rate, taken over a period of time, Committee for 1981. Growth in M-2 within a range of 13 to 18 percent are had decelerated slightly in April; exlikely to be inconsistent with the mone- pansion of this aggregate was still tary and related reserve paths, the Manrelatively rapid, however, and its ager for Domestic Operations is promptly to notify the Chairman, who will then level in April was somewhat above decide whether the situation calls for its longer-run range for the year. supplementary instructions from the While the level of M-1B in April Committee. was only at the midpoint of the long- Votes for this action: Messrs. er-run range, its growth in the month Volcker, Boehne, Boykin, Corrigan, was more rapid than the pace of 5V2 Partee, Rice, Schultz, Solomon, Mrs. percent or somewhat less specified Teeters, and Mr. Winn. Vote against for the period from March to June by this action: Mr. Wallich. Absent: the Committee at its March 31 meet- Messrs. Gramley and Mayo. (Mr. Winn voted as alternate for Mr. ing. Consequently, strong pressures Mayo.) had developed on bank reserve positions as less reserves were supplied Mr. Wallich dissented from this through open market operations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 105 than banks demanded. Indeed, non- essary to maintain adequate restraint borrowed reserves were estimated on the monetary and credit aggreto have declined at an annual rate of gates. about 12 percent in April. In adjust- On May 6, the Committee agreed that ing to the constrained availability of through the period before the next regureserves, banks had a negative ex- lar meeting the reserve path should concess reserve position on the average tinue to be set on the basis of the shortrun objectives for monetary growth in the latter part of April and inestablished at its meeting on March 31, creased borrowings from the disrecognizing that the federal funds rate count window sharply in late April might continue to exceed the upper end and early May; borrowings averaged of the range indicated for consultation at about $2.4 billion in the two weeks the March 31 meeting. ending May 6. The federal funds rate, which had been in a 15 to 15xh Votes for this action: Messrs. percent range for most of April, rose Volcker, Boehne, Boykin, Corrigan, considerably in late April and early Gramley, Rice, Schultz, Solomon, May as banks intensified their efforts Mrs. Teeters, and Mr. Winn. Votes against this action: None. Absent: to acquire reserves; trading in recent Messrs. Partee and Wallich. (Mr. days had been in a range of 17 to 20 Winn voted as an alternate member.) percent. Effective May 5, the basic Federal Reserve discount rate was raised from 13 to 14 percent and the 2. Review of Continuing surcharge on frequent borrowing by Authorizations large depository institutions was increased from 3 to 4 percentage At this, the first regular meeting of points, placing the surcharge rate at the Federal Open Market Committee 18 percent. following the election of new mem- In the telephone conference on bers from the Federal Reserve May 6, the Committee agreed that in Banks to serve for the year beginthe brief period before the next regu- ning March 1, 1981, the Committee lar meeting scheduled for May 18, followed its customary practice of the reserve path would continue to reviewing all of its continuing authobe set on the basis of the short-run rizations and directives. The Comobjectives for monetary growth es- mittee reaffirmed the authorization tablished at the March 31 meeting. It for domestic open market operawas noted that for a time actual tions, the foreign currency directive, money growth might be high relative and the procedural instructions with to those objectives in view of the respect to foreign currency operarecent performance of the monetary tions in the forms in which they were aggregates. The Committee recog- currently outstanding. nized that short-term market interest rates might well fluctuate around Votes for these actions: Messrs. levels prevailing in recent days and Volcker, Boehne, Boykin, Corrigan, that the federal funds rate might con- Partee, Rice, Schultz, Solomon, Mrs. Teeters, Messrs. Wallich, and Winn. tinue to exceed the upper end of the Votes against these actions: None. range indicated for consultation at Absent: Messrs. Gramley and Mayo. the previous meeting. The Commit- (Mr. Winn voted as alternate for Mr. tee agreed to consult further if nec- Mayo.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 FOMC Policy Actions In reviewing the authorization for was expressly authorized by the domestic open market operations, Committee. The language suggested the Committee took special note of that authorizations of larger posiparagraph 3, which authorizes the tions would be temporary. On De- Reserve Banks to engage in the lend- cember 19, 1978, the Committee had ing of U.S. government securities authorized an open position of $8 held in the System Open Market billion (shown as a footnote in the Account under such instructions as authorization), which had remained the Committee might specify from in effect since that date. At this time to time. That paragraph had meeting, the Committee voted to inbeen added to the authorization on corporate the long-standing limit of October 7, 1969, on the basis of a $8 billion in the text of paragraph judgment by the Committee that ID. such lending of securities was rea- Paragraph 3 specifies that all sonably necessary to the effective transactions in foreign currencies be conduct of open market operations at prevailing market rates except in and to the implementation of open the case of certain transactions with market policies, and on the under- foreign central banks. At this meetstanding that the authorization ing, the Committee voted to delete a would be reviewed periodically. At reference to an exception that is no this meeting the Committee con- longer relevant and to add language curred in the judgment of the Manag- spelling out circumstances in which er for Domestic Operations that the transactions at nonmarket rates may lending activity in question remained be undertaken. reasonably necessary and that, ac- Paragraph 5 is concerned with the cordingly, the authorization should investment of System holdings of remain in effect subject to annual balances of foreign currencies. In review. view of a provision in the Monetary Control Act of 1980 allowing the 3. Authorization for Foreign System to invest in securities issued Currency Operations or fully guaranteed by foreign gov- The Committee adopted several ernments, the Committee voted to amendments to the authorization for limit investment of foreign currency foreign currency operations to sim- holdings to liquid forms and generalplify and clarify its instructions to ly to instruments having no more the Federal Reserve Bank of New than 12 months remaining to maturi- York and to bring the document up ty. to date in light of recent develop- The Committee also amended ments. None of these amendments paragraph 6 to provide that all operawas intended as a change in policy tions pursuant to the preceding paraorientation. graphs be reported promptly, rather As adopted in December 1976, than on a daily basis, to the Foreign paragraph ID authorized the Federal Currency Subcommittee. Reserve Bank of New York, for the As amended, paragraphs ID, 3, 5 System Open Market Account, to and 6 read as follows: maintain an overall open position in 1. The Federal Open Market Commitall foreign currencies not to exceed tee authorizes and directs the Federal $1.0 billion, unless a larger position Reserve Bank of New York, for System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 107 Open Market Account, to the extent may designate (or in the absence of necessary to carry out the Committee's members of the Board serving on the foreign currency directive and express Subcommittee, other Board Members authorizations by the Committee pursu- designated by the Chairman as alterant thereto, and in conformity with such nates, and in the absence of the Vice procedural instructions as the Commit- Chairman of the Committee, his altertee may issue from time to time: nate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager for Foreign Operations for the purposes of reviewing recent or contemplat- D. To maintain an overall open poed operations and of consulting with the sition in all foreign currencies not ex- Manager on other matters relating to his ceeding $8.0 billion. For this purpose, responsibilities. At the request of any the overall open position in all foreign member of the Subcommittee, questions currencies is defined as the sum (disrearising from such reviews and consultagarding signs) of net positions in individtions shall be referred for determination ual currencies. The net position in a to the Federal Open Market Committee. single foreign currency is denned as holdings of balances in that currency, Votes for these actions: Messrs. plus outstanding contracts for future re- Volcker, Boehne, Boykin, Corrigan, ceipt, minus outstanding contracts for Partee, Rice, Schultz, Solomon, Mrs. future delivery of that currency, i.e., as Teeters, Messrs. Wallich, and Winn. the sum of these elements with due re- Votes against these actions: None. gard to sign. Absent: Messrs. Gramley and Mayo. 3. All transactions in foreign curren- (Mr. Winn voted as alternate for Mr. cies undertaken under paragraph 1(A) Mayo.) above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of 4. Agreement with Treasury providing an investment return on Systo Warehouse tem holdings of foreign currencies, or for the purpose of adjusting interest rates Foreign Currencies paid or received in connection with swap At its meeting on January 17-18, drawings, transactions with foreign central banks may be undertaken at non- 1977, the Committee had agreed to a market exchange rates. suggestion by the Treasury that the 5. Foreign currency holdings shall be Federal Reserve undertake to invested insofar as practicable, consider- "warehouse" foreign currencies— ing needs for minimum working balances. Such investments shall be in liq- that is, to make spot purchases of uid form, and generally have no more foreign currencies from the Exthan 12 months remaining to maturity. change Stabilization Fund and When appropriate in connection with simultaneously to make forward arrangements to provide investment fasales of the same currencies at the cilities for foreign currency holdings, U.S. Government securities may be pur- same exchange rate to the ESF. Purchased from foreign central banks under suant to that agreement, the Comagreements for repurchase of such secu- mittee had agreed that the Federal rities within 30 calendar days. Reserve would be prepared to ware- 6. All operations undertaken pursuant house for the Treasury or for the to the preceding paragraphs shall be reported promptly to the Foreign Currency ESF up to $5 billion of eligible for- Subcommittee and the Committee. The eign currencies. At this meeting the Foreign Currency Subcommittee con- Committee reaffirmed the agreement sists of the Chairman and Vice Chairman on the terms adopted on March 18, of the Committee, the Vice Chairman of the Board of Governors, and such other 1980, with the understanding that it member of the Board as the Chairman would be subject to annual review. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 FOMC Policy Actions Votes for this action: Messrs. The index of industrial produc- Volcker, Boehne, Boykin, Corrigan, tion, which had increased 0.5 per- Partee, Rice, Schultz, Solomon, Mrs. cent in March, rose 0.4 percent in Teeters, Messrs. Wallich, and Winn. April. An increase in auto assem- Votes against this action: None. Absent: Messrs. Gramley and Mayo. blies, to a rate substantially above (Mr. Winn voted as alternate for Mr. the recent pace of sales, was a major Mayo.) factor in the April advance, and output of business equipment and space and defense products exhibited considerable strength. A strike cut pro- Meeting Held on May 18, 1981 duction of coal in half and limited the rise in the total industrial production Domestic Policy Directive index by about 0.3 percentage point. The information reviewed at this Nonfarm payroll employment meeting suggested that growth of changed little in March and April real gross national product was after adjustment for strikes, and the slowing in the current quarter from unemployment rate was stable at 7.3 the rapid pace in the first quarter, percent. In April employment conbut activity currently appeared tinued to expand in service indusstronger than had been projected at tries but declined considerably in the time of the Committee's meeting retail trade establishments and in on March 31. Real GNP had grown construction. Small employment at an annual rate of 6V2 percent in the gains were recorded in the manufacfirst quarter, according to prelimi- turing sector, and the average facnary estimates of the Commerce De- tory workweek edged up 0.1 hour to partment, and additional data that 40.1 hours. became available after release of the Private housing starts in March preliminary estimates suggested that remained at the annual rate of about growth had been even more rapid. 1 VA million units recorded in Febru- Average prices, as measured by the ary; during the preceding six fixed-weight price index for gross months, housing starts had been in a domestic business product, have range of 1.4 million to 1.6 million continued to rise rapidly in the cur- units. Sales of new homes in March rent quarter, but somewhat less so continued at the reduced pace of than earlier in the year. recent months, and sales of existing The dollar value of total retail homes declined further. sales increased slightly further in Producer prices of finished goods March but declined appreciably in rose at an annual rate of 9Vi percent April, reflecting mainly a sharp drop in April, compared with an average in sales of new cars in response to rate of 12 percent during the first the ending of manufacturers' price quarter. The surge of energy prices rebates. Unit sales of new automo- that had characterized earlier biles fell from an annual rate of 10.3 months of the year abated in April, million units in March to 8.1 million and prices of consumer foods were units in April. The value of sales unchanged. Prices of crude foodexcluding automobiles and building stuffs, however, rose sharply. The materials registered sizable gains in rise in the consumer price index both March and April. slowed in March, reflecting a slow- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 109 ing in price increases of energy items In the latter part of April, incomand continued moderate increases in ing data suggested that M-1B, after food prices and homeowner ship adjustment for the estimated effects costs. Prices of other consumer of shifts into NOW accounts, was items continued to rise at a relatively growing at a rate well above the rapid pace. Over the first four short-run objectives set forth by the months of 1981, the rise in the index Committee. Consequently, required of average hourly earnings of private reserves increased more than the nonfarm production workers was supply of reserves being made availslightly less rapid than the pace re- able through open market operacorded during 1980. tions. Banks adjusted to the con- In foreign exchange markets the strained availability of reserves by trade-weighted value of the dollar reducing excess reserves and by inagainst major foreign currencies had creasing borrowings from the Federrisen by about 8V2 percent since the al Reserve. In the two statement final days of March to its highest weeks ending May 6, member bank level in Vh years. In March the U.S. borrowings averaged about $2.4 biltrade deficit declined sharply, bring- lion, compared with an average of ing the first-quarter deficit to a level about $1 billion in the first three well below the average in 1980. The statement weeks after the meeting value and volume of exports rose on March 31; and the federal funds substantially from the fourth quar- rate, which had averaged around ter, and the value of imports in- 15 !/2 percent in the first three weeks creased moderately. of April, fluctuated within a range of At its meeting on March 31, the 17 to 20 percent in the last days of Committee had decided that open April and the first days of May. On market operations in the period until May 4 the Board of Governors anthis meeting should be directed to- nounced an increase from 13 to 14 ward behavior of reserve aggregates percent in Federal Reserve basic disconsistent with growth in M-1B from count rates and an increase from 3 to March to June at an annual rate of 4 percentage points in the surcharge 5V2 percent or somewhat less, after on frequent borrowings of large inallowance for the impact of flows stitutions. into NOW accounts, and growth in In a telephone conference on May M-2 at an annual rate of about \Wi 6, the Committee agreed that in the percent. If it appeared during the brief period before the next regular period before the next regular meet- meeting scheduled for May 18, the ing that fluctuations in the federal reserve path would continue to be funds rate, taken over a period of set on the basis of the short-run time, within a range of 13 to 18 objectives for monetary growth espercent were likely to be inconsis- tablished on March 31. It was recogtent with the monetary and related nized that for a time monetary reserve paths, the Manager for Do- growth might be high in relation to mestic Operations was promptly to those objectives and that the federal notify the Chairman, who would funds rate might continue to exceed then decide whether the situation the upper end of the range indicated called for supplementary instruc- for consultation. In the period retions from the Committee. maining until this meeting, bank re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 FOMC Policy Actions serve positions remained under pres- levels and on balance advanced sure, and federal funds typically about 1 percentage point. Over the traded between 18 and 19 percent. intermeeting interval, the prime rate Growth in M-1B, adjusted for the charged by commercial banks on estimated effects of shifts into NOW short-term business loans was raised accounts, accelerated sharply in in steps from YlVi percent to \9Vi April to an annual rate of about 14 percent. In home mortgage markets, percent. But adjusted M-1B had average rates on new commitments grown from the fourth quarter of for fixed-rate loans at savings and 1980 to the first quarter of 1981 at an loan associations rose above 16 perannual rate of only 1 percent, and its cent, from 15.40 percent at the end level in April was well within the of March. Committee's longer-run range for The staff projections presented at that aggregate. M-2 had continued to this meeting suggested that the surge grow rapidly in April, and its level in growth of real GNP in the first continued above the upper end of its quarter would be followed by much longer-run range. Growth in the non- slower growth over the rest of 1981. transaction component of M-2 The rise in the fixed-weight price slowed markedly, however, as the index for gross domestic business total of savings and small-denomina- product was projected to moderate tion time deposits was about un- as the year progressed but neverthechanged and inflows into money less to remain rapid. market mutual funds slowed. In the Committee's discussion of Total credit outstanding at U.S. the economic situation and outlook, commercial banks registered a slight members commented on the considdecline in March and grew at an erably greater strength in activity in annual rate of about 4Vi percent in the first quarter than had been ex- April. Holdings of investments pected, and they continued to stress changed little over the two months, the difficulties of economic forecastand growth in loans, particularly ing currently and the importance of business loans, was quite weak. Net adhering to longer-term objectives. issues of commercial paper by nonfi- While generally anticipating a subnancial corporations declined in stantial slowing of growth from the April, following expansion at a rapid exceptionally rapid pace now indipace in the first quarter. Issuance of cated for the first quarter, a number publicly offered bonds remained of members expressed the view that heavy during April, and the volume expansion in activity over the rest of of new equity offerings rose consid- the year was likely to continue to erably. exceed the rates typically being fore- Short-term market interest rates cast. The observation was made that had risen substantially over the peri- weakness in demands and activity od since the Committee's meeting on appeared to be confined to a few March 31: yields on Treasury bills sectors, albeit such major ones as moved up V/A to 4 percentage points housing and automobiles, and that while yields on private short-term the risks of a significant decline in market instruments increased AVi to overall activity appeared to be tem- 5!/4 percentage points. Most long- pered by the prospect that some term interest rates rose to record accumulated backlogs of demands Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 111 would be activated whenever inter- over the two-month period would est rates declined. It was also sug- have to be negligible if the specificagested, on the other hand, that high tions adopted on March 31 were to and volatile interest rates could be- be realized. gin to have a cumulative effect in The staff analysis also suggested dampening activity, and that little that growth of M-2 would be less was known about the effects of fi- rapid over the second quarter than nancial stress that might be develop- had been anticipated earlier, reflecting. ing a slowing of growth in savings At its meeting on February 2-3, deposits and small-denomination the Committee had adopted the fol- time deposits as well as continued lowing ranges for growth of the mon- weakness in money market mutual etary aggregates over the period funds. Thus, growth of the broader from the fourth quarter of 1980 to the monetary aggregates might begin to fourth quarter of 1981: M-1A and move down toward their target M-1B, 3 to 5V2 percent and Vh to 6 ranges for growth over the year from percent respectively, after adjust- the fourth quarter of 1980 to the ment for the estimated effects of fourth quarter of 1981. flows into NOW accounts; M-2, 6 to In considering objectives for mon- 9 percent; and M-3, 6V2 to 9Vi per- etary growth over the remainder of cent. It was understood that the dis- the quarter, the members in general torting effects of shifts into NOW agreed that a posture of restraint accounts would change during the needed to be maintained. They genyear and that other short-run factors erally agreed with the view that it might cause considerable variation was particularly important to reduce in annual rates of growth from one growth of the monetary aggregates month to the next and from one rather quickly, and initial differences quarter to the next. in views concerning the precise In the Committee's discussion of specifications for monetary growth policy for the period immediately were relatively narrow. In the disahead, it was emphasized that on cussion, a number of points were March 31 the Committee had estab- emphasized. The indications of conlished an objective for growth of tinuing strength in economic activity M-1B (adjusted for the estimated ef- combined with the recent exceptionfects of shifts into NOW accounts) al rise in the income velocity of over the three months from March to money posed the risk of pressure for June at an annual rate of 5l/z percent excessive expansion in money and or somewhat less, and that growth in credit as the year developed. April had greatly exceeded that Growth of the broader monetary agpace. According to a staff analysis, gregates was already somewhat high some retardation of M-1B growth relative to the Committee's ranges over the remaining two months of for the year. The indications of some the quarter was to be expected, in slowing of the rise in the consumer light of the greater pressure on bank price index did not appear to reflect reserve positions that had developed as yet any clear relaxation of underrecently and the apparent slowing of lying inflationary pressures, and emgrowth in nominal GNP in the cur- phasis was placed on the importance rent quarter. But growth of M-1B of conveying a clear sense of re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 FOMC Policy Actions straint at a critical time with respect ated with a federal funds rate persisto inflation and inflationary expecta- tently outside a range of 16 to 22 tions. percent. With respect to the federal funds The following domestic policy dirate, it was again stressed that the rective was issued to the Federal specification of an intermeeting Reserve Bank of New York: range for fluctuations over a period The information reviewed at this meetof time provided a mechanism for ing suggests that real GNP will grow initiating timely consultations be- much less rapidly in the current quarter, following the substantial expansion in tween regularly scheduled meetings the first quarter; prices on the average when it appeared that fluctuations have continued to rise rapidly, although within the specific range were prov- somewhat less so most recently than ing to be inconsistent with the objec- earlier in the year. The dollar value of tives for the behavior of the reserve total retail sales increased slightly further in March, but it declined appreciaand monetary aggregates. The bly in April when sales of new cars fell in ranges proposed for the period response to the ending of price concesahead typically were from 16 or 17 sions. Industrial production rose moderpercent to 21 or 22 percent. ately in both months, while nonfarm payroll employment changed little, after At the conclusion of the discusadjustment for strikes, and the unemsion, the Committee decided to seek ployment rate was stable at 7.3 percent. behavior of reserve aggregates asso- In March housing starts remained at a ciated with growth of M-1B from reduced pace. Over the first four months of 1981, the rise in the index of average April to June at an annual rate of 3 hourly earnings was slightly less rapid percent or lower, after allowance for than during 1980. the impact of flows into NOW ac- The weighted average value of the counts, and growth in M-2 at an dollar against major foreign currencies annual rate of about 6 percent. A has risen steadily since the end of March to its highest level in three and a half shortfall in growth of M-1B from the years. The U.S. trade deficit declined two-month rate of 3 percent would sharply in March, bringing the first-quarbe acceptable, in light of the rapid ter deficit to a level well under the 1980 growth in April and the objective average. Growth in M-1B, adjusted for the estiadopted by the Committee on March mated effects of shifts into NOW ac- 31 for growth from March to June at counts, accelerated sharply in April and an annual rate of 5Vi percent or growth in M-2 remained rapid. Since somewhat less. The members recog- March, both short-term and long-term nized that shifts into NOW accounts market interest rates have risen substantially. On May 4 the Board of Governors would continue to distort measured announced an increase in Federal Regrowth in M-1B to an unpredictable serve discount rates from 13 to 14 perextent and that operational paths cent and an increase in the surcharge would have to be developed in the from 3 to 4 percentage points on frequent borrowings of large institutions. light of evaluation of those distor- The Federal Open Market Committee tions. The Chairman might call for seeks to foster monetary and financial Committee consultation if it ap- conditions that will help to reduce inflapeared to the Manager for Domestic tion, promote economic growth, and Operations that pursuit of the mone- contribute to a sustainable pattern of international transactions. At its meeting tary objectives and related reserve in early February, the Committee agreed paths during the period before the that these objectives would be furthered next meeting was likely to be associ- by growth of M-1A, M-1B, M-2, and M-3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 113 from the fourth quarter of 1980 to the of 8.6 percent. Average prices, as fourth quarter of 1981 within ranges of 3 measured by the fixed-weight price to 5Vi percent, V/i to 6 percent, 6 to 9 index for gross domestic business percent, and 6V2 to 9Vi percent respecproduct, rose less rapidly than in the tively, abstracting from the impact of introduction of NOW accounts on a na- first quarter. tionwide basis. The associated range for The dollar value of retail sales was bank credit was 6 to 9 percent. These virtually unchanged in May after ranges will be reconsidered as conditions having declined appreciably in April. warrant. In the short run the Committee seeks Unit sales of new automobiles rebehavior of reserve aggregates consis- mained weak in June; sales in the tent with a substantial deceleration of second quarter as a whole were growth in M-1B from April to June to an about one-fifth below the first-quarannual rate of 3 percent or lower, after ter rate. allowance for the impact of flows into NOW accounts, and with growth in M-2 The index of industrial production at an annual rate of about 6 percent. The rose 0.3 percent in May, following shortfall in growth of M-1B from the an increase of only 0.1 percent in two-month rate specified above would April. A further increase in automobe acceptable, in light of the rapid growth in April and the objective adopt- bile assemblies in May, to an annual ed by the Committee on March 31 for rate nearly 2 million units above the growth from March to June at an annual recent pace of sales of domestic rate of 5Vi percent or somewhat less. It is models, accounted for more than recognized that shifts into NOW accounts will continue to distort measured half of the increase in the total index. growth in M-1B to an unpredictable ex- Production of business equipment tent, and operational reserve paths will and space and defense products conbe developed in the light of evaluation of tinued to expand, while output of those distortions. The Chairman may call for Committee consultation if it ap- construction supplies fell. pears to the Manager for Domestic Oper- Nonfarm payroll employment, ations that pursuit of the monetary ob- adjusted for changes in the number jectives and related reserve paths during of workers on strike, continued to the period before the next meeting is likely to be associated with a federal advance in April and May but defunds rate persistently outside a range of clined appreciably in June; employ- 16 to 22 percent. ment fell substantially further in construction and state and local Votes for this action: Messrs. government in June, and it also de- Volcker, Solomon, Boehne, Boykin, clined in retail trade. In manufac- Corrigan, Gramley, Partee, Rice, turing, employment was about un- Schultz, Mrs. Teeters, Messrs. Wallich, and Winn. Votes against this ac- changed, while the average factory tion: None. (Mr. Winn voted as an workweek edged down to 40.1 alternate member.) hours. The unemployment rate was 7.3 percent, lower than in May but Meeting Held on July 6-7, 1981 unchanged from earlier months of the year. 1. Domestic Policy Directive The Department of Commerce The information reviewed at this survey of business spending plans meeting suggested that real gross taken in May suggested that currentnational product changed little in the dollar expenditures for plant and second quarter, following expansion equipment would rise about %Vi perin the first quarter at an annual rate cent in 1981, compared with lOVi Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 FOMC Policy Actions percent reported in the February In foreign exchange markets the survey and an actual expansion of trade-weighted value of the dollar about 9VA percent in 1980. The latest against major foreign currencies survey results implied little growth continued to rise through May and in nominal expenditures over the re- early June and then leveled off. On mainder of the year, given the rela- the average in June, the value of the tively large increase in outlays in the dollar was about 25 percent above its first quarter. year-earlier level. The U.S. trade Private housing starts fell 14 per- deficit in the April-May period was cent in May to an annual rate of 1.15 somewhat above the average in the million units, 25 percent below the first quarter. The value of exports average pace in the fourth quarter of was down marginally, but the value 1980. Combined sales of new and of imports was considerably higher. existing homes in May continued at At its meeting on May 18, the about the reduced rate of recent Committee had decided that open months. market operations in the period until Producer prices of finished goods this meeting should be directed toincreased 0.6 percent in June, about ward behavior of reserve aggregates the same as the April-May average. associated with growth of M-1B Over the second quarter producer from April to June at an annual rate prices rose at an annual rate of about of 3 percent or lower, after allow- 7 percent, considerably below the ance for the impact of flows into average rate of 12 percent in the first NOW accounts, and growth in M-2 quarter. Prices of consumer foods at an annual rate of about 6 percent. continued to change little on balance A shortfall in growth of M-1B from during the quarter; and energy the two-month rate of 3 percent prices, which had surged in the first would be acceptable, in light of the quarter following decontrol of oil rapid growth in April and the objecprices, rose at an annual rate of only tive adopted by the Committee at its 5VA percent. Price increases for other meeting on March 31 for growth finished goods on the average were from March to June at an annual rate somewhat higher in the second quar- of 5Vi percent or somewhat less. If it ter than in the first. The rise in the appeared to the Manager for Domesconsumer price index slowed in tic Operations that pursuit of the April to an annual rate of 5 percent; monetary objectives and related rebut it accelerated in May to a rate of serve paths during the period before 8 percent, reflecting primarily a the next meeting was likely to be sharp rise in the homeownership associated with a federal funds rate component of the index. Over the persistently outside a range of 16 to two-month period, food prices de- 22 percent, the Chairman might call clined slightly on balance, and the for Committee consultation. rate of increase in prices of energy During the intermeeting period, items slowed substantially. Over the incoming data indicated a progresfirst six months of 1981, the rise in sive weakening of M-1B. In accorthe index of average hourly earnings dance with the Committee's decision of private nonfarm production work- on May 18, reserves provided ers was slightly less rapid than it was through open market operations during 1980. were constrained to accommodate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 115 the weakness up to a point, but picked up in May from the sluggish subsequently they were more ample. pace of earlier months and acceler- Reserves borrowed from the dis- ated further in June. Net issues of count window remained around $2lA commercial paper by nonfinancial billion through most of June and corporations grew at exceptionally then declined to around $PA billion rapid rates in May and June, followtoward the end of the intermeeting ing a decline in April. period. Federal funds generally trad- Yields on most long-term securied in a range of 18!/2 to 19V2 percent ties trended downward through throughout the intermeeting period. much of the intermeeting period but However, most other short-term moved up in the final days to levels market interest rates declined 3A to little changed from those at the time PA percentage points, on balance. of the May meeting. Over the inter- M-1B, adjusted for the estimated val, the prime rate charged by comeffects of shifts into NOW accounts, mercial banks on short-term busideclined at annual rates of about 5 ness loans moved in a range of 19^2 percent and 10!/2 percent in May and to 201/2 percent; at the end of the June respectively, following expan- period the rate was 20 percent at sion at an annual rate of close to 17 most banks. In home mortgage marpercent in April. From the fourth kets, average rates on new commitquarter of 1980 to the second quarter ments for fixed-rate loans at savings of 1981, shift-adjusted M-1B grew at and loan associations remained close an annual rate of about 2lA percent, to the level of \&A percent prevailing below the lower end of the Commit- since mid-May. tee's range for growth in that aggre- The staff projections presented at gate for the year ending in the fourth this meeting suggested that growth quarter of 1981. Growth in M-2 in real GNP would probably be slugslowed to an annual rate of about 43A gish over the second half of 1981 and percent on average in May and June, into the first half of 1982. That develreflecting not only the contraction in opment might well be accompanied M-1B, but also a moderation in by an upward drift in the unemploygrowth of money market mutual ment rate but also by some progress funds. The recent slowing brought in reducing inflation. The rise in the M-2 to a level in the second quarter fixed-weight price index for gross that was only slightly above the up- domestic business product was proper end of the growth path consis- jected to change little during the rest tent with its range for the year from of this year from the reduced pace of the fourth quarter of 1980 to the the second quarter and to decline fourth quarter of 1981. somewhat further in the first half of Total credit outstanding at U.S. next year. commercial banks expanded at an A substantial number of members annual rate of \PA percent in May, believed that growth in real GNP but the rate slowed to about 5 per- would prove to be stronger than procent in June. Heavy acquisitions of jected by the staff, although in some U.S. government securities charac- cases anticipated strength was conterized both months. Growth in total centrated in 1982. Other members loans accelerated in May and then thought that economic activity was slowed in June, but business loans likely to be weaker than projected by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 FOMC Policy Actions the staff; they anticipated a decline straint on expenditures. It was also in real GNP over the balance of 1981 suggested that long-term interest followed by relatively sluggish re- rates might be on the verge of eascovery in 1982. While expecting the ing, in response to the improvement rate of inflation to remain high by in the outlook for prices that aphistorical standards, nearly all mem- peared to be developing, which bers anticipated some improvement. would permit stronger expansion in A number questioned whether prog- economic activity next year than ress thus far represented more than a generally projected. On the other temporary respite; and they felt that hand, some skepticism was exsignificant and sustained progress in pressed about the chances of emergreducing the underlying rate of infla- ing from the current environment of tion would take time and might not rapid inflation and high interest rates be consistent with an early and gradually, and without considerable strong rebound in economic activity. stress in the financial structure and Others were more optimistic, sug- risks for economic activity during gesting that significant improvement the transition to lower rates of inflain the behavior of prices would help tion. to set the stage for sizable growth in At its meeting on February 2-3, 1982. 1981, the Committee had adopted A number of members commented the following ranges for growth of that realization of forecasts of sus- the monetary aggregates over the tained growth in real GNP over the period from the fourth quarter of next year or more, even at a slow 1980 to the fourth quarter of 1981: pace, depended upon declines in in- M-1A and M-1B, 3 to 5Vz percent terest rates. In their opinion, an ex- and 3Vz to 6 percent respectively, tended period with interest rates at after adjustment for the estimated or near the high levels currently pre- effects of flows into NOW accounts; vailing would more likely induce M-2, 6 to 9 percent; and M-3, 6V2 to both a decline in economic activity 9!/2 percent. The associated range for and a spreading of financial strains. growth of commercial bank credit A few members described monetary was 6 to 9 percent. In establishing policy, and its objective of re- the ranges then, the Committee had strained growth in monetary aggre- agreed that monetary growth should gates, as a "governor" on the econ- slow in 1981 in line with the continuomy that retarded expansion in ing objective of contributing to a economic activity as long as inflation reduction in the rate of inflation and and inflationary expectations re- providing the basis for restoration of mained high but tended to prevent economic stability and sustainable any contraction in activity from cu- growth in output of goods and servmulating. In this framework, a pick- ices. up in demands for goods and serv- At this meeting, in accordance ices while inflation remained high with the Full Employment and Balwould lead to rising interest rates anced Growth Act of 1978 (the Humand increasing restraint on expendi- phrey-Hawkins Act), the Committee tures, and any easing in demands for reviewed its ranges for growth of the goods and services would tend to monetary and credit aggregates for lower interest rates and lessen re- the period from the fourth quarter of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 117 1980 to the fourth quarter of 1981 cent decisions of the Depository Inand gave preliminary consideration stitutions Deregulation Committee to objectives for monetary growth (DIDC), effective August 1: one rethat might be appropriate for 1982.l moved rate caps on the 2!/2-year In doing so, the members recognized small saver certificate, enabling the the likelihood of continued diver- rate to fluctuate with the yield on gence in the growth of the different 2!/2-year Treasury securities at all aggregates, partly reflecting institu- levels; and the other eliminated ceiltional change, and the considerable ings altogether on small time deposuncertainty about how such institu- its with initial maturities of four tional change might affect monetary years or more. The rapid growth of growth in the future. As noted earli- money market funds appeared to iner, expansion of shift-adjusted M-1B fluence the growth of both M-l and from the fourth quarter of 1980 to the M-2, in opposite directions, but the second quarter of 1981 was relative- magnitude of the effects was difficult ly low in relation to the path implied to judge. by the Committee's range for the In the Committee's discussion of year. However, growth of M-2 and the longer-run ranges, the members M-3 so far in 1981 has been at or were in agreement on the need to above the Committee's ranges. maintain a policy of restraint. How- The shortfall in growth of shift- ever, continuation of the increase in adjusted M-1B in the first half of the velocity of M-lB at the rate of the year followed relatively rapid first half seemed unlikely, and thus growth in the latter part of 1980; and the public's demand for narrowly it was accompanied by an unusually defined money would probably pick rapid rise in the income velocity of up in the second half. Moreover, a money, as nominal GNP expanded significantly more rapid increase in strongly. In partial explanation, ex- narrowly defined money would be traordinarily high interest rates in necessary to reach the Committee's combination with the introduction of objective for the year. At the same NOW accounts on a nationwide ba- time, it was observed that the pressis apparently provided a greater ent situation provided a critical opstimulus to intensive management of portunity to sustain the signs of procash balances than that normally as- gress in reducing the rate of sociated with an increase in interest inflation, an opportunity that could rates. In the period ahead, M-1B be lost if monetary growth in the might behave somewhat differently months ahead became too rapid. from earlier measures of transaction Even if rapid monetary expansion balances, because of the sizable vol- should lower interest rates, which ume of deposits earning interest and was debatable, such effects would because of the greater weight of likely be temporary, and latent dehousehold balances in the total. The mands for goods and services would behavior of M-2 was likely to be be released at the potential cost of a affected to some extent by two re- still more difficult period of high interest rates and financial strains later. The point was made that last- 1. The Board's midyear report under the ing declines in nominal interest rates act was transmitted to the Congress on July 20, 1981, and a solid base for sustained growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 FOMC Policy Actions would depend on convincing prog- monetary aggregates might be high in ress in reducing inflation. their ranges. In light of all the circumstances, Votes for this action: Messrs. the Committee agreed to retain the Volcker, Solomon, Boehne, Boykin, previously established ranges for the Corrigan, Gramley, Keehn, Partee, monetary aggregates for 1981. In the Rice, Schultz, Mrs. Teeters, and Mr. course of the discussion, some senti- Wallich. Votes against this action: None. ment was expressed for a reduction of Vi percentage point in the range With respect to 1982, the Commitfor M-1B, which would indicate that tee favored some reduction in the the System did not intend to seek objectives for monetary growth in very rapid monetary growth in the keeping with the long-standing goal second half of the year. However, a of moving gradually toward rates of small adjustment of that sort, though monetary expansion consistent with partly justified by institutional general price stability. Looking tochange, was considered on balance ward completion of the major shift potentially more confusing than use- into NOW accounts, the Committee ful. Instead, in light of its desire to decided to establish a range for a maintain moderate growth in money single M-l aggregate having the over the balance of the year, the same coverage as the present M-1B. Committee wished to affirm that Moreover, on the assumption that growth in M-1B near the lower end shifts into NOW accounts from nonof its range would be acceptable and transaction balances would no longdesirable. At the same time, the er be significant, calculation of rates Committee recognized that growth of growth for M-l after adjustment in the broader monetary aggregates for such shifts would not be necesmight be high in their ranges. sary. The Committee also decided to widen the range for the narrow mon- The Committee reaffirmed the ranges etary aggregate to 3 percentage for growth in the aggregates for the peri- points, from 2V2 points, reflecting od from the fourth quarter of 1980 to the the greater uncertainty at this time in fourth quarter of 1981 that it had adopted judging the relationship of this aggreat its meeting in early February 1981. gate to economic and financial de- These ranges, abstracting from the impact of NOW accounts on a nationwide velopments resulting from the recent basis, were 3 to 5Vi percent for M-1A, change in its composition; because V/i to 6 percent for M-IB, 6 to 9 percent of the possibility of some residual for M-2, and 6V2 to 9V percent for M-3. 2 shifting into NOW accounts, the up- The associated range for bank credit was 6 to 9 percent. The Committee recog- per end of the range was reduced by nized that a shortfall in M-1B growth in less than the lower end. the first half of the year partly reflected a Thus, the Committee tentatively shift in public preferences toward other agreed that for the period from the highly liquid assets and that growth in fourth quarter of 1981 to the fourth the broader aggregates had been running somewhat above the upper end of the quarter of 1982 growth of M-l, M-2, ranges. In light of its desire to maintain and M-3 within ranges of 2V2 to 5Vi moderate growth in money over the bal- percent, 6 to 9 percent, and 6I/2 to 9!/2 ance of the year, the Committee expectpercent would be appropriate. The ed that growth in M-1B for the year upper and lower ends of the range would be near the lower end of its range. At the same time, growth in the broader for M-l were reduced V2 percentage Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 119 point and 1 percentage point respec- the year. At the same time, howevtively from the 1981 range for M-1B. er, they wished to avoid generating The ranges for the broader aggre- an excessively rapid rebound in gates were unchanged from those for growth of M-1B, both because the 1981. However, given the expecta- pace would need to be sharply retion that growth of these aggregates duced later and because such a rein 1981 would be around the upper bound might tend to raise growth of end of the ranges and looking toward M-2 above the upper end of its range results in 1982 more toward the mid- for the year. With respect to the dle of the ranges, the new ranges intermeeting range for the federal were fully consistent with year-to- funds rate that provided a mechayear reductions in growth. nism for initiating further consultation of the Committee, proposals The Committee tentatively agreed that typically were from 15 or 16 percent for the period from the fourth quarter of 1981 to the fourth quarter of 1982 growthto 21 or 22 percent. of M-l, M-2, and M-3 within ranges of Specifically, the members agreed 2V2 to 5Vi percent, 6 to 9 percent, and 6V2 to seek behavior of reserve aggreto 9V2 percent would be appropriate. gates associated with growth of Votes for this action: Messrs. M-1B from June to September at an Volcker, Solomon, Boehne, Boykin, annual rate of 7 percent, after allow- Corrigan, Gramley, Keehn, Partee, ance for flows into NOW accounts, Rice, Schultz, and Wallich. Vote provided that growth of M-2 reagainst this action: Mrs. Teeters. mained around the upper end of its Mrs. Teeters dissented from this range for the year or tended to move action because she believed that, in down within the range. Given the light of all the uncertainties in the declines in May and June, growth of economic situation, it was prema- M-1B at the rate specified for the ture to adopt objectives calling for period from June to September reduced monetary growth in 1982. would result in growth at an annual She preferred to specify the same rate of about 2 percent from the ranges for 1982 as for 1981, pending average in the second quarter to the the Committee's reconsideration of average in the third quarter. The monetary objectives for 1982 at its members recognized that shifts into meeting next February. NOW accounts would continue to In the Committee's discussion of distort measured growth in M-lB to policy for the short run, the mem- an unpredictable extent and that opbers in general agreed that opera- erational paths would have to be tions in the period before the next developed in the light of evaluation meeting should be directed toward of those distortions. The Chairman growth of monetary aggregates over might call for Committee consultathe third quarter at rates that would tion if it appeared to the Manager for promote achievement of the mone- Domestic Operations that pursuit of tary objectives for the year as a the monetary objectives and related whole. Thus, they wished to foster reserve paths during the period begrowth of M-lB over the third quar- fore the next meeting was likely to ter at a rate high enough to permit be associated with a federal funds growth of this monetary aggregate rate persistently outside a range of toward the lower end of its range for 15 to 21 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 FOMC Policy Actions The following domestic policy di- M-1B, M-2, and M-3 from the fourth rective was issued to the Federal quarter of 1980 to the fourth quarter of 1981 within ranges of 3 to 5Vi percent, Reserve Bank of New York: 3Vi to 6 percent, 6 to 9 percent, and 6!/2 to The information reviewed at this meet- Wi percent respectively, abstracting ing suggests that real GNP changed little from the impact of introduction of NOW in the second quarter, following the sub- accounts on a nationwide basis. The stantial expansion in the first quarter; Committee recognized that the shortfall prices on the average rose less rapidly in M-1B growth in the first half of the than in the first quarter. The dollar value year partly reflected a shift in public of total retail sales was virtually un- preferences toward other highly liquid changed in May after having declined assets and that growth in the broader appreciably in April, and sales of new aggregates has been running somewhat cars remained weak in June. Industrial above the upper ends of the ranges. The production rose slightly on the average Committee reaffirmed its ranges for in April and May, while nonfarm payroll 1981, but in light of its desire to maintain employment continued to advance, after moderate growth in money over the baladjustment for strikes. In June strike- ance of the year, the Committee expectadjusted nonfarm employment declined ed that growth in M-1B for the year appreciably; the unemployment rate was would be near the lower end of its range. 7.3 percent, somewhat lower than in At the same time, growth in the broader May but unchanged from earlier months aggregates may be high in their ranges. of 1981. In May housing starts declined The associated range for bank credit was sharply. Over the first six months of 6 to 9 percent. The Committee also ten- 1981, the rise in the index of average tatively agreed that for the period from hourly earnings was slightly less rapid the fourth quarter of 1981 to the fourth than during 1980. quarter of 1982 growth of M-l, M-2, and M-3 within ranges of 2!/2 to 5Vz percent, 6 The weighted average value of the to 9 percent, and 6V2 to 9Vi percent dollar against major foreign currencies would be appropriate. These ranges will continued to rise through May and early be reconsidered as warranted to take June and then leveled off. In April-May account of developing experience with the U.S. foreign trade deficit was somepublic preferences for NOW and similar what above the first-quarter rate. accounts as well as changing economic M-1B, adjusted for the estimated efand financial conditions. fects of shifts into NOW accounts, declined substantially in May and June In the short run the Committee seeks following the sharp expansion in April, behavior of reserve aggregates consisand growth in M-2 slowed. The level of tent with growth of M-lB from June to adjusted M-1B in the second quarter on September at an annual rate of 7 percent the average was below the lower end of after allowance for the impact of flows the Committee's range for growth over into NOW accounts (resulting in growth the year from the fourth quarter of 1980 at an annual rate of about 2 percent from to the fourth quarter of 1981; the level of the average in the second quarter to the M-2 in the second quarter was slightly average in the third quarter), provided above the upper end of its range for the that growth of M-2 remains around the year. Since mid-May, on balance, short- upper limit of, or moves within, its range term market interest rates have declined for the year. It is recognized that shifts somewhat while long-term yields gener- into NOW accounts will continue to disally have changed little. tort measured growth in M-1B to an The Federal Open Market Committee unpredictable extent, and operational reseeks to foster monetary and financial serve paths will be developed in the light conditions that will help to reduce infla- of evaluation of those distortions. The tion, promote sustained economic Chairman may call for Committee congrowth, and contribute to a sustainable sultation if it appears to the Manager for pattern of international transactions. At Domestic Operations that pursuit of the its meeting in early February, the Com- monetary objectives and related reserve mittee agreed that these objectives paths during the period before the next would be furthered by growth of M-1A, meeting is likely to be associated with a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 121 federal funds rate persistently outside a Teeters, Messrs. Winn, and Black. range of 15 to 21 percent. Votes against this action: None. Absent: Messrs. Boehne and Partee. Votes for this action: Messrs. (Mr. Black voted as alternate for Mr. Volcker, Solomon, Boehne, Boykin, Boehne.) Corrigan, Gramley, Keehn, Rice, Schultz, Mrs. Teeters, and Mr. Wal- This action was taken on the reclich. Vote against this action: Mr. ommendation of the Manager for Partee. Domestic Operations. The Manager Mr. Partee dissented from this ac- had advised that since the July meettion because, in light of the indica- ing, substantial net purchases of setions of weakening in economic ac- curities had been undertaken to tivity, he preferred to give more counter the effects on member bank emphasis to reducing the risk of a reserves of the transfer of funds ascumulative shortfall in growth of sociated with settlement of Iranian M-1B. Accordingly, he favored accounts and also the effects of levspecification of a somewhat higher els of float that were lower than objective for growth of M-1B over normal. The leeway for further purthe period from June to September, chases had been reduced to about and without the additional weight as- $200 million, and additional pursigned to the potential for more rapid chases in excess of that amount growth of M-2. In his view, the might be required over the rest of the short-run behavior of M-2 was sub- intermeeting interval. ject to great uncertainty because of both the volatile influence of money Meeting Held on August 18, 198! market mutual funds and the recent DIDC actions authorizing certain de- Domestic Policy Directive posit instruments to be offered at The information reviewed at this competitive interest rates beginning meeting suggested that real GNP August 1. was likely to change little in the current quarter, following a decline 2. Authorization for Domestic at an annual rate of about 2 percent Open Market Operations in the second quarter indicated by preliminary estimates of the Com- On August 6, 1981, the Committee merce Department. Average prices, voted to increase from $3 billion to as measured by the fixed-weight $4V2 billion the limit on changes price index for gross domestic busibetween Committee meetings in ness product, appeared to be con- System Account holdings of U.S. tinuing to rise less rapidly than earligovernment and federal agency seer in the year. curities specified in paragraph l(a) of The dollar value of total retail the authorization for domestic open sales increased appreciably in June market operations, effective immediand July following sizable declines ately, for the period ending with the over the previous two months. Sales close of business on August 18, gains at dealers in automotive prod- 1981. ucts accounted for about half of the overall increase in June and nearly Votes for this action: Messrs. Volcker, Solomon, Boykin, Corrigan, all of the rise in July. Unit sales of Gramley, Keehn, Rice, Schultz, Mrs. new automobiles picked up some- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 FOMC Policy Actions what in July from an extremely low nent of the index; retail food prices pace in the second quarter. were about unchanged and though The index of industrial production energy prices continued to increase, rose 0.3 percent in July following a the pace was much slower than earlislight decline in June. Most of the er in the year. Over the second quar- July increase reflected a continua- ter as a whole, consumer prices rose tion of the post-strike rebound in at an annual rate of about 7J/2 percoal output; production of automo- cent, compared with a rate of 91/2 biles and trucks fell sharply, and percent in the first quarter. Over the output of construction supplies con- first seven months of the year, the tinued to decline. Capacity utiliza- rise in the index of average hourly tion in manufacturing edged down to earnings was somewhat less rapid 79.6 percent in July following a more than it was during 1980. sizable decline in June. In foreign exchange markets the Nonfarm payroll employment, trade-weighted value of the dollar adjusted for changes in the number against major foreign currencies had of workers on strike, advanced sub- risen about 5 percent further bestantially in July after having de- tween early July and early August, clined appreciably in June. Employ- when it reached its highest level in ment gains were widespread, and nearly a decade. More recently, the were relatively strong in manufac- dollar had declined, but it was up turing and in retail trade; employ- about 2 percent on balance over the ment in construction, however, fell intermeeting period. In June, the further. The unemployment rate de- U.S. trade deficit declined slightly clined to 7.0 percent, somewhat be- from the May level. For the second low the average rate of 7.4 percent quarter the deficit was up substanfor the first half of the year. tially over the first-quarter rate, as Private housing starts fell substan- the value of imports increased and tially further in June, to an annual the value of exports declined somerate of just over 1 million units; what, reflecting a large drop in agrinewly issued permits for residential cultural exports. construction also declined sharply. At its meeting on July 6-7, the Combined sales of new and existing Committee had decided that open homes continued at about the re- market operations in the period until duced pace of recent months. this meeting should be directed to- The rise in producer prices of fin- ward behavior of reserve aggregates ished goods moderated to an annual associated with growth of M-1B rate of about 5lA percent in July, a from June to September at an annual little less than the average in the rate of 7 percent after allowance for second quarter and sharply below flows into NOW accounts (resulting the rate of 1314 percent in the first in growth at an annual rate of about 2 quarter. Energy prices declined in percent from the average in the sec- July, while prices of finished foods ond quarter to the average in the rose sharply. In June, the consumer third quarter), provided that growth price index increased at an annual of M-2 remained around the upper rate of about 8!/2 percent. As in May, end of its range for the year or the increase reflected a substantial tended to move down within the rise in the homeownership compo- range. If it appeared to the Manager Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 123 for Domestic Operations that pursuit well below the lower end of the of the monetary objectives and relat- Committee's range for growth over ed reserve paths during the period the year from the fourth quarter of before the next meeting was likely to 1980 to the fourth quarter of 1981, be associated with a federal funds while the level of M-2 was slightly rate persistently outside a range of below the upper end of its range for 15 to 21 percent, the Chairman might the year. Data available for early call for a Committee consultation. August suggested substantial strength Data becoming available after the in both M-1B and M-2. The strength first week or so of the intermeeting in M-2 apparently reflected in part period indicated some shortfall in responses of the public to the availgrowth of M-1B from the short-term ability of more attractive yields on path implied by the objective speci- small saver certificates with maturified by the Committee. Growth of ties of 2Vi years or more, whose M-2 appeared to be about in line interest rate ceilings were liberalwith the Committee's objective. ized, effective August 1. Consequently, required reserves and Total credit outstanding at U.S. the demand for reserves contracted commercial banks expanded at an in relation to the supply being made annual rate of 53/4 percent in July, available through open market oper- about the same as in June. With the ations, and member bank borrow- exception of business loans, which ings declined from an average of accelerated somewhat further from a about $P/4 billion around the time of brisk pace in June, growth in the the July meeting to an average of major components of bank credit about $1.2 billion in the first two was sluggish. Net issues of commerstatement weeks in August. The fed- cial paper by nonfinancial corporaeral funds rate averaged about 19 tions expanded at a moderate pace in percent during July and declined to July, following growth at exceptionan average of about IS1A percent ally rapid rates in the preceding two during the first half of August. De- months. spite the decline in the federal funds Yields on most intermediate- and rate, yields on most other short-term long-term securities moved up Vi to instruments rose about 1 to 1 Vi per- 1 Vi percentage points over the intercentage points over the intermeeting meeting interval to record levels. period. The upward pressure on interest M-1B, adjusted for the estimated rates apparently reflected increasing effects of shifts into NOW accounts, concern about current and prospecexpanded at an annual rate of about tive financing needs of the Treasury V/i percent in July, following con- in the light of enactment of legislatraction at annual rates averaging tion to reduce taxes, incoming data nearly 7 percent in May and June. on the economy that were stronger Growth in M-2, buoyed by rapid than many market participants had expansion in money market mutual anticipated, and some disappointfund shares, accelerated to an annu- ment that easing of market pressures al rate of 8 percent from an annual had not developed as rapidly as rate of about 4 percent on average in many had expected. The prime rate the previous two months. In July, charged by commercial banks on the level of shift-adjusted M-1B was short-term business loans was raised Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 FOMC Policy Actions !/2 percentage point over the inter- built up in financial markets and that meeting period to 20!/2 percent. In a near-term relaxation of those fihome mortgage markets, average nancial pressures might quickly disrates on new commitments for fixed- sipate the sense of progress against rate loans at savings and loan associ- inflation. ations rose to 17!/4 percent from 163A Several members indicated their percent at the time of the July meet- broad agreement with the staff proing. jection of little change in economic The staff projections presented at activity over the months immediatethis meeting suggested that growth ly ahead, but one member commentin real GNP probably would be slug- ed that some decline was a more gish over the remainder of 1981 and likely prospect. The longer-run ecoduring the first half of 1982. Such a nomic outlook was more clouded development was likely to be accom- and subject to diverging influences. panied by a moderate increase in the Some members were concerned that unemployment rate from its current if abnormally high interest rates level. The rise in the fixed-weight should persist for an extended periprice index for gross domestic busi- od, the already strong pressures on ness product was projected to many interest-sensitive sectors of change little during the rest of this the economy would intensify and the year from the reduced pace of the resulting financial strains could insecond quarter but to decline some- duce dislocations and a sharp dewhat further in the first half of 1982. cline in overall economic activity. In the Committee's discussion of Other members noted that the econthe economic situation and outlook, omy had displayed remarkable resilthe view was expressed that overall iency and adaptability to high intereconomic activity was holding up est rates and they emphasized that fairly well despite reports of de- fiscal policy would exert an increaspressed conditions in some areas of ingly stimulative impact on the econthe country and in some credit-de- omy as time went on. It was also pendent sectors of the economy. suggested that further moderation in Real GNP had declined somewhat in inflation would have a favorable efthe second quarter, but the latest fect on economic activity over time, indicators of economic activity did in large part by relieving pressures not suggest that a cumulative decline on financial markets, although the was under way. A number of mem- near-term impact could be some rebers emphasized the improvement in duction in consumer spending that key measures of inflation, including would otherwise have been made in some signs of moderation in wage anticipation of later price increases. increases, and suggested that infla- At its meeting on July 6-7, 1981, tionary expectations might be abat- the Committee reaffirmed the moneing. Other members felt, however, tary growth ranges for the period that it was premature to conclude from the fourth quarter of 1980 to the that inflationary attitudes and behav- fourth quarter of 1981 that it had set ior had been fundamentally altered. at its meeting in early February. In this connection it was observed These ranges were 3 to 5V2 percent that restraint on some prices reflect- for M-1A and 3l/i to 6 percent for ed the intense pressures that had M-1B, abstracting from the impact of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 125 NOW accounts on a nationwide ba- in M-2, which was already close to sis, 6 to 9 percent for M-2, and 6!/2 to the top of its range, also turned up in 9V2 percent for M-3. The associated early August. A staff analysis sugrange for bank credit was 6 to 9 gested that the nontransaction compercent. The Committee recognized ponents of M-2 were likely to continthat a shortfall in M-1B growth in the ue to expand rather rapidly over the first half of the year partly reflected period ahead, partly because of liba shift in public preferences toward eralized deposit rate ceilings on other highly liquid assets and that small saver certificates. growth in the broader aggregates had In the course of the discussion, been running somewhat above the the members considered at some upper end of the ranges. In light of length the possible implications for its desire to maintain moderate the economy, for policy, and for growth in money over the balance of reserve provision of the divergent the year, the Committee expected trends in M-1B and M-2, together that growth in M-1B for the year with the other aggregates. It was would be near the lower end of its emphasized that in addition to the range. At the same time, growth in previously recognized distortions in the broader monetary aggregates measured growth of M-1B resulting might be at the higher end of their from shifts into NOW accounts and ranges. the development of money substi- In the Committee's discussion of tutes, recent legislative and regulapolicy for the weeks immediately tory developments were likely to ahead, a consensus emerged in favor affect growth in the aggregates, of retaining the monetary growth ob- especially M-2, over the near term. jectives for the third quarter that had Among the uncertainties in question been adopted at the July meeting. were the further impact on M-2 of There was also agreement to retain the liberalization of interest rate ceilthe 15 to 21 percent intermeeting ings on small saver certificates, the range for the federal funds rate that continuing attractiveness of money provided a mechanism for initiating market mutual funds, and the extent further consultation by the Commit- to which payments to stockholders tee. During July, growth in M-1B, as a result of recent merger activities adjusted for the estimated effects of were being invested in nontransacflows into NOW accounts, had fallen tion-type accounts included in M-2. considerably short of the 7 percent Even more difficult to assess was the annual rate objective established for impact of the introduction of taxthe June to September period, and exempt "all saver" certificates on achievement of that objective there- October 1, 1981; those certificates fore implied some acceleration of could well contribute to a marked M-1B during August and September. acceleration in M-2 growth during Available data for the first part of the fourth quarter, but in the interim August suggested a pickup in M-1B measured M-2 might be artificially growth, although interpretation was lowered to the extent that funds earcomplicated by the transitory influ- marked for investment in these new ence of demand balances accumulat- instruments were being temporarily ed in conjunction with corporate accumulated in repurchase agreemergers. At the same time, growth ments with October 1 maturities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 FOMC Policy Actions Given the uncertainties that were in M-2 in prospect for August would involved, the members agreed that not in itself call for further restraint widely divergent behavior of the ag- in the provision of reserves, since gregates might pose difficult ques- such growth would, in any event, tions about policy implementation leave M-2 around the upper end of and reserve provision over the com- its range for the year as provided in ing period. A view was also ex- the directive. Should measured pressed that the increasing difficulty growth subsequently appear excesof interpreting the performance of sive in the light of the target, careful the monetary aggregates argued for assessment would be required of the giving weight to interest rates in possibility that special factors, inevaluating the degree of restraint be- cluding regulatory and institutional ing exerted by monetary policy. This changes, were distorting the data. If view was based on the premise that necessary, the Chairman might call interest rates were already exerting a for Committee consultation to evalugreat deal of restraint and a small ate the implications for policy. decline would be welcomed, provid- At the conclusion of the discused it was not inconsistent with sion, the Committee agreed to reafachievement of the Committee's firm the short-run policy objectives longer-term objectives for monetary for the third quarter adopted at its growth. In contrast, the danger was previous meeting. emphasized that a change in ap- The following domestic policy diproach that attempted to stabilize rective was issued to the Federal interest rates or to encourage a near- Reserve Bank of New York: term decline could well be counter- The information reviewed at this meetproductive if such an effort were ing suggests little change in real GNP in accompanied by or fostered an ex- the current quarter, following a small cessive rebound in monetary decline in the second quarter; prices on the average appeared to be continuing to growth; the net result could then be rise less rapidly than earlier in the year. to encourage inflationary expecta- The dollar value of total retail sales intions, call into question the commit- creased appreciably further in July, rement of the Federal Reserve to an flecting some recovery in sales at automotive dealers. Industrial production anti-inflationary policy, and thereby rose slightly in July, while nonfarm payactually jeopardize the prospects for roll employment advanced substantially; ultimately achieving and sustaining the unemployment rate declined to 7.0 the significantly lower interest rates percent, somewhat below its average that were sought. level in earlier months of 1981. In June housing starts declined sharply further. Several members expressed con- Over the first seven months of the year, cern about placing too much reliance the rise in the index of average hourly on M-2 as a guide to policy over the earnings was somewhat less rapid than weeks ahead in light of the various during 1980. The weighted average value of the factors that were potential sources dollar rose further against major foreign of distortion. In this view the provicurrencies in July and early August, regsion of reserves should not be re- istering gains against all major currenstrained solely on the basis of M-2 cies. In June the U.S. foreign trade deficit declined slightly from the May level, growth in excess of the Committee's but for the second quarter the deficit was objective. In the discussion, it was up substantially over the first-quarter understood that the sizable growth rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 127 In July M-1B, adjusted for the estimat- also tentatively agreed that for the period ed effects of shifts into NOW accounts, from the fourth quarter of 1981 to the expanded somewhat following a substan- fourth quarter of 1982 growth of M-l, tial decline in May and June, and growth M-2, and M-3 within ranges of 2!/2 to 5Vi in M-2 accelerated from a relatively slug- percent, 6 to 9 percent, and 6^2 to 9Vi gish pace in the previous two months. percent would be appropriate. These The level of adjusted M-1B in July was ranges will be reconsidered as warranted well below the lower end of the Commit- to take account of developing experience tee's range for growth over the year from with public preferences for NOW and the fourth quarter of 1980 to the fourth similar accounts as well as changing ecoquarter of 1981 while the level of M-2 nomic and financial conditions. was slightly below the upper end of its In the short run the Committee continrange for the year. Available data for ues to seek behavior of reserve aggreearly August suggested further accelera- gates consistent with growth of M-1B tion in growth of M-1B and M-2, with from June to September at an annual rate acceleration in M-2 apparently influ- of 7 percent after allowance for the imenced in part by initial responses of the pact of flows into NOW accounts (resultpublic to the availability of more attrac- ing in growth at an annual rate of about 2 tive deposit instruments, pointing up the percent from the average in the second necessity of evaluating the behavior of quarter to the average in the third quar- M-2 in the light of the impact of regula- ter), provided that growth of M-2 retory and legislative changes. Since early mains around the upper limit of, or July most market interest rates have moves within, its range for the year. It is risen considerably on balance. recognized that shifts into NOW ac- The Federal Open Market Committee counts will continue to distort measured seeks to foster monetary and financial growth in M-lB to an unpredictable exconditions that will help to reduce infla- tent, and operational reserve paths will tion, promote sustained economic be developed in the light of evaluation of growth, and contribute to a sustainable those distortions. The Chairman may pattern of international transactions. At call for Committee consultation if it apits meeting in early July, the Committee pears to the Manager for Domestic Operagreed that these objectives would be ations that pursuit of the monetary obfurthered by reaffirming the monetary jectives and related reserve paths during growth ranges for the period from the the period before the next meeting is fourth quarter of 1980 to the fourth quar- likely to be associated with a federal ter of 1981 that it had set at the February funds rate persistently outside a range of meeting. These ranges included growth 15 to 21 percent. of 3x/2 to 6 percent for M-1B, abstracting from the impact of flows into NOW Votes for this action: Messrs. accounts on a nationwide basis, and Volcker, Solomon, Boykin, Corrigan, growth of 6 to 9 percent and 6/2 to 9Vi Gramley, Keehn, Rice, Schultz, Mrs. percent for M-2 and M-3, respectively. Teeters, Messrs. Wallich, and Black. The Committee recognized that the Vote against this action: Mr. Partee. shortfall in M-1B growth in the first half (Mr. Black voted as alternate for Mr. of the year partly reflected a shift in Boehne.) public preferences toward other highly liquid assets and that growth in the Mr. Partee dissented from this acbroader aggregates had been running at tion because, as at the previous about or somewhat above the upper ends meeting, he preferred to give more of their ranges. In light of its desire to maintain moderate growth in money emphasis to reducing the risk of a over the balance of the year, the Com- cumulative decline in growth of mittee expected that growth in M-1B for M-1B in light of the indications of the year would be near the lower end of weakening in economic activity. Acits range. At the same time, growth in the broader aggregates might be high in their cordingly, he favored specification ranges. The associated range for bank of a somewhat higher objective for credit was 6 to 9 percent. The Committee growth of M-lB over the period from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 FOMC Policy Actions June to September, and without the The index of industrial production additional weight assigned to the po- fell 0.4 percent in August. Most of tential for more rapid growth of M-2. the decline reflected a sharp reduc- In his view, the short-run behavior tion in output of consumer durable of M-2 was subject to great uncer- goods, particularly in the motor vetainty because of the volatile influ- hicle industry. Production of busience of money market mutual funds, ness equipment and space and dethe liberalization of deposit rate ceil- fense products continued to expand, ings on small saver certificates be- while output of home goods, conginning August 1, and the introduc- struction supplies, and materials fell. tion of tax-exempt "all saver" Incoming information for Septemcertificates beginning October 1. ber, including reports of declines in output in steel, electricity, and coal, and data on hours and employment, Meeting Held on suggested a further appreciable de- October 5-6, 1981 cline in industrial production. Ca- Domestic Policy Directive pacity utilization in manufacturing The information reviewed at this declined 0.6 percentage point in Aumeeting suggested that real GNP de- gust to 79.2 percent, its lowest level clined slightly further in the third since October 1980 and 8 percentage quarter, following a decline at an points below its recent peak in early annual rate of about 1 Vi percent in 1979. the second quarter indicated by re- Total nonagricultural employment vised estimates of the Commerce changed little in August and Septem- Department. Average prices, as ber, according to the establishment measured by the fixed-weight price data. In manufacturing, employment index for gross domestic business changes in the two months were product, were estimated to have small and offsetting, and the average continued rising at the somewhat factory workweek dropped 0.9 hour lower rate that emerged in the sec- in September, although the decline ond quarter. was apparently overstated because In July and August the nominal the survey week included Labor value of total retail sales was essen- Day. Over the August-September tially unchanged from the level in period, employment in service in- June. Substantial credit and price dustries continued to expand, while concessions offered during August employment by state and local govand early September temporarily ernments declined appreciably. In boosted unit sales of new domestic contrast to the establishment data, automobiles. Sales dropped off in the survey of households showed a the latter part of September, how- substantial decline in employment in ever, and for the month as a whole September, and the unemployment were down considerably from Au- rate rose to 7.5 percent, about equal gust. Growth in consumer spending to its average in the first half of 1981. on goods other than autos had re- The Department of Commerce mained sluggish in August; the nomi- survey of business spending plans nal value of nonauto retail sales in taken in late July and August sug- August was only slightly above its gested that current-dollar expendi- March level. tures for plant and equipment would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 129 be 8.8 percent greater in 1981 than in through mid-September from its 1980, compared with the 8.4 percent peak in early August and on balance indicated by the survey taken in late had changed little after that. The April and May. The latest survey depreciation through mid-September implied little, if any, change in real was associated with a decline in expenditures for the year. U.S. short-term interest rates and Private housing starts fell in Au- with market sentiment that the U.S. gust to an annual rate below 1 mil- current account might move more lion units, down from the already sharply into deficit than had been depressed rate of just over a million thought earlier. In August the U.S. units in June and July. Starts of foreign trade deficit rose substantialsingle-family homes, at an annual ly from the low rate in July; for July rate of less than 600,000 units in and August combined, the rate was August, were down two-fifths from considerably higher than that in the their level of a year earlier. Newly second quarter, as the value of nonissued permits for residential con- petroleum imports increased and the struction also declined, and sales of value of exports, agricultural and new and existing homes dropped nonagricultural, declined markedly. considerably. Outlays for residential At its meeting on August 18, the construction had declined sharply in Committee had decided to reaffirm real terms over the spring and sum- the policy objectives for the third mer months, but expenditures for quarter that had been adopted at its nonresidential construction had meeting on July 6-7. Specifically, changed little on balance during that the Committee agreed that open period. market operations in the period until The producer price index for fin- this meeting should be directed toished goods rose 0.3 percent in Au- ward behavior of reserve aggregates gust, compared with 0.4 percent in associated with growth of M-1B July. The rate of increase in the two from June to September at an annual months was moderately lower than rate of 7 percent after allowance for the rate during the second quarter flows into NOW accounts (resulting and sharply lower than that during in growth at an annual rate of about 2 the first quarter. The consumer price percent from the average in the secindex rose considerably more in July ond quarter to the average in the and August than in the immediately third quarter), provided that growth preceding months. Much of the ac- of M-2 remained around the upper celeration reflected a substantial rise end of, or moved within, its range in the homeownership component of for the year. If it appeared to the the index; food prices rose consider- Manager for Domestic Operations ably, but energy costs increased lit- that pursuit of the monetary objectle. Over the first nine months of the tives and related reserve paths duryear, the rise in the index of average ing the period before this meeting hourly earnings was somewhat less was likely to be associated with a rapid than it was during 1980. federal funds rate persistently out- In foreign exchange markets the side a range of 15 to 21 percent, the trade-weighted value of the dollar Chairman might call for a Committee against major foreign currencies had consultation. declined by nearly 10 percent Shortly after the meeting on Au- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 FOMC Policy Actions gust 18, data becoming available in- for the year. Growth of M-2 during dicated some shortfall in growth of the third quarter was reduced, per- M-1B from the path consistent with haps by 1 or 2 percentage points at the Committee's objective for an annual rate, by the diversion of growth over the three months from M-2-type assets into retail repur- June to September; and later in the chase agreements issued by deposiintermeeting period, the shortfall tory institutions in anticipation of widened. However, growth of M-2 the scheduled introduction of all savremained relatively strong, especial- ers certificates on October 1. ly after allowance for shifts from Total credit outstanding at U.S. time accounts into retail repurchase commercial banks grew at an annual agreements (not included in M-2) in rate of about lOVi percent in August, anticipation of the October 1 intro- following expansion at annual rates duction of all savers certificates. Re- of about 53/4 percent in June and flecting the shortfall in growth of July. Growth in business loans M-1B, required reserves and the picked up somewhat further from demand for reserves contracted in the brisk pace in June and July, relation to the supply being made while security loans contracted available through open market oper- sharply. Bank holdings of Treasury ations. Consequently, borrowings securities declined in August, but from Federal Reserve Banks for pur- acquisitions of other securities inposes of adjusting reserve positions creased appreciably. Net issues of declined considerably from late Au- commercial paper by nonfinancial gust to late September. The federal corporations expanded at an excepfunds rate fell from around I8V4 per- tionally rapid pace, following modercent in mid-August to 15 percent in ate growth in July. the statement week ending Septem- In frequently volatile markets, ber 30. The funds rate moved back short-term interest rates declined on up to about I6V2 percent in the days balance over the intermeeting perijust before this meeting, apparently od, while long-term rates rose furreflecting cautious bank reserve ther. At the time of this meeting, management associated with the in- most short-term rates were down troduction of same-day settlement about 1 to 3 percentage points and for most international transactions long-term rates were up about Vi to 1 cleared through New York. percentage point from their levels in M-1B, adjusted for the estimated mid-August. The rise in long-term effects of shifts into NOW accounts, rates apparently reflected concerns increased at an annual rate of about of market participants about the pro- VA percent over the period from spective size of federal deficits. Dur- June to September, while M-2 grew ing the intermeeting interval, the at an annual rate of about 9 percent. prime rate charged by commercial In September the level of shift- banks on short-term business loans adjusted M-1B was well below the was reduced by V/i percentage lower end of the Committee's range points to 19 percent. On September for growth over the year from the 21, in view of the decline in shortfourth quarter of 1980 to the fourth term market rates, the Board of quarter of 1981, while the level of Governors announced a reduction, M-2 was at the upper end of its range from 4 to 3 percentage points, in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 131 surcharge on frequent borrowings of some cases, avoiding plant closings. large depository institutions at the At its meeting on July 6-7, 1981, discount window. In home mortgage the Committee reaffirmed the monemarkets, average rates on new com- tary growth ranges for the period mitments for fixed-rate level-pay- from the fourth quarter of 1980 to the ment conventional loans at sampled fourth quarter of 1981 that it had set savings and loan associations rose to at its meeting in early February. 18!/4 percent from 17 lA percent at the These ranges were 3 to 5!/2 percent time of the August meeting. for M-1A and 3l/i to 6 percent for The staff projections presented at M-1B, abstracting from the impact this meeting suggested that real GNP of NOW accounts on a nationwide was likely to decline further in the basis; 6 to 9 percent for M-2; and 6V2 current quarter and that activity to W2 percent for M-3. The associatwould remain sluggish over the first ed range for bank credit was 6 to 9 part of 1982. The rise in the fixed- percent. The Committee recognized weight price index for gross domes- that a shortfall in M-1B growth in the tic business product was projected first half of the year partly reflected to moderate somewhat further over a shift in public preferences toward the year ahead. other highly liquid assets and that In the Committee's discussion of growth in the broader aggregates had the economic situation and outlook, been running somewhat above the the consensus was that real GNP upper end of the ranges. In light of was drifting downward more or less its desire to maintain moderate as portrayed by the staff projections. growth in money over the balance of The members generally agreed that the year, the Committee expected the evidence currently available did that growth in M-1B for the year not portend a sharp cumulative con- would be near the lower end of its traction in activity in coming range. At the same time, growth in months, but a few nevertheless com- the broader monetary aggregates mented on the risks of a more signifi- might be at the higher end of their cant decline. A number of members ranges. For the period from the observed that businesses, especially fourth quarter of 1981 to the fourth the smaller ones, were exposed to quarter of 1982, the Committee tengrowing financial strains because of tatively agreed that growth of M-l, the sluggishness of their sales, the M-2, and M-3 within ranges of 216 to high level of interest rates, and a 5!/2 percent, 6 to 9 percent, and 6!/2 to tendency among their customers to 91/2 percent respectively would be defer payments of bills. appropriate. With respect to prospects for The Committee considered policy prices, the members in general ac- for the period immediately ahead cepted the staff projection of a fur- against the background of a widenther moderation of the rise over the ing divergence between the behavior next few quarters. The view was of M-1B and the more broadly deexpressed that in the current envi- fined monetary aggregates. M-1B ronment, both business and labor (shift-adjusted) had expanded little were being subjected to pressures to from June to September, and its anrestrain or to reduce costs for the nual rate of growth from the average sake of maintaining sales and, in in the fourth quarter of 1981 to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 FOMC Policy Actions estimated level in September was more rapid growth in M-1B over the about 1 percent, compared with the remaining three months of 1981, Committee's range of V/i to 6 per- while taking account of the relative cent for growth over the year from strength of the broader aggregates. the fourth quarter of 1980 to the The observation was made that a fourth quarter of 1981. From June to pickup in growth of M-1B now September, meanwhile, M-2 had would reduce the risks of a cumulacontinued to grow at a rate consis- tive contraction in activity, which tent with the upper end of its range could well be followed by an excesof 6 to 9 percent for the year, and sively rapid recovery and expansion. M-3 had grown at a rate somewhat At the same time, many members above its range. expressed the view that very rapid In interpreting recent experience growth of M-1B over the few reand contemplating policy for the pe- maining months of the year would riod immediately ahead, the Com- contribute to instability and would mittee continued to face uncertain- interfere with achievement of longties with respect to the behavior of er-term economic goals. Specificalthe monetary aggregates. Among ly, such growth most likely would these was an apparent decline in the dissipate the gains already made in public's desire to hold transaction moderating inflation, exacerbate inbalances in the forms included in flationary expectations, and induce a M-1B. Given income and interest rebound in interest rates after no rates, the increase in M-1B so far more than a temporary decline. this year had been considerably Moreover, rapid growth in M-1B smaller than would have been pre- would significantly increase the risk dicted from historical relationships that the broader monetary aggreembodied in conventional money de- gates would exceed their ranges for mand equations. It also seemed growth over the year by sizable marclear, however, that the slow growth gins, which was a source of concern in M-1B recently had resulted in part in light of the uncertainties about the from the weakening in economic ac- interpretation of the various monetivity. With respect to M-2, the un- tary aggregates in the current circertainties included the impact of the cumstances. liberalization of interest rate ceilings In weighing the risks of inadeon small savers certificates, the quate monetary growth versus exgrowth of money market mutual cessive growth over the last three funds, and the introduction of the all months of 1981, Committee memsavers (tax-exempt) certificate on bers took account of the need to October 1, 1981. Reflecting various reduce the chances of large destabistructural changes, assets that bear lizing swings in both monetary either a market interest rate or are growth and interest rates, while at subject to variable ceilings closely the same time achieving the targets related to market rates had become a for money growth tentatively estabmuch larger share of the nontransac- lished for 1982. Agreement was tion component of M-2 than they reached to seek behavior of reserve were just a year or two ago. aggregates associated with growth of Committee members agreed on M-1B from September to December the desirability of continuing to seek at an annual rate of 7 percent, after Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 13 3 allowance for the impact of flows The weighted average value of the into NOW accounts, and growth of dollar against major foreign currencies declined sharply through mid-September M-2 at an annual rate of 10 percent from its peak in early August and on or slightly higher; in specifying the balance has changed little since then. In rate for M-2, the Committee recog- August the U.S. foreign trade deficit nized that the behavior of that aggre- widened substantially from the low rate in July; for July and August combined, gate would be affected by the recent the deficit was considerably larger than regulatory and legislative changes, the second-quarter rate. particularly the public's response to M-1B, adjusted for the estimated efthe availability of the all savers cer- fects of shifts into NOW accounts, intificate. In developing related re- creased little over the period from June to September, while M-2 grew at a relaserve paths, approximately equal tively strong pace. The level of adjusted weight would be given to the move- M-1B in September was well below the ments of M-1B and M-2. It was lower end of the Committee's range for understood that if these objectives growth over the year from the fourth were realized, growth of M-1B from quarter of 1980 to the fourth quarter of 1981; the level of M-2 was at the upper the fourth quarter of 1980 to the end of its range for the year. In frequentfourth quarter of 1981 would remain ly volatile markets, short-term interest below the Committee's range for the rates have declined on balance since year, while growth of M-2 would mid-August while long-term rates have risen considerably further. On Septemequal or slightly exceed the upper ber 21 the Board of Governors anend of its range. The intermeeting nounced a reduction in the surcharge range for the federal funds rate that from 4 to 3 percentage points on frequent provided a mechanism for initiating borrowings of large depository institufurther consultation of the Commit- tions. tee was set at 12 to 17 percent. The Federal Open Market Committee seeks to foster monetary and financial The following domestic policy diconditions that will help to reduce inflarective was issued to the Federal tion, promote sustained economic Reserve Bank of New York: growth, and contribute to a sustainable pattern of international transactions. At The information reviewed at this meet- its meeting in early July, the Committee ing suggests that real GNP declined agreed that these objectives would be slightly further in the third quarter and furthered by reaffirming the monetary that prices on the average continued to growth ranges for the period from the rise at the somewhat lower rate that fourth quarter of 1980 to the fourth quaremerged in the second quarter. In July ter of 1981 that it had set at the February and August the nominal value of total meeting. These ranges included growth retail sales was essentially unchanged of 3'/2 to 6 percent for M-1B, abstracting from the June level, and unit sales of from the impact of flows into NOW domestic automobiles weakened in Sep- accounts on a nationwide basis, and tember. Industrial production declined growth of 6 to 9 percent and 6V2 to 9Vi slightly in August and apparently slack- percent for M-2 and M-3, respectively. ened further in September, while non- The Committee recognized that the farm payroll employment changed little shortfall in M-1B growth in the first half in both months. The unemployment rate of the year partly reflected a shift in rose to 7.5 percent in September, about public preferences toward other highly equal to its average in the first half of liquid assets and that growth in the 1981. Housing starts fell in August to the broader aggregates had been running at lowest rate in several years. Over the about or somewhat above the upper ends first nine months of the year, the rise in of their ranges. In light of its desire to the index of average hourly earnings was maintain moderate growth in money somewhat less rapid than during 1980. over the balance of the year, the Com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 FOMC Policy Actions mittee expected that growth in M-1B for in the public's desire to hold transacthe year would be near the lower end of tion balances of the types included in its range. At the same time, growth in the M-1B and to the growth of other broader aggregates might be high in their asset forms, especially money marranges. The associated range for bank credit was 6 to 9 percent. The Committee ket mutual funds, that to some exalso tentatively agreed that for the period tent serve as transaction balances. from the fourth quarter of 1981 to the He was also concerned that the pubfourth quarter of 1982 growth of M-l, M-2, and M-3 within ranges of 2!/2 to 5!/2 lic might perceive fairly rapid monepercent, 6 to 9 percent, and 6V2 to 9Vi tary growth over the balance of the percent would be appropriate. These year as a relaxation of the System's ranges will be reconsidered as warranted policy of restraint, especially if such to take account of developing experience growth were to be accompanied by with public preferences for NOW and similar accounts as well as changing eco- sizable decreases in interest rates. nomic and financial conditions. In the short run the Committee seeks Meeting Held on behavior of reserve aggregates consis- November 17, 1981 tent with growth of M-lB from September to December at an annual rate of 7 1. Domestic Policy Directive percent after allowance for the impact of flows into NOW accounts and with The information reviewed at this growth in M-2 at an annual rate around meeting suggested that real GNP 10 percent or slightly higher, recognizing was declining appreciably in the curthat the behavior of M-2 will be affected rent quarter, following a slight deby recent regulatory and legislative changes, particularly the public's re- cline in the third quarter indicated by sponse to the availability of the all savers preliminary estimates of the Comcertificate. The Chairman may call for merce Department. Average prices, Committee consultation if it appears to as measured by the fixed-weight the Manager for Domestic Operations that pursuit of the monetary objectives price index for gross domestic busiand related reserve paths during the peri- ness product, appeared to be rising od before the next meeting is likely to be somewhat less rapidly than on the associated with a federal funds rate peraverage in the first three quarters of sistently outside a range of 12 to 17 the year. percent. The nominal value of retail sales in Votes for this action: Messrs. October was down Wi percent from Volcker, Solomon, Boehne, Boykin, September and about 1 percent from Corrigan, Gramley, Keehn, Partee, Rice, Schultz, and Mrs. Teeters. Vote the third-quarter average; although against this action: Mr. Wallich. the nominal value had risen about 2VA percent from the second to the Mr. Wallich dissented from this third quarter, sales in real terms had action because he favored specifica- changed little. In October sales of tion of somewhat lower rates for automotive products were particugrowth in the monetary aggregates larly weak; unit sales of new autoover the last three months of 1981 mobiles fell nearly one-fifth from than those adopted at this meeting September, even though some reand was willing to accept a greater bates and special financing arrangeshortfall in growth of M-lB from the ments remained in effect. Committee's range for growth over The index of industrial production the year. In his opinion, much of the fell 1.5 percent in October, following shortfall was attributable to a decline a decline of 1.2 percent in Septem- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 135 ber. Reductions in both months were tially more than foreign short-term widespread among market group- rates. The U.S. trade deficit in Sepings, with declines particularly large tember was substantially lower than in durable materials, construction the extraordinarily large one in Ausupplies, and consumer durable gust. For the third quarter, the defigoods. cit was little changed from that in the Total nonfarm payroll employ- second quarter. A decline in the valment declined sharply in October. ue of exports about offset a reduc- Job losses in manufacturing were tion in imports, which was accountsizable, overwhelming moderate ed for largely by oil. gains in trade and service industries, At its meeting on October 5-6, the and the average factory workweek Committee had decided that open remained at a reduced level. The market operations in the period until unemployment rate rose from 7.5 to this meeting should be directed to- 8.0 percent. ward behavior of reserve aggregates Private housing starts edged down consistent with growth of M-1B from in September from an already de- September to December at an annual pressed level. At an annual rate of rate of 7 percent (after allowance for less than 1 million units, starts in the shifts into NOW accounts) and with third quarter were one-fourth below growth of M-2 at an annual rate of the rate in the first half. Sales of new around 10 percent or slightly higher. houses in September were at their If it appeared to the Manager for lowest level in the 18-year history of Domestic Operations that pursuit of the series, and sales of existing the monetary objectives and related homes continued to decline. reserve paths during the period be- The producer price index for fin- fore the next meeting was likely to ished goods rose on the average in be associated with a federal funds September and October at about the rate persistently outside a range of reduced rate of the preceding four 12 to 17 percent, the Chairman might months. The consumer price index call for a Committee consultation. rose at a much faster pace in Sep- By late October, incoming data tember and during the third quarter began to indicate shortfalls in growth as a whole than in the first half of the of the monetary aggregates, espeyear. Much of the acceleration re- cially M-1B, from the rates that the flected the behavior of the home- Committee had specified for the ownership component and food three-month period from September prices. Over the first 10 months of to December. Subsequently, money 1981, the rise in the index of average market conditions eased: the federal hourly earnings was less rapid than it funds rate in the days just before this was during 1980. meeting was about 13Vi percent, In foreign exchange markets the compared with an average of about trade-weighted value of the dollar 15 percent in the four weeks ending against major foreign currencies had October 28. In the statement week fluctuated over a wide range since including the day of the meeting, early October. On balance, it de- borrowings from Federal Reserve clined only a little over the inter- Banks for purposes of adjusting remeeting interval although U.S. serve positions were running $300 short-term interest rates fell substan- million to $400 million below the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 6 FOMC Policy Actions average of the preceding weeks of percent by most commercial banks, the intermeeting period. and to I6V2 percent by a few banks. M-1B (adjusted for shifts into On October 30, against the back- NOW accounts) expanded at an an- ground of the declines in short-term nual rate of about 33/4 percent in rates, the Board of Governors an- October, following a contraction of 4 nounced a reduction in Federal Repercent in September, and M-2 grew serve basic discount rates from 14 to at an annual rate of about 9VA per- 13 percent. The surcharge on frecent. In October the level of shift- quent borrowings of large depository adjusted M-1B remained well below institutions had been reduced from 3 the lower end of the Committee's to 2 percentage points on October 9, range for growth over the year from and on November 16 it was removed the fourth quarter of 1980 to the altogether. In home mortgage marfourth quarter of 1981, while the kets, average interest rates on new level of M-2 was at the upper end of commitments for fixed-rate convenits range for the year. tional loans at savings and loan asso- Expansion in total credit outstand- ciations had eased a bit in recent ing at U.S. commercial banks weeks after reaching a record level slowed to an annual rate of about 8V2 in early October. percent in October, following expan- In the Committee's discussion of sion at annual rates of 10 and IOV2 the economic situation and outlook, percent in August and September the consensus was that the downrespectively. The slowing reflected ward drift in economic activity apin part a moderation in the growth of parent when the Committee met in business loans from the brisk pace in early October had clearly developed the third quarter. Bank holdings of into a recession. Weakness in output Treasury securities were unchanged and employment was intensifying in in October, while acquisitions of those industries and regions that had other securities increased. Net is- already been seriously affected, and sues of commercial paper by nonfi- it was spreading. As usual, considernancial corporations slowed sub- able uncertainty existed about the stantially, following expansion at likely severity and duration of the exceptionally rapid rates in August recession. It was generally thought, and September. however, that the scheduled reduc- Short-term market interest rates tions in federal income taxes, the declined about 2V2 to 3]/2 percentage projected increases in defense points over the intermeeting period. spending along with other elements Yields on longer-term securities gen- in the federal fiscal outlook, and the erally reached record levels around decline in interest rates most likely the end of September but had de- would generate an upturn in ecoclined in recent weeks, apparently in nomic activity by the middle of 1982, response to incoming evidence of although some difference of opinion weakness in economic activity and existed about the timing of recovery. reduced pressures in short-term At the same time, concern about markets. During the intermeeting pe- inflationary tendencies remained riod, the prime rate charged on strong. Some encouraging signs of short-term business loans was re- an easing in inflationary expectaduced by 2 percentage points to 17 tions were noted, but it was also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 137 emphasized that such expectations 5!/2 percent, 6 to 9 percent, and 6V2 tended to change slowly; they would to 9Vi percent respectively would be be sensitive to judgments about fed- appropriate. eral budgetary developments, to the In reviewing the objectives that it nature of the newly negotiated col- had established in early October for lective bargaining agreements, and growth of M-1B and M-2 over the to perceptions of the course of mon- final three months of the year, the etary policy. Inflationary expecta- Committee continued to face uncertions, as well as the budgetary out- tainties with respect to the forces look, would have a major effect on affecting the behavior of the monelong-term interest rates and thus on tary aggregates, including the apparbusiness financial positions and the ent decline in the public's desire to sustainability of the projected recov- hold transaction balances in the ery in activity. forms included in M-1B and the ex- At its meeting on July 6-7, 1981, pansive effect on M-2 of growth in the Committee reaffirmed the mone- money market mutual funds and of tary growth ranges for the period shifts into deposit forms that either from the fourth quarter of 1980 to the bear a market interest rate or are fourth quarter of 1981 that it had set subject to variable ceilings closely at its meeting in early February. related to market rates. Growth of These ranges were 3 to 51/2 percent M-1B in October had fallen below for M-1A and Vh to 6 percent for the 7 percent annual rate that the M-1B, abstracting from the impact Committee had adopted for growth of NOW accounts on a nationwide over the final three months of the basis; 6 to 9 percent for M-2; and 6V2 year. M-2, meanwhile, had grown at to 9'/2 percent for M-3. The associat- an annual rate only slightly less than ed range for bank credit was 6 to 9 the 10 percent that had been specipercent. The Committee recognized fied for the final three months and that a shortfall in M-1B growth in the remained close to the upper end of first half of the year partly reflected its range for the year. a shift in public preferences toward Committee members continued to other highly liquid assets and that agree on the desirability of seeking growth in the broader aggregates had somewhat more rapid growth in been running somewhat above the M-1B, while taking account of the upper end of the ranges. In light of relative strength of the broader monits desire to maintain moderate etary aggregates. At the same time, growth in money over the balance of however, questions were raised the year, the Committee expected about how aggressively more rapid that growth in M-1B for the year growth in M-lB should be pursued in would be near the lower end of its the short period before the end of the range. At the same time, growth in year. The view was expressed that the broader monetary aggregates objectives for growth of M-lB over might be at the higher end of their that interval should take account of ranges. For the period from the the desirability of a smooth transifourth quarter of 1981 to the fourth tion to the targets for monetary quarter of 1982, the Committee ten- growth tentatively established for tatively agreed that growth of M-l, 1982 as well as the relatively rapid M-2, and M-3 within ranges of 2xh to growth in the broader aggregates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 8 FOMC Policy Actions While recognizing the variability of growth of M-1B from October to demands for money over the short December at an annual rate of about run, many members thought that an 7 percent (after allowance for the aggressive effort to stimulate M-1B impact of flows into NOW accounts) growth over November and Decem- and with growth of M-2 at an annual ber at a pace sufficiently rapid to rate of around 11 percent. It was compensate for the shortfall in Octo- understood that somewhat more rapber would interfere with achieve- id growth of M-1B, consistent with ment of longer-term economic goals the objective for growth over the and would risk overly rapid expan- fourth quarter adopted at the prevision of money and credit in later ous meeting, would be accepted in months, particularly if the effort the event that transaction demands were accompanied by a precipitous for money proved to be stronger decline in short-term interest rates to than anticipated; it was also underlevels that might not be sustainable. stood that moderate shortfalls from Such a decline in short-term rates the growth path would not be unaccould exacerbate inflationary expec- ceptable, particularly if broader agtations and abort a desirable down- gregates continued to expand rapidtrend in bond yields and mortgage ly. The intermeeting range for the interest rates. federal funds rate that provided a Committee members in general mechanism for initiating further conbelieved that additional weakness in sultation of the Committee was set at economic activity could well be ac- 11 to 15 percent. companied by further declines in in- The following domestic policy diterest rates, which would be con- rective was issued to the Federal structive in supporting economic Reserve Bank of New York: activity. In that light, they wished to The information reviewed at this meetset objectives for monetary growth ing suggests that real GNP is declining over the period ahead consistent appreciably in the current quarter and with achieving further progress in that prices on the average are rising reducing inflationary expectations somewhat less rapidly than over the first and with minimizing the risk of de- three quarters of the year. In October the nominal value of total retail sales stabilizing swings in both monetary dropped; industrial production fell more growth and interest rates. Their view than in September; and nonfarm payroll was reinforced by the concern that employment, especially in manufacprojection of large budgetary deficits turing, declined sharply. The unemployment rate rose from 7.5 percent to 8.0 in the years ahead, combined with percent. Housing starts edged down in inflationary sensitivities, could gen- September from an already depressed erate anticipations of a reversal of level. Over the first 10 months of 1981, favorable interest rate trends as re- the rise in the index of average hourly earnings was less rapid than during 1980. covery in activity got under way. The weighted average value of the After noting the moderate shortdollar against major foreign currencies fall in growth of M-1B in October has declined only a little since early from the 7 percent annual rate that October, although U.S. short-term interhad been adopted for growth from est rates have declined more than foreign rates. A reduced U.S. foreign trade defi- September to December, the Comcit in September brought the deficit for mittee decided to seek behavior of the third quarter close to the secondreserve aggregates associated with quarter rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 139 M-1B (adjusted for estimated shifts 9 percent. The Committee also tentativeinto NOW accounts) expanded in Octo- ly agreed that for the period from the ber almost as much as it had declined in fourth quarter of 1981 to the fourth quar- September, and growth of M-2 picked ter of 1982 growth of M-l, M-2, and M-3 up. The level of adjusted M-1B remained within ranges of 2V2 to 5Vi percent, 6 to 9 well below the lower end of the Commit- percent, and 6V2 to 9V2 percent respectee's range for growth over the year from tively would be appropriate. These the fourth quarter of 1980 to the fourth ranges will be reconsidered as warranted quarter of 1981; the level of M-2 was at to take account of developing experience the upper end of its range for the year. with public preferences for NOW and Short-term market interest rates have similar accounts as well as changing ecodeclined substantially since the end of nomic and financial conditions. September, and bond yields have also The Committee, after noting a moderdropped from the peaks generally ate shortfall in growth of M-lB in Octoreached about then. On October 30 the ber from the target path set at the last Board of Governors announced a reduc- meeting, seeks behavior of reserve agtion in Federal Reserve basic discount gregates consistent with growth of M-lB rates from 14 to 13 percent. The sur- from October to December at an annual charge on frequent borrowings of large rate of about 7 percent (after allowance depository institutions had been reduced for the impact of flows into NOW acfrom 3 to 2 percentage points on October counts) and with growth of M-2 at an 9, and on November 16 the Board re- annual rate around 11 percent. The moved the remaining 2 percentage Chairman may call for Committee conpoints. sultation if it appears to the Manager for The Federal Open Market Committee Domestic Operations that pursuit of the seeks to foster monetary and financial monetary objectives and related reserve conditions that will help to reduce infla- paths during the period before the next tion, promote a resumption of growth in meeting is likely to be associated with a output on a sustainable basis, and con- federal funds rate persistently outside a tribute to a sustainable pattern of inter- range of 11 to 15 percent. national transactions. At its meeting in early July, the Committee agreed that its Votes for this action: Messrs. objectives would be furthered by reaf- Volcker, Solomon, Boehne, Boy kin, firming the monetary growth ranges for Corrigan, Gramley, Keehn, Partee, the period from the fourth quarter of Rice, Schultz, Mrs. Teeters, and Mr. 1980 to the fourth quarter of 1981 that it Wallich. Votes against this action: had set at the February meeting. These None. ranges included growth of 3V2 to 6 percent for M-1B, abstracting from the impact of flows into NOW accounts on a nationwide basis, and growth of 6 to 9 2. Authorization for Domestic percent and 6V2 to 9Vi percent for M-2 Open Market Operations and M-3 respectively. The Committee recognized that the shortfall in M-1B On December 4, 1981, the Commitgrowth in the first half of the year partly reflected a shift in public preferences tee voted to increase from $3 billion toward other highly liquid assets and that to $4 billion the limit on changes growth in the broader aggregates had between Committee meetings in been running at about or somewhat System Account holdings of U.S. above the upper end of their ranges. In government and federal agency selight of its desire to maintain moderate growth in money over the balance of the curities specified in paragraph l(a) of year, the Committee expected that the authorization for domestic open growth in M-1B for the year would be market operations, effective immedinear the lower end of its range. At the ately, for the period ending with the same time, growth in the broader aggregates might be high in their ranges. The close of business on December 22, associated range for bank credit was 6 to 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 FOMC Policy Actions Votes for this action: Messrs. and durable goods materials. Capac- Volcker, Solomon, Boehne, Boykin, ity utilization in manufacturing fell Corrigan, Gramley, Keehn, Partee, 2 percentage points further to 74.9 Rice, Schultz, and Mrs. Teeters. Votes against this action: None. Ab- percent, equal to its recent trough in sent: Mr. Wallich. July 1980. Total nonfarm payroll employ- This action was taken on recom- ment declined by nearly lA million in mendation of the Manager for Do- November, the same as in October. mestic Operations. The Manager Employment decreases in both had advised that since the Novem- months were concentrated in manuber meeting, substantial net pur- facturing, and in November the chases of securities had been under- trade sector registered its first detaken to provide reserves in cline since June 1980. The unemassociation with a seasonal increase ployment rate rose an additional 0.4 in currency in circulation. The lee- percentage point to 8.4 percent. way for further purchases had been The nominal value of retail sales, reduced to about $900 million, and which had declined 2.1 percent in additional purchases in excess of October, rose 0.8 percent in Novemthat amount were likely to be re- ber; the level in November remained quired before the next Committee well below the average for the third meeting. quarter. Unit sales of new automobiles, although up slightly in November, continued at a depressed rate. Private housing starts in Novem- Meeting Held on ber, at an annual rate of about December 21-22, 1981 870,000 units, changed little from the depressed level of October. Sales of 1. Domestic Policy Directive new homes picked up in October, The information reviewed at this while sales of existing homes meeting suggested that real GNP de- dropped further; total sales of new clined appreciably in the fourth quar- and existing homes were about oneter, after having increased at an annu- third below the pace in 1980. al rate of 1.4 percent in the third The producer price index for finquarter, according to revised esti- ished goods rose 0.5 percent in Nomates of the Commerce Department. vember, about the same as in Octo- Average prices, as measured by the ber. Food prices declined in fixed-weight price index for gross do- November while prices of energymestic business product, appeared to related items, particularly gasoline have risen less rapidly than over the and natural gas, rose.' During the first three quarters of the year. first eleven months of 1981, the fin- In November the index of indus- ished goods index increased at an trial production fell 2.1 percent, the annual rate of about 7!/2 percent, largest of four consecutive monthly well below the increase of nearly 12 declines. The decline was broadly percent over 1980. The consumer based, reflecting reductions in out- price index rose about 0.4 percent put for nearly all major product and 0.5 percent in October and Nogroupings, and was particularly vember respectively; through Nosharp for durable consumer goods vember of this year the index in- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 141 creased at an annual rate of about associated with a federal funds rate 9Vi percent, compared with a rise of persistently outside a range of 11 to about 12V2 percent over 1980. The 15 percent, the Chairman might call rise in the index of average hourly for a Committee consultation. earnings was somewhat less rapid In the event, M-1B (adjusted for thus far in 1981 than during 1980. shifts into NOW accounts) expanded In foreign exchange markets the in November and early December at trade-weighted value of the dollar rates somewhat above the Octoberhad changed little on balance since to-December path, as checkable demid-November, as a decline through posits other than demand deposits the end of November was more than rose markedly. Nevertheless, growth reversed in early December. Trading of M-1B from the third to the fourth conditions in the final week of the quarter (partly estimated) was at an intermeeting period were unsettled annual rate of only about 4!/2 perby the declaration of martial law in cent; and growth over the year from Poland. The U.S. trade deficit in the fourth quarter of 1980 to the October widened substantially from fourth quarter of 1981 was about 2 the unusually low rate in September. percent, well below the Committee's The average for the two months was range of Vh to 6 percent. Growth of about the same as that for July and M-2 accelerated in November to the August, but larger than that record- highest rate so far in 1981, reflecting ed in the first and second quarters of a surge in its nontransaction compothe year. nent in addition to the strength in At its meeting on November 17, M-1B. Growth over the year ending the Committee had noted the moder- in the fourth quarter of 1981 was ate shortfall in growth of M-1B in estimated at about 9!/2 percent, October from the 7 percent annual somewhat above the Committee's rate from September to December range of 6 to 9 percent for the year. adopted at the preceding meeting Growth in nonborrowed reserves and had decided that open market picked up in November and thus far operations in the period until this in December from the October rate, meeting should be directed toward but on balance remained well below behavior of reserve aggregates con- the pace of last summer. Borrowings sistent with growth of M-1B from from Federal Reserve Banks for pur- October to December at an annual poses of adjusting reserve positions rate of about 7 percent (after allow- remained relatively low on the averance for shifts into NOW accounts) age in the five weeks of the interand with growth of M-2 at an annual meeting period; they were little rate of around 11 percent. It was changed from those in the week endunderstood that somewhat more rap- ing November 18 and were well beid growth of M-1B, consistent with low levels in the immediately prethe objective adopted at the preced- ceding weeks. The federal funds rate ing meeting, would be accepted. If it declined from about 13 lA percent in appeared to the Manager for Domes- the days just before the November tic Operations that pursuit of the meeting to around 12 percent in earmonetary objectives and related re- ly December and then moved up into serve paths during the period before a range of 12 to \2Vi percent. On the next meeting was likely to be December 3 the Board of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 FOMC Policy Actions announced a reduction in Federal this meeting suggested that real GNP Reserve discount rates from 13 to 12 would continue to decline in the first percent to bring them into better quarter of 1982, although at a pace alignment with the short-term rates considerably slower than that estithat had recently been prevailing in mated for the fourth quarter of 1981, the market. and that activity would begin to re- Short-term market interest rates cover in the second quarter. The declined about 3A to 1 percentage unemployment rate was expected to point further in the latter part of rise somewhat further to a peak in November, and bond yields moved the second quarter of the new year. down about lA to Vi percentage The rise in the fixed-weight price point. Subsequently, most market index for gross domestic business rates rose to levels close to or some- product was projected to slow furwhat higher than those prevailing at ther in the quarters ahead. the time of the mid-November In the Committee's discussion of FOMC meeting, apparently in re- the economic situation and outlook, sponse to strength in the monetary the consensus was that real GNP aggregates and reports of adminis- was declining appreciably in the curtration estimates of substantially en- rent quarter. It was suggested that larged budget deficits. However, the the overall reduction in output was prime rate charged by commercial likely to be at least as deep as the banks on short-term business loans average decline in recessions since was reduced about 1 percentage the Second World War, but it was point further to 15% percent over the also observed that uncertainty conintermeeting period, and the average cerning the likely severity of a recesrate for primary conventional mort- sion typically was great at this early gages also declined about 1 percent- stage. Business capital spending was age point. one sector that seemed vulnerable to Expansion in total credit outstand- a weaker performance than was gening at U.S. commercial banks slowed erally being projected. The mood in to an annual rate of about 3lA percent the business community, particularin November. The slowing reflected ly the industrial sector, was deprimarily a sharp reduction in bank scribed as gloomy, because of the holdings of Treasury securities and a sluggish economic growth in recent further moderation in the growth of years, the currently low rates of cabusiness loans. Short-term borrowing pacity utilization, and the wideby businesses through issuance of spread expectation of huge federal commercial paper rose substantially, budget deficits and high real interest however, as the spread between com- rates. mercial bank prime rates and market It was also observed, however, interest rates widened. In response to that the risk of significant further the decline in long-term interest rates, contraction in the housing and auto moreover, the volume of public offer- sectors appeared small. Those secings of corporate bonds rose in No- tors were likely to benefit from the vember to a record level; the pace of declines in interest rates that had offerings slowed in early December already occurred. Moreover, the inbut was still relatively large. come tax reductions already legislat- The staff projections presented at ed were generally expected to con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 143 tribute to an upturn in economic quarter of 1982, the Committee had activity by the middle of 1982. tentatively agreed that growth of With respect to the outlook for M-l, M-2, and M-3 within ranges of continued progress in reducing infla- 2Vi to 5Vi percent, 6 to 9 percent, tionary pressures, the view was ex- and 6V2 to 9Vi percent respectively pressed that the climate appeared to would be appropriate. At this meetbe more favorable for moderation in ing, the Committee began a review negotiation of new labor contracts of the ranges for 1982 in the expectaand in pricing decisions than it had tion that at the meeting scheduled been for many years. In some indus- for early February it would complete tries and regions, measures to pre- the review and establish ranges for serve jobs were coming to be viewed the year within the framework of the as more important than improve- Full Employment and Balanced ments in wages and benefits. Com- Growth Act of 1978 (the Humphreypetition from imports, moreover, Hawkins Act). was exerting a restraining influence In looking ahead to 1982, it had on wages and prices. been decided earlier to abandon as At its meeting in July 1981, the of the beginning of the year the com- Committee had reaffirmed the mone- pilation of M-l A and the shift-adjusttary growth ranges for the period ed M-l B (that is, M-1B adjusted to from the fourth quarter of 1980 to the exclude that portion of flows into fourth quarter of 1981 that it had set NOW accounts in 1981 estimated to at its meeting in early February. have come from other interest-bear- These ranges were 3 to 5!/2 percent ing assets rather than from demand for M-1A and 3!/2 to 6 percent for deposits). That decision was based M-1B, abstracting from the impact on a judgment that, after a full year of NOW accounts on a nationwide of availability of NOW accounts on a basis; 6 to 9 percent for M-2; and 61/2 national basis, the magnitude of adto 916 percent for M-3. The associat- ditional shifts might no longer be ed range for bank credit was 6 to 9 significant, and that in any event, it percent. The Committee had recog- would not be possible to make relinized that a shortfall in M-1B growth able estimates of the sources of in the first half of the year partly funds flowing into such accounts. reflected a shift in public preferences The remaining aggregate for M-l in toward other highly liquid assets and 1982 will be the one formerly labeled that growth in the broader aggre- M-1B, which includes the total gates had been running somewhat amount of NOW accounts. above the upper end of the ranges. In the near-term pursuit of the In light of its desire to maintain fundamental objective of fostering moderate growth in money over the the financial conditions that would balance of the year, the Committee help to reduce inflation and promote expected that growth in M-1B for the recovery in economic activity on a year would be near the lower end of sustainable basis, the Committee its range. At the same time, growth continued to face considerable unin the broader monetary aggregates certainty about the interpretation of might be at the higher end of their the behavior of the monetary aggreranges. For the period from the gates. Growth of other checkable fourth quarter of 1981 to the fourth deposits (OCD) had picked up sharp- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 FOMC Policy Actions ly in November and early Decem- by upward interest rate pressures, ber. (Such deposits include NOW because such developments might accounts and ATS accounts at banks well hamper recovery in economic and thrift institutions and credit activity. A number of members were union share draft accounts.) More- willing to accept relatively rapid over, the surge in OCD was accom- growth in the period ahead, to the panied by a renewal of flows into extent that it reflected a continuation savings deposits at commercial of the recent behavior of other banks and continuation of substan- checkable deposits and thus might tial flows into money market mutual reflect expansion in its sizable savfunds, which raised growth of M-2 in ings component. November to the highest rate so far At the conclusion of the discusin 1981. Given the volatility of the sion, the Committee decided to seek behavior of the monetary aggregates behavior of reserve aggregates assoin the short run, it seemed that the ciated with growth of M-l and M-2 recent spurt might have resulted from November 1981 to March 1982 partly from an expansion of highly at annual rates of around 4 to 5 liquid precautionary balances at a percent and around 9 to 10 percent time of considerable uncertainty respectively. In setting the objective about near-term economic and finan- for M-l, the Committee took accial conditions, as well as a response count of the relatively rapid growth to the lower level of market interest that had already taken place through rates in earlier weeks. the first part of December. It also The Committee decided to specify recognized that interpretation of acmonetary growth rates for the four- tual money growth might need to month period from November 1981 take account of the significance of to March 1982, because data for De- fluctuations in NOW accounts, cember were necessarily incomplete which recently had been growing at the time of the meeting. It was relatively rapidly. The intermeeting generally recognized that a marked range for the federal funds rate that slowing in monetary growth in the provides a mechanism for initiating early months of 1982 from the rapid consultation of the Committee was pace in November and early Decem- set at 10 to 14 percent. ber was desirable. Some members The following domestic policy distressed the desirability of specify- rective was issued to the Federal ing growth rates for both M-l and Reserve Bank of New York: M-2 for the four-month period that The information reviewed at this meetwould be within the ranges that had ing suggests that real GNP declined apbeen tentatively adopted for 1982, preciably in the fourth quarter and that partly with a view to avoiding any prices on the average rose less rapidly than over the first three quarters of the possible misunderstanding of the year. In November industrial production Committee's objectives in the period fell more than in preceding months; nonbefore completion of the review of farm payroll employment, especially in its growth ranges for 1982. Other manufacturing, declined sharply further; and the unemployment rate rose an addimembers stressed the importance of tional 0.4 percentage point to 8.4 peravoiding an abrupt deceleration of cent. The nominal value of retail sales monetary growth in the first quarter increased, but the level was still well of 1982, particularly if accompanied below the average for the third quarter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FOMC Policy Actions 145 Housing starts remained at a depressed been running at about or somewhat level. The rise in the index of average above the upper end of their ranges. In hourly earnings has been somewhat less light of its desire to maintain moderate rapid this year than during 1980. growth in money over the balance of the The weighted average value of the year, the Committee expected that dollar against major foreign currencies growth in M-1B for the year would be has changed little on balance since mid- near the lower end of its range. At the November. The U.S. foreign trade defi- same time, growth in the broader aggrecit in October widened substantially gates might be high in their ranges. The from the unusually low rate in Septem- associated range for bank credit was 6 to ber, and the average for the two months 9 percent. The Committee also tentativewas about the same as that for July and ly agreed that for the period from the August. fourth quarter of 1981 to the fourth quar- M-1B (adjusted for estimated shifts ter of 1982 growth of M-l, M-2, and M-3 into NOW accounts) expanded substan- within ranges of 2Vi to 5Vi percent, 6 to 9 tially in November and early December, percent, and 6V2 to 9Vi percent respecbut its level in November was still well tively would be appropriate. below the lower end of the Committee's In the short run, the Committee seeks range for growth over the year from the behavior of reserve aggregates consistfourth quarter of 1980 to the fourth quar- ent with growth of M-l and M-2 from ter of 1981. Growth of M-2 accelerated November 1981 to March at annual rates sharply in November, raising its level of around 4 to 5 percent and 9 to 10 above the upper end of its range for the percent respectively. The target for M-l year. Short-term market interest rates no longer reflects the "shift-adjustment" and bond yields continued to decline in for conversion of outstanding interestthe latter part of November, but since bearing assets into new NOW accounts, then they have risen to levels generally formerly estimated in the "shift-adjusthigher than those of mid-November; ed" M-1B series. In setting the M-l over the period since mid-November, target the Committee took account of the mortgage interest rates have declined relatively rapid growth that had already further. On December 3 the Board of taken place through the first part of Governors announced a reduction in December; it also recognized that inter- Federal Reserve basic discount rates pretation of actual money growth may from 13 to 12 percent. need to take account of the significance The Federal Open Market Committee of fluctuations in NOW accounts, which seeks to foster monetary and financial have recently been growing relatively conditions that will help to reduce infla- rapidly. The Chairman may call for Comtion, promote a resumption of growth in mittee consultation if it appears to the output on a sustainable basis, and con- Manager for Domestic Operations that tribute to a sustainable pattern of inter- pursuit of the monetary objectives and national transactions. At its meeting in related reserve paths during the period early July, the Committee agreed that its before the next meeting is likely to be objectives would be furthered by reaf- associated with a federal funds rate perfirming the monetary growth ranges for sistently outside a range of 10 to 14 the period from the fourth quarter of percent. 1980 to the fourth quarter of 1981 that it had set at the February meeting. These Votes for this action: Messrs. ranges included growth of Vh to 6 per- Volcker, Boehne, Corrigan, Gramley, cent for M-1B, abstracting from the im- Keehn, Partee, Rice, Schultz, Mrs. pact of flows into NOW accounts on a Teeters, and Mr. Wallich. Votes nationwide basis, and growth of 6 to 9 against this action: Messrs. Solomon percent and 6!/2 to 9Vi percent for M-2 and Boykin. and M-3 respectively. The Committee recognized that the shortfall in M-1B Mr. Solomon dissented from this growth in the first half of the year partly action because he felt it was particureflected a shift in public preferences toward other highly liquid assets and that larly important at the beginning of an growth in the broader aggregates had annual target period that the Com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 FOMC Policy Actions mittee not formulate its directive in to $4 billion the limit on changes terms that conveyed an unrealistic between Committee meetings in sense of precision. In his view, the System Account holdings of U.S. directive language referring to the government and federal agency se- November-to-March growth rates in curities specified in paragraph l(a) of M-l and M-2 did seem to convey the authorization for domestic open such a sense. market operations, effective immedi- Mr. Boykin dissented from this ately for the period ending with the action because he favored specifica- close of business on February 2, tion of somewhat lower rates for 1982. growth in the monetary aggregates Votes for this action: Messrs. from November to March. For M-2 Volcker, Solomon, Boehne, Boykin, in particular, he stressed the desir- Corrigan, Gramley, Keehn, Partee, ability of specifying a rate no higher Rice, Schultz, Mrs. Teeters, and Mr. than the range of 6 to 9 percent that Wallich. Votes against this action: None. had earlier been tentatively adopted for growth over 1982, with a view to avoiding a possible interpretation This action was taken on recomthat the Committee had implicitly mendation of the Manager for Doraised its objective before complemestic Operations. The Manager tion of the current review of the had advised that substantial net sales growth ranges for 1982. of securities were likely to be required during January in order to 2. Authorization for Domestic absorb reserves that had been pro- Open Market Operations vided over recent weeks to meet At this meeting the Committee seasonal needs for currency in circuvoted to increase from $3 billion lation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

147 Consumer and Community Affairs The year 1981 was one of simplifica- the Board issued a staff commentary tion, consolidation, and reorganization on Regulation Z that replaces indiof the Board's consumer credit regu- vidual interpretations of the regulalations by its Division of Consumer tion; published consumer leasing proand Community Affairs. Under the visions of Regulation Z as a separate Board's ongoing Regulatory Improve- Regulation M; printed a revised and ment Project, all regulations are being simplified Regulation C, implementing reviewed, simplified, and modernized.1 the Home Mortgage Disclosure Act, On March 26, 1981, the Board that is nearly a third shorter, and that published a restructured, shortened, focuses on the most useful disclosure and simplified version of Regulation Z, requirements and those that can be which implements the Truth in Lend- provided at reasonable costs; and ing Act. The Board began work on issued a staff commentary on Regusimplification of this regulation in lation E, implementing the Electronic 1977, while suggesting to the Con- Fund Transfer Act, that sets objecgress that the act be made less com- tive standards for both compliance plex to permit more thorough clarifi- and enforcement. cation and simplification of the Two rulings of the Supreme Court implementing regulation. The Con- strengthened the legal standing of gress responded by passing the Truth Board and staff interpretations of in Lending Simplification and Reform Board regulations.3 On September 8, Act of 1980, after which the Board 1981, the Board, for the first time, rewrote Regulation Z to implement denied an application for expansion the new act. Compared with the old of a bank holding company chiefly version, the new one is 40 percent on the grounds of violations of conshorter; it is easier to use, because of sumer credit laws.4 a complete restructuring; its language On October 7, 1981, the Board is simpler, of plain English easily approved a policy statement and imunderstood yet covering the necessary plementing guidelines for enforcerequirements; and by virtue of a ment of the Equal Credit Opportunity line-by-line reworking, it is completely Act and the Fair Housing Act. These up-to-date and without nonessential actions relate to corrective measures provisions.2 to be taken by state member banks In other regulatory developments, when the most serious violations of these laws occur. 1. For details on these reviews and simplifications, see the section "Regulatory 3. Anderson Bros. Ford v. Valencia, Simplification" in this REPORT. 49 U.S.L.W. 4635 (1981), and Ford Motor 2. Regulation Z was effective April 1, Credit Co. v. Milhollin, 444 U.S. 555 1981, but not mandatory until October 1, (1980). 1982, under legislation, signed into law on 4. The application was by First State December 26, 1981, that postpones the Holding Company, Inc., Joplin, Missouri. mandatory effective date of the Simplifica- See Federal Reserve Bulletin, vol. 67 tion Act. (October 1981), pp. 802^-03. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 Consumer and Community Affairs In 1981, the Board requested each consumer and economic educators Reserve Bank to appoint a Community during 1981. At the Board, teacher Affairs Officer to serve as the princi- workshops were held in conjunction pal contact at the Reserve Bank for with the Maryland Council on Ecoquestions about the Community Rein- nomic Education, and many of the vestment Act of 1977. These officers Reserve Banks began or added to provide banks and neighborhood workshop series. New curriculum organizations with information about units were also made available during the Board's procedures on applica- the year. For example, the Federal tions and handling of protests; they Reserve Bank of St. Louis produced also serve an education function and "Teaching about Credit: Activities as conduits for information regard- for Secondary Classes," and the Mining various community development neapolis Reserve Bank is preparing a programs that are available through teaching package covering credit proboth the public and the private sectors. tection laws and the economics of consumer credit protection. Educational Activities The Federal Reserve Bank of Chi- In 1981, the Board and the Reserve cago began a consumer newsletter Banks continued to provide a variety that was designed to supply educators of educational materials and services with information and with ideas for to consumers and to teachers, expand- classroom use. ing a Systemwide effort to help both Two films on consumer credit conconsumers and creditors comply with tinued to be popular during the year. and make use of the consumer credit They were UEFT: At Your Service," protection laws. seen by about three-quarters of a About a million copies of the million viewers, and "To Your Consumer Handbook to Credit Pro- Credit," which reached an audience tection Laws, now in its fifth printing, of about two million. were distributed, many in quantity to In addition, the Board undertook consumer organizations and for class- a new program, as described in the room use, and many to individuals following section "Truth in Lending," through the network of the Govern- to help creditors comply with the ment Services Administration's Con- simplified Regulation Z. sumer Information Center in Pueblo, Colorado. About a million copies of Truth in Lending Alice in Debitland, a 16-page booklet explaining consumer protections under This 13th Annual Report on the the Electronic Fund Transfer Act, Truth in Lending Act summarizes were also distributed, as were more the efforts in 1981 of the Board of than a million copies of a series of Governors of the Federal Reserve consumer pamphlets explaining indi- System to simplify its truth in lending vidual aspects of the consumer credit rules, to minimize compliance burlaws, such as credit-card use, equal dens, and to educate creditors and credit opportunity, and ways to file a regulators about truth in lending. It consumer credit complaint. also discusses compliance with the The Board and the Reserve Banks act, uniform enforcement policies, also expanded their efforts to reach actions of the Consumer Advisory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 149 Council, legislation affecting the act, issued on October 9, 1981, as "Offiand legislative recommendations. cial Staff Interpretation TIL-1" (46 F.R. 50288), will be updated and The Revised Regulation revised as necessary and will substitute for individually issued interpre- After enactment of the Truth in Lendtations. ing Simplification and Reform Act, The Board contemplates keeping a revised Regulation Z was issued by revisions to both the regulation and the Board on April 7, 1981 (46 F.R. the commentary to a minimum to re- 20848). The new regulation reduces duce the creditors' burden of keeping burdens on creditors while preservtrack of frequent changes. However, ing the rights of consumers to inforthe Board recognizes that new credit mation needed to compare the costs practices, new court cases, and other of credit. It represents the culminarapidly evolving developments in the tion of several years of effort to credit industry may create a need for reduce the difficulties of compliance, changes in the truth in lending law to clear up troublesome ambiguities and Regulation Z. that had been the source of much litigation, and to make credit dis- Education closures more meaningful to consumers. In May, the Board launched a System- One of the most important con- wide program to help creditors and tributions both to cutting compliance agency personnel understand the new costs and to insuring clear presenta- truth in lending rules and to plan comtion of disclosures is the inclusion of pliance and enforcement procedures model disclosure forms. The forms in advance of the mandatory compliassure compliance with the act pro- ance date of October 1, 1982. The vided they are properly used by credi- teaching device used was a slide pretors. They give a precise format to sentation of major changes in the follow as well as clear guidance in rules that affect the practices of credipresenting information to creditors tors. At the outset, Board staff memwho prefer to design their own forms. bers presented the program to about Other major aspects of the Board's 5,000 supervisory agency personnel effort to reduce compliance burdens and creditors at the Federal Reserve include the adoption of clear-cut Banks and, later, in other presentarules that the Board hopes will re- tions, to about 8,000 creditors. Using quire less interpretation and thereby the same presentation package, each reduce litigation, and the use of Reserve Bank then launched its own "plain English" in the regulation. The regional effort. By the end of Noregulation, which is now 40 percent vember, the Federal Reserve Banks shorter than it was, was also reorga- had reached an additional 22,000 nized to make it easier to use. In people. Thus, by the end of the year, addition, the Board has integrated the System had presented the prothe interpretations of Regulation Z, gram to about 35,000 people. unofficial and official staff opinions In addition, the Reserve Banks as well as formal Board interpreta- have distributed copies of the pretions, into a commentary on Regu- sentation script to the public upon lation Z. This single document, request. More than 400 copies of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 Consumer and Community Affairs the script have been sent to banks, Two cease-and-desist orders for savings and loans associations, credit violations of the act, one by the Board unions, retailers, lawyers, and regu- of Governors and the other by the latory personnel who have used them FDIC, were issued in 1981. for internal training and other pur- Summaries of examination findings poses. compiled by the Board of Governors, A condensed videotape of the pre- the FDIC, the FHLBB, the OCC, sentation is available on loan from and the NCUA indicate that the most the Board of Governors and the Fed- frequent violations involve the faileral Reserve Banks of Boston, Rich- ure to (1) use required terms such as mond, and Cleveland. The System is "total of payments" and "balloon payexperimenting with videotape tele- ment," (2) disclose properly the payconferences in an effort to make the ment schedule, (3) disclose the corpresentations widely available at a rect annual percentage rate or finance reasonable cost. charge, (4) disclose properly the "amount financed," using that term, and (5) describe adequately any Compliance property that secures credit. The The five federal agencies that super- Board anticipates that use of the vise financial institutions reported sub- model forms by creditors and the stantial compliance in 1981 with the increased flexibility of the revised "old" Regulation Z. About 25 per- regulation should help reduce noncent of the institutions examined compliance in most of these areas. were in full compliance, and 56 per- The Civil Aeronautics Board cent were found to be in violation of (CAB), the Farm Credit Adminisno more than a few provisions of the tration, and the Packers and Stockregulation. The Board of Governors, yards Administration reported high the Federal Deposit Insurance Corpo- levels of compliance with the act in ration (FDIC), and the Office of the 1981. However, the CAB entered Comptroller of the Currency (OCC) into consent orders with 10 air carreported slight decreases (ranging riers for failure to credit refunds from 3 to 9 percent) in the percent- promptly to consumers as required age of examined institutions found by the act and by Regulation Z. not to be in compliance. The Federal The Federal Trade Commission Home Loan Bank Board (FHLBB) (FTC) reported that its 1981 project reported no change from 1980 in the to improve compliance with the adnumber of noncomplying institutions; vertising requirements of the act rethat agency, however, indicates a sulted in settlements involving civil 21 percent decrease in the number of penalties with 12 firms in the housing violations discovered. The National industry. The FTC reported that Credit Union Administration (NCUA) compliance with the advertising rereported an 8 percent increase in the quirements appeared to have impercentage of noncomplying instituproved, perhaps because of the pubtions; this increase may be attributlicity of these settlements. The able to the more thorough checking commission also entered into consent made possible by NCUA's relatively agreements with an automobile dealer new and separate examination proand a retail business involving truth gram dealing with consumer affairs. in lending advertising rules and Fair Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 151 Credit Billing Act requirements re- lation, gross negligence, or a willful spectively. violation that was intended to mis- The FTC reported that it planned lead the consumer. The agencies to release at the end of 1981 the reported a high degree of voluntary results of its investigation to deter- restitution by the institutions they mine whether creditors are giving supervise; since March 1980, approxiconsumers accurate disclosures of mately 1,800 institutions have reimcredit costs. The FTC also reported bursed $4.7 million on an estimated continued evidence that some credi- 128,000 accounts. These figures intors orally contradict the written dis- clude reimbursements made in conclosures that credit accident and life nection with violations cited before insurance in closed-end credit trans- enactment of the restitution proviactions is voluntary, as well as con- sions. tinued consumer complaints suggesting that compliance with the Fair Credit Billing Act has not measurably Consumer Advisory Council increased. With regard to the Con- In 1981, the Federal Reserve's Consumer Leasing Act, the FTC has sumer Advisory Council met four focused on seeking voluntary correc- times to discuss consumer-related tions of individual violations, rather issues, including truth in lending rules than on conducting investigations, be- and enforcement. The council discause of difficulties in distinguishing cussed the use of estimates in credit between the consumer leasing and disclosures, the unit-cost disclosure the business leasing of lessors. of credit insurance charges, the tolerances for annual percentage rates and finance charges, the model forms, Uniform Enforcement Actions the Regulation Z commentary, and Since July 1980, the five federal agen- the preemption of state law by the cies that make up the Federal Finan- Truth in Lending Act. cial Institutions Examination Council In April, the council adopted a (FFIEC)5 have been enforcing the resolution urging the Board to defer restitution provisions of the act, using requests for integrating the errora policy guide that was developed by resolution and liability requirements the Task Force on Consumer Com- of the Truth in Lending and the Elecpliance for the FFIEC and was later tronic Fund Transfer Acts. The resoadopted by all the agencies. These lution suggests no changes be made provisions require that agencies or- until the Permanent Editorial Board der creditors to adjust the consumer's for the Uniform Consumer Code sets account in cases in which annual per- forth a final version of its proposed centage rates or finance charges are Uniform Payments Code for considunderstated as a result of a clear and eration by the states. consistent pattern or practice of vio- In September, the council's committee on legislation advised the 5. The FFIEC is the Board of Governors Board that it believed real estate of the Federal Reserve System, the Federal brokers who arrange financing by Deposit Insurance Corporation, the Federal sellers more than five times a year Home Loan Bank Board, the Office of the Comptroller of the Currency, and the Na- should be required to provide truth tional Credit Union Administration. in lending disclosures. (As is dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 Consumer and Community Affairs cussed more fully in "Proposed the Truth in Lending Act is now be- Amendments" below, the Board ing considered by the Congress. The proposed in October 1981 that the proposed Financial Institutions Reterm "arranger of credit" be so structuring and Services Act of 1981 amended in the revised Regula- (S. 1720, 97th Congress, 1st Session) tion Z.) would allow the Truth in Lending Act to supersede similar state laws (sec- Amendments tion 704(b)), would delete coverage of "arrangers" under the act (sec- The Cash Discount Act, amendments tion 703), and would provide that a to the Higher Education Act, and the creditor is not civilly liable under the International Banking Facility Deact unless its actions reflect "substanposit Insurance Act, which were tial noncompliance" (section 705(a)). passed after the Truth in Lending Simplification and Reform Act, have Proposed Amendments affected certain requirements in that statute. Section 101 of the Cash Dis- The revised Regulation Z defines an count Act (Public Law 97-25, July arranger of credit as a person who 27, 1981) exempts cash discounts regularly arranges for the extension from disclosure as finance charges of consumer credit by another perunder the Truth in Lending Act when son if (1) a finance charge may be such discounts are offered to custom- imposed for that credit, or the credit ers who pay cash instead of charg- is payable by written agreement in ing a purchase on a credit card or on more than four installments (not inan open-end credit account. Sec- cluding a downpayment); and (2) tion 201 of the Cash Discount Act the person extending the credit is not reimposes the prohibition against a creditor. Because of an increase surcharges on credit card use until in seller-financed mortgage loans and February 27, 1984. because of the importance of con- The Higher Education Act (Pub- sumer disclosures in such transaclic Law 97-35, August 13, 1981) tions, the Board proposed on Octoprovides that lenders charging a 5 per- ber 23 an amendment to the new cent origination fee on student loans regulation (46 F.R. 51920). The should not consider the fee in calcu- amendments would cover most mortlating the annual percentage rate of gage loan brokers who arrange sellerthe loan and in making other truth in financed transactions. It would clarify lending disclosures (section 536(a) the meaning of the term "arrange." (4)). These changes are reflected in Persons would be subject to Regularevisions to the commentary on Reg- tion Z if they develop or negotiate ulation Z. credit terms, and if they help to com- Section 301 of Title III of the Inter- plete credit documents, including national Banking Facility Deposit In- sales contracts that spell out the surance Act postpones for six months, terms upon which the seller agrees to until October 1, 1982, the effective provide financing to the buyer. date of most of the provisions of the The Board requested comment on Truth in Lending Simplification and the proposal by December 7, 1981. Reform Act. The proposal was pending at year- Other legislation that may affect end. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 153 Legislative Recommendations Uniform Enforcement Policies The Office of the Comptroller of the On August 10, 1981, the Federal Currency has questioned whether all Financial Institutions Examination the disclosures required by the Truth Council6 proposed a policy statement in Lending Act and by Regulation Z for enforcement of the Equal Credit are necessary. The OCC believes that Opportunity and Fair Housing Acts. the essential disclosures in closed-end The objective of the statement is to transactions are the amount financed, establish a uniform national policy the finance charge, the annual per- to require creditors to take corrective centage rate, the schedule of pay- action for the more serious past vioments, information on assumptions, lations, and to ensure future comand the cost of credit life insurance. pliance. The policy statement was The OCC suggested that these dis- adopted by the Federal Reserve closures remain mandatory and that Board, the Federal Deposit Insurance consumers be referred to other debt Corporation (FDIC), the Office of or loan documents for other costs and the Comptroller of the Currency terms of credit. As an alternative, (OCC), and the National Credit the OCC suggested that the disclosure Union Administration (NCUA) (46 of other information be made op- F.R. 56500, November 17, 1981). tional, and be made available to the The policy statement emphasizes consumer upon request. that the agencies will enforce the The OCC also proposed the inte- acts vigorously, and states that instigration of the Electronic Fund Trans- tutions will be required to establish fer and Truth in Lending Acts so that procedures to prevent repetition of a single ceiling is placed on consumer certain violations that the policy idenliability for unauthorized use of ac- tifies as serious. The policy applies to cess devices and credit cards. The violations that are discovered after OCC recommends that the amount its adoption; when a serious vioof liability be "at a higher level than lation is discovered, the creditor is $50.00." usually required to correct all similar violations that occurred in the 24 months before the discovery of the Equal Credit Opportunity violation. The serious violations identified This fifth annual report on the Equal are discouraging applicants on a pro- Credit Opportunity Act (ECOA) dishibited basis, using credit criteria in cusses the uniform enforcement policy a discriminatory manner in evaluthat was developed by the Federal ating applications, imposing more Financial Institutions Examination onerous terms and requiring co- Council. That policy was designed signers on a prohibited basis, failing to ensure corrective action by finanto provide notice of adverse action, cial institutions whose practices vioand failing to report separate credit late the intent of the Equal Credit histories for married persons. Opportunity and Fair Housing Acts. The report also discusses compliance, rulewriting, and the activities of the 6. See footnote 5 for composition of the Consumer Advisory Council. Examination Council. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 Consumer and Community Affairs To implement the policy statement, 8 percent; the FHLBB, 11 percent; the Examination Council also pro- and the OCC, 20 percent. The NCUA posed a Supervisory Enforcement reported a 16 percent decrease in Policy for the Equal Credit Oppor- compliance, which it attributes to the tunity and Fair Housing Acts. The examination techniques of its new enforcement policy, which has been consumer compliance program. adopted by the Board, the OCC, and The Board issued two cease-andthe NCUA, recommends specific desist orders that addressed equal measures to correct serious violations. credit opportunity matters, and the For example, creditors that have dis- FDIC issued one. criminated illegally are required to The most common violations cited take the following steps: by the agencies were failures (1) to • Identify all applicants who suf- give or to complete properly written fered illegal discrimination in the pre- notices of adverse action; (2) to folvious 24 months. low the requirements about the tim- • Solicit new applications from ing of adverse action notices; (3) to them and allow 60 days for reappli- provide the required disclosures recation. garding "other income" and marital • Describe to the affected appli- status; (4) to observe the provisions cants the conditions for any refunds prohibiting spousal signatures; and or reimbursements. (5) to retain for the required time • Notify any party informed of a period evidence of compliance with rejection that the applicant's credit the act and Regulation B. history should be corrected. • Evaluate the new application Other Agencies using the original credit standards, The Civil Aeronautics Board (CAB) without any discriminatory elements. reported a satisfactory level of compliance among U.S. and foreign airlines in 1981; it received fewer com- Compliance plaints than in 1980, and none Federal Financial Institutions required any formal enforcement ac- Regulatory Agencies tion. The CAB provided consumers The Board, the FDIC, the Federal interested in the ECOA with tele- Home Loan Bank Board (FHLBB), phone information and with approand the OCC reported that com- priate government publications. pliance continued to improve in 1981. The Farm Credit Administration More than half (51 percent) of the (FCA) reported continued good examined institutions were found to compliance. The complaints received be in full compliance with Regula- in 1981 did not suggest any distion B. Only 20 percent of the criminatory patterns or practices. examined institutions that were not The Federal Trade Commission in full compliance had violated more (FTC) reported an apparent imthan five provisions. (The regulation provement in compliance. However, contains about 170 provisions that it mentioned that certain requirecould be violated.) The Board re- ments continue to be violated: the ported a 10 percent increase in over- prohibition against requiring spousal all compliance from 1980; the FDIC, signatures; the use of possibly dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 155 criminatory criteria such as ZIP Consumer Advisory Council codes in credit-scoring systems; and The Consumer Advisory Council was the use of vague, rather than speestablished in 1976 to advise the cific, reasons for rejecting applica- Board in carrying out its responsitions. The FTC is also concerned bilities under the Consumer Credit that in both judgmental and credit- Protection Act and in other conscoring systems, some creditors may sumer-related activities. The council disregard, or treat less favorably, inhas 30 members who represent the come derived from sources other interests of consumers and creditors than employment. The FTC is infrom different regions of the country. vestigating whether these practices With regard to equal credit legishave the effect of illegal discriminalation, council members discussed tion against divorced or separated ways to improve the detection of women, elderly persons, and recip- ECOA violations, including the deients of public assistance. velopment and use by creditors of The Interstate Commerce Comwritten loan policies. The council mission (ICC) explained in its report also discussed the extent to which that, of the regulated carriers, those past violations of the act should be that transport household goods, and considered under the enforcement thus deal with individuals rather than policy developed by the Examination business firms, would be most likely Council and the ways creditors to violate the ECOA. Nonetheless, should be required to remedy the that agency said that it has never violations, and the advantages and received a complaint from a shipper disadvantages to consumers and credinvolving the discriminatory denial of itors of judgmental and numerical credit by such a carrier. credit-scoring systems. The Securities and Exchange Commission (SEC) reported substantial Rulewriting compliance with the ECOA. It brought no enforcement actions and In 1981, the Board continued to received no formal complaints. analyze various issues related to two The Small Business Administra- proposed regulatory interpretations tion (SBA) reported no enforcement (45 F.R. 56818) and two proposed problems and good compliance. The amendments to Regulation B (43 SBA's monitoring efforts were ex- F.R. 49987). The Board expects to panded in 1981 to include service- take final action on the proposals in oriented borrowers, such as doctors early 1982. and attorneys. One proposed interpretation con- The U.S. Department of Agricul- cerns the consideration of income by ture reported substantial compliance creditors. The second is related to by creditors subject to the Packers the way a creditor that uses a creditand Stockyards Act. No complaints scoring system should select and diswere received and no enforcement close the principal reasons for denying actions were initiated. credit. None of the agencies, including The first proposed amendment rethe Board, has legislative recommen- lates to the business-credit exempdations. tion from recordkeeping and noti- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 Consumer and Community Affairs fication requirements and would mortgage disclosure statement to their modify the rules for business loans primary federal regulatory agency; under $100,000. The other pro- (2) require covered institutions to posed amendment would have the display a notice in their lobby about effect of making all business-credit the availability of information on the transactions subject to the prohibi- institution's mortgage lending; (3) tion against requesting information permit the use of either 1970 or 1980 on marital status. Under the cur- census tracts as a basis for reporting, rent regulation, such transactions are pending full availability of 1980 cenexempt from that prohibition. sus tract maps from the Bureau of the Census; (4) require itemization of data by census tract and county (rather than by census tract and ZIP Home Mortgage Disclosure code); (5) permit most institutions The Board of Governors of the Fed- that have lost an exemption held on eral Reserve System implements the grounds of size or location to begin Home Mortgage Disclosure Act of compiling data for the year following 1975 (HMDA) through its Regula- the year of the loss (rather than for tion C (Home Mortgage Disclosure). the year preceding it); (6) require The act, which requires financial in- disclosure of conventional loans and stitutions that have assets of more of loans such as Federal Housing than $10 million and offices in stan- Administration, Farmers Home Addard metropolitan statistical areas ministration, and Veterans Adminis- (SMSAs) to disclose publicly the tration loans, but not (as previously location of their residential mortgage required) the sum of the conventional loans, was reenacted with certain and other types of loans; (7) avoid amendments on October 8, 1980. duplicate reporting of loans by a On February 10, the Board pub- branch and a head office of a lending lished a proposed version of Regula- institution located in the same SMSA; tion C (46 F.R. 11780). After and (8) limit reporting by branch analyzing about 225 comments that it offices to data on loans made on had received, the Board adopted, on property in the SMSA where the July 31, a revised and simplified ver- branch is located. sion of the regulation (46 F.R. In keeping with the statutory man- 40679). Most of the provisions were date, the Board has issued a revised effective upon adoption. In keeping HMDA-1 form to be used for diswith the purposes of the Board's closure and reporting purposes by all Regulatory Improvement Project, the institutions subject to Regulation C. revised regulation is nearly a third The form was reviewed and approved shorter than the earlier version, and its by the Office of Management and language is simpler and more concise. Budget, as required under the Paper- The principal revisions to the regu- work Reduction Act (Public Law lation (1) require depository institu- 96-511). tions to use a standard format pre- Finally, a statutory amendment to scribed by the Federal Reserve Board the act provides for a system of cento disclose the required information, tral data repositories in each SMSA and to submit copies of their home and also for the annual aggregation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 157 of mortgage loan data to cover all 1. Consumer Complaints Received by the Federal Reserve System, by institutions in each SMSA. Subject, 1981 Federal Trade Commission Act Subject Number Under section 18 (f) of the Federal Regulation B (Equal Credit Trade Commission Act, the Board of Opportunity) 696 Regulation C (Home Mortgage Governors of the Federal Reserve Disclosure) 6 System has certain responsibilities: Regulation E (Electronic Fund Transfers) 66 (1) to identify unfair or deceptive Regulation Q (Interest on Deposits) 291 banking practices and to adopt regu- Regulation X (Securities Credit) — Regulation Z (Truth In Lending) ... 1 lations prohibiting them; (2) to take Regulation BB (Community 623 appropriate action on complaints Reinvestment) Regulation CC (Consumer Credit against state member banks; and Restraint) 4 (3) within 60 days of the effective Fair Credit Reporting Act 1 date of certain rules prescribed by the Fair Debt Collection Practices Act .. • 129 Fair Housing Act 64 Federal Trade Commission, to pro- Transfer agents 2 mulgate regulations for banks that are Municipal securities dealer regulation 35 Unregulated bank practices 1 substantially similar, unless the Board Other1 1,937 57 finds (a) that the acts or practices Total 3,913 covered by the rule are not unfair or 1. "Other" refers primarily to miscellaneous deceptive with regard to banks, or complaints against business entities. (b) that the implementation of simicontact member banks and comlar rules with respect to banks would plainants during the course of an inseriously conflict with essential monevestigation. When necessary, System tary policies or payments system examiners conduct investigations at policies of the Board. the member bank, especially when discrimination appears to be involved. Consumer Complaints Table 1 identifies, by subject, the In 1981, the Federal Reserve System consumer complaints received by the received 3,913 complaints: 2,113 by Federal Reserve System during 1981. mail, 1,754 by telephone, and 46 in The Board's Division of Consumer person (table 1). The total number and Community Affairs is continuing received represents a 12 percent de- to assist the Reserve Banks in hancrease from 1980. dling consumer complaints. Members In responding to consumer com- of the Board's staff regularly review a plaints and inquiries, the staff pro- sample of the correspondence that vided specific explanations about involves complaints resolved by the consumer credit laws, as well as bank Reserve Banks and evaluate the acpolicies and practices. Members of tions of the Banks for adherence to the System's staffs investigated 1,290 System procedures and guidelines. complaints against state member The results of the review are then banks and referred those about credi- discussed with the pertinent Bank. tors or businesses not under the In keeping with its practices, the Board's supervision to the appropriate Board sent follow-up questionnaires enforcement agencies. The System's to consumers whose complaints against procedures require Reserve Banks to state member banks were handled by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 Consumer and Community Affairs the System. The questionnaires asked able; 74 percent, that they were satiswhether the complainants were satis- fied with the promptness in handling; fied with the way the System handled 90 percent, that they were treated their complaints and requested sug- courteously by Federal Reserve staff; gestions for improvement. In 1981, 83 percent, that they would contact consumers returned 89 precent of the Federal Reserve again if they had these questionnaires, a dramatic in- other problems with banks; and 52 crease over previous years: in 1980, percent, that the resolutions of their the return rate was 60 percent; and complaints were acceptable. The proin 1979, it was 67 percent. Approxi- portion of those satisfied with the outmately 75 percent of the respondents come is relatively lower than the reported that the explanations re- proportion of those satisfied with the ceived were clear and understand- System's handling of the complaints 2. Consumer Complaints Received by the Federal Reserve System, by Function and Resolution, 1981 x Type of complaint Total Loan functions Elec- Type of resolution p c la o i m nt - s c D ri i m s- i- Other f D un e c p t o io s n it s t t f r r u o a n n n d i s c - se T r r v u ic s e t s Other nation fers Total complaints 3,913 380 1,534 1,257 71 46 625 Total concerning state member banks 1,290 217 488 349 30 27 179 Insufficient information .. 87 16 19 18 1 1 32 Information furnished — 251 42 116 68 4 10 11 Bank legally correct No accommodation — 398 81 145 96 10 9 57 Accommodation made • 145 25 64 38 4 1 13 Clerical error, corrected .. 125 13 50 41 5 0 16 Factual dispute 32 1 6 16 0 1 8 Bank violation, resolved .. 20 3 6 8 0 0 3 Possible bank violation, unresolved 11 0 2 3 1 14 Customer error 12 1 2 5 0 0 4 Pending December 31, 1981 209 35 78 56 5 4 31 1. The terms used in this table that are not disputes not resolvable by the Federal Reserve self-explanatory are defined as follows: System and contractual disputes that can be Insufficient information. The staff has been resolved only by the courts. Consumers wishunable, after follow-up correspondence with ing to pursue the matter are advised to seek the consumer, to obtain sufficient information legal counsel or legal aid, or to use small to process the complaint. claims courts. Information furnished. When it is apparent Bank violation, resolved. In these cases a that the complainant does not understand the bank appears to have violated a law or regulaw and that there has been no violation on lation and has taken corrective measures the part of the bank, the Federal Reserve Sys- voluntarily or as ordered by the Federal Retem explains the law in question and provides serve System. the complainant with other pertinent informa- Possible bank violation, unresolved. When tion. a bank appears to have violated a law or Bank legally correct, accommodation made. regulation, customers are advised to seek civil In these cases the bank appears to be legally remedy through the courts. Cases that appear correct but chooses to make an accommoda- to involve criminal irregularity are referred tion. to the appropriate law enforcement agency. Factual dispute. These cases involve factual Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 159 because a number of the complaints cent); the release of funds from involved practices that, although ob- accounts (76, or 4 percent); excesjectionable to, or not understood by sive time to clear checks (75, or 4 consumers, are permissible banking percent); refusals to cash checks (70, practices. or 4 percent); rude bank personnel Table 2 summarizes the nature and (60, or 3 percent); and wire transfers resolution of the complaints against (52, or 3 percent). state member banks in 1981. The The two categories of complaints complaints are classified according to that ranked highest in the number bank functions: loans, deposits, elec- received (disputed deposits and distronic fund transfers, trust services, crepancies in accounts) involve facand other. About 41 percent con- tual disputes between the consumer cerned loan functions: 18 percent and the bank in which no faulty pracalleged discrimination on a prohibited tice is clearly indicated. Moreover, basis, and 23 percent dealt with credit each of these "high ranking" catedenial on a nonprohibited basis (such gories represents only a small fraction as length of residency), disclosures of (4 percent or less) of all consumer credit costs, and other general loan complaints received. functions. Approximately 32 percent The Board periodically reviews involved interest on deposits and gen- major complaint categories to detereral practices concerning deposit mine whether they reflect a pattern accounts. of unfair or deceptive practices that should be prohibited by regulation. Identification of In 1981, the Board did not detect any Unregulated Practices such pattern. The Board monitors complaints about Rule Writing and the banking practices that are not subject Federal Trade Commission to existing regulation to focus on those that may be unfair or deceptive. The Board continues to monitor the In 1981, complaints about such un- status of three trade regulation rules regulated practices received by the proposed by the FTC to determine System totaled 1,937, 13 percent the need for substantially similar rules fewer than in 1980. applicable to banks. In August 1981, The Board identified categories in the FTC adopted in final form the which there were 15 or more com- "Used Car Rule," which requires cerplaints per quarter, or 50 annually, tain disclosures by automobile dealers about any unregulated practice. Of engaged in the sale of used motor the 1,937 complaints, 915 fell into vehicles. In September, the Comsuch categories: complaints about mission submitted the rule to the disputed deposits (156, or 8 percent Congress for review pursuant to the of the total complaints about un- legislative-veto provisions of the act. regulated practices); discrepancies in The Congress did not veto the rule, accounts (151, or 8 percent); charges but 90 days of continuous legislative and procedures concerning insufficient session did not pass before adjournfunds (105, or 5 percent); excessive ment. As a result, in January 1982, service charges (85, or 4 percent); the Commission resubmitted the rule debt-collection tactics (85, or 4 per- to the new session of the Congress, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 Consumer and Community Affairs which is also entitled to a 90-day tor the status of the FTC's proposed period. If the rule is not vetoed, it Credit Practices Rule. The rule would will become effective six months fol- prohibit certain contractual terms that lowing expiration of that period. creditors have used when collecting Board responsibilities, if any, would unpaid debts and would require crediarise at that time. tors to make specific disclosures. The The proposed creditor amendment proposal, which was first issued for of the Holder in Due Course Rule is comment by the FTC in 1975, has pending at the FTC. The seller por- been modified to meet some of the tion of the rule has been in effect since technical objections that were raised May 14, 1976; the amendment would during hearings held by the Commisextend the requirements of the rule to sion in 1977 and 1978. On June 4, nonseller creditors. The purpose of 1981, the FTC issued the summary of the rule, as described by the FTC, is comments received in the post-record to ensure that no legal device inter- comment period on the Presiding feres with a seller's duty to perform Officer's Report and the Final Report its responsibilities when a consumer of the Staff on the proposed rule. The has agreed to pay for goods. rule has not yet been issued in final The Board also continues to moni- form by the FTC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

161 Legislative Recommendations The Board of Governors has made The proposed amendment would rethe following recommendations for lieve the reserve burdens on smaller legislation to the Congress of the depository institutions without signifi- United States. cantly affecting the Federal Reserve's ability to conduct monetary policy. Reserve Requirements on Another approach would be to ex- Money Market Mutual Funds empt from reserve requirements the first $2 million of deposits of all The Board has recommended that the depository institutions. Congress amend the Monetary Control Act of 1980 to authorize the Federal Reserve to impose reserve re- Helping Regulatory Agencies quirements on money market mutual to Deal with funds that can be used for third-party Ailing Depository Institutions payment or transaction purposes. The Board has recommended that the The Monetary Control Act ex- Congress give the federal financial tended reserve requirements on transregulatory agencies greater authority action balances to all depository to deal with the unusual financial institutions to improve the Federal pressures that many depository insti- Reserve's ability to control the money tutions now face. The legislation aims supply. However, the rapid growth at (1) increased flexibility in adminisof money market mutual funds since tering federal deposit insurance funds, passage of the act has had strong (2) transitional assistance to thrift implications for the competitive posiinstitutions during a period of finantions of depository institutions and cial stress, and (3) broadened merger could result in serious complications possibilities, designed to minimize the for the conduct of monetary policy. cost impact on the federal insurance Imposition of reserve requirements funds, while assisting the maximum on those funds that can serve as number of institutions. transaction accounts is consistent with The proposal (1) would permit the the premise of the Monetary Control Federal Deposit Insurance Corpora- Act and would remove an artificial tion to provide assistance when seincentive favoring money market vere financial conditions threatened funds over traditional depository instithe stability of a significant number tutions. of insured institutions, provided that such assistance would avert or sub- Exemption of Smaller Institutions stantially reduce the risk of loss to from Reserve Requirements the insurance fund; (2) would ex- The Board has recommended that the pand the powers to facilitate conver- Congress amend the Monetary Con- sion of mutual organizations to stock trol Act to exempt depository institu- form to make mergers with stock tions with less than $5 million in organizations easier, and as a last deposits from reserve requirements. resort, would permit acquisition of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 Legislative Recommendations thrift institutions by healthy out-of- to permit the financial regulatory state thrift institutions or bank hold- agencies to set a limit that is based ing companies; and (3) would provide on economic conditions at the time; limited power for the FDIC to arrange and (2) to modify the requirement an interstate merger of a large failing that a majority of the board of direccommercial bank when an intrastate tors give prior approval for loans merger would be neither possible nor totaling more than $25,000 to execudesirable. tive officers and other insiders. The suggested amendment would provide a flexible loan limit that could be Amendments to the Financial adjusted periodically as economic Institutions Regulatory and conditions change; it would also per- Interest Rate Control Act of 1978 mit the board of directors to delegate The Board has recommended amend- the authority to approve such loans ments to the Financial Institutions to a loan committee or an executive Regulatory and Interest Rate Control committee of board members, thereby Act of 1978 (FIRA) to ease re- simplifying the present cumbersome quirements that are unnecessarily procedure. burdensome, to correct procedural • Amendment of section 22 (h) of problems, and to contribute to the the Federal Reserve Act to permit a efficient enforcement of the act. The member bank to pay an overdraft on Board's recommendations for 1981 an executive officer's or director's accomprise the following major ele- count at such bank. This amendment ments: would place insiders on an equal foot- • Elimination of the maximum ing with other bank customers who amount in section 22 (g) of the Fed- already have overdraft privileges. eral Reserve Act on a member bank's • Amendment of section 106(b) loans to its executive officers for the of the Bank Holding Company Act to purchase of a home or education of eliminate the reporting by banks of children, and replacement of the loans they make to insiders at banks $10,000 limit on other kinds of loans with which they maintain a correwith authority for the financial regula- spondent relationship. This requiretory agencies to set an appropriate ment is not justified by its limited limit based on prevailing economic benefits to the supervisory authoriconditions. ties. • Elimination of the requirement • Amendment of section 106 (b) contained in section 22 (g) of the of the Bank Holding Company Act to Federal Reserve Act that a member extend the prohibitions against prefbank file a quarterly report on loans erential loans to individual executive to its executive officers. This require- officers, directors, and principal ment duplicates the annual reporting shareholders of banks that maintain provisions of FIRA. correspondent balances with the lend- • Amendment of section 22 (h) of ing bank to related interests of such the Federal Reserve Act (1) to re- individuals. The amendment would move the $25,000 limit above which close an apparent loophole in the loans to executive officers and other law. insiders must be approved by a • Deletion of section 7(k) of the majority of the board of directors and Federal Deposit Insurance Act, which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislative Recommendations 163 requires annual disclosure of a bank's sored and advised by a banking principal shareholders and of exten- organization; and (3) to expand the sions of credit by the bank or its types of collateral permitted on bank correspondents to those shareholders loans and extensions of credit to and to executive officers of the bank. affiliates, while requiring that these Review of insider loans is a routine new types of collateral have a high practice at all examinations, and the value relative to the loan. costs of preparing this report are not justified by the benefits for super- Expansion oi" Class i' Directors vision and public disclosure. The Board has submitted to the Congress draft legislation to increase the Financial Transact ions number of Class C directors at each with Affiliates Federal Reserve Bank from three to During 1976 and 1977, the Board five. The proposal aims to diversify conducted a major review of section further the backgrounds and interests 23A of the Federal Reserve Act. represented on the Reserve Banks' Section 23A is designed to protect boards of directors as a way of member banks from abuse by restrict- accomplishing one of the objectives of ing non-arm's-length financial trans- the Federal Reserve Reform Act of actions between these banks and affili- 1977. That act provides for the repated companies. The Board's review resentation of the interests of conof this statute was prompted in part sumers, labor, and services, in addiby the discovery that several large tion to agriculture, commerce, and banks had been adversely affected by industry on the boards of the Reserve transactions with their affiliates. Banks. One of the Board's major conclusions is that bank transactions with Amendments to the affiliates within the statutory limits International Banking Act have not caused substantial instability in the banking system. At the The International Banking Act of same time, the Board finds some flaws 1978 (IBA) required the Board to in the present statute: (1) it is in- report to the House and Senate ordinately complex; (2) it contains Banking Committees within two years some potentially troublesome loop- of the date of enactment its recomholes; and (3) it appears to be un- mendations to improve the impleduly restrictive in several ways. mentation of the act. The act To correct these flaws, the Board provides a federal regulatory framehas recommended amendments to work governing the operations of section 23A: (1) to allow a holding foreign banks within the United company greater freedom to transfer States and also contains statutory funds among its sister subsidiary banks provisions for the organization and but to prohibit a bank from purchas- operations of Edge corporations. The ing low-quality assets from a sister Board has submitted its report to the subsidiary bank; (2) to broaden the Congress recommending that the act definition of affiliate to include real be amended as follows: estate investment trusts and other • To authorize access for Edge financial organizations that are spon- corporations to the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 Legislative Recommendations discount window without requiring of the Congress under section 5 of the them to become members of the Fed- IBA with respect to a change in home eral Reserve System. state. • To authorize the Board to permit • To clarify the provisions of secmajority ownership of Edge corpora- tion 2(h) of the Bank Holding Comtions by a U.S. bank that is controlled pany Act, as amended by the IBA, by foreign individuals. (1) to assure that the requirements • To eliminate the statutory limi- for U.S. nonbanking activities are tation on member-bank investments applicable to direct offices as well as in Edge corporations and authorize to subsidiaries, and (2) to assure that the Board to control aggregate and foreign banking organizations cannot individual investments in Edge cor- conduct U.S. financial operations of porations. the kinds not permissible for domestic • To authorize the Board to im- bank holding companies. pose reserve requirements on all • To permit the banking agencies foreign banking institutions in the to afford confidential treatment to United States, including commercial information obtained from foreign lending companies and agencies of banking organizations that is not disforeign banks with consolidated closed, either by law or by custom, in worldwide assets of less than $1 their home countries. billion. • To authorize the banking agen- • To amend the Bank Holding cies to exchange examination and Company Act so as effectively to other supervisory information with prohibit bank holding companies foreign banking authorities about from acquiring by merger banks out- banks and bank holding companies side their principal state of banking under suitable agreements to maintain operations, and to clarify the intent confidentiality of that information. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

165 Litigation During 1981, the Board of Gover- mits bank holding companies to act as nors was named in forty-three law- investment advisers to, or sponsors of, suits, compared with thirty-three in an investment company that is regis- 1980. Of the actions filed in 1981, tered under the Investment Company five raised questions under the Bank Act of 1940. On March 30, 1979, Holding Company Act, compared the court overturned the Board's with nine in 1980. As of December 31, amendment (606 F.2d 1004). The 1981, fourteen cases were pending, Board applied for and was granted two of which involve the Bank Hold- certiorari by the U.S. Supreme Court ing Company Act. A brief descrip- on February 19, 1980 (444 U.S. tion of each of these cases and of 1070). those disposed of in 1981 follows. On February 24, 1981, the Supreme Court overturned the decision Bank Holding Companies— of the court of appeals. It decided that Antitrust Action bank holding companies could act as investment advisers to closed-end in- In 1981, the U.S. Department of vestment companies without violating Justice filed no challenges under the the Glass-Steagall Act and that such antitrust laws of the United States to services were closely related to bankacquisitions by registered bank holding under the Bank Holding Coming companies or to bank mergers pany Act (450 U.S. 46). that had been approved previously In Security Bancorp et al. v. Board by the Board, and no such cases are of Governors, Nos. 78-1581 and 78pending from previous years. 2031 (9th Circuit, filed March 17 and May 12, 1978), petitioners chal- Bank Holding Companies— lenged the Board's denial of Security Review of Board Actions Bancorp's application to become a In Investment Company Institute v. bank holding company through the Board of Governors, No. 77—1862 acquisition of Security National Bank, (D.C. Circuit, filed September 23, Walnut Creek, California {Federal 1977), petitioner sought judicial re- Reserve Bulletin, volume 64, May view of a Board order, dated Au- 1978, page 405). On October 27, gust 31, 1977 {Federal Reserve Bul- 1980, the court of appeals issued an letin, volume 63, September 1977, opinion ordering the Board to appage 856); that order denied its peti- prove the application (655 F.2d 164), tion for reconsideration and rescission and on April 10, 1981, denied a moof a portion of the Board's January tion by the Board to vacate the 1972 amendment to Regulation Y judgment because of mootness (id.). {Federal Register, volume 37, 1972, On December 14, 1981, the Supreme page 1463). Citing the Glass-Steagall Court granted the Board's petition for Act, petitioner challenged the validity certiorari, vacated the opinion of the of the Board's amendment, which per- court of appeals as moot, and re- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 Litigation manded the case to the Board with findings to show that a violation of instructions to vacate its order as the antitrust laws would occur if the moot. application were approved. In County National Bancorporation In Republic of Texas Corp. v. et al. v. Board of Governors, No. 79- Board of Governors, No. 80-1985 1783 (8th Circuit, filed September 18, (5th Circuit, filed September 11, 1979), petitioners challenged the 1980), petitioner challenged a Board Board's order of August 27, 1979 order of August 20, 1980 (Federal (Federal Reserve Bulletin, volume 65, Reserve Bulletin, volume 66, Septem- September 1979, page 763), denying ber 1980, page 787), denying petipetitioners' application to acquire TG tioner's application to acquire the Bancshares Co., St. Louis, Missouri, Citizens National Bank of Waco, a multibank holding company. Waco, Texas. Petitioner claimed that On September 3, 1980, the court the application should be granted by held that the Board could not deny operation of law because of the approval of an application to acquire Board's alleged failure to act within a bank under section 3 of the Bank 91 days of receipt of the application. Holding Company Act for anticom- Petitioner also claimed that the petitive effects unless those effects Board's order was not supported by amounted to a violation of the anti- substantial evidence. On June 24, trust laws. The Board was granted 1981, the court of appeals vacated the a rehearing en bane on October 10, Board's order, and on July 16, 1981, 1980. On July 31, 1981, the court it remanded Republic's petition to the en bane agreed with the earlier panel Board for reconsideration (649 F.2d decision, vacated the original Board 1026). The court held that the Board order, and remanded the case to the had acted in a timely fashion under Board to reconsider the application the Bank Holding Company Act but de novo (645 F.2d 1253). that the Board's findings were not suf- In Mercantile Texas Corporation v. ficient to support a denial based on a Board of Governors,No. 80-1528 (5th violation of the antitrust laws. Circuit, filed May 15, 1980), peti- In Independent Insurance Agents tioner requested that the court review of America, Inc., and Independent a Board order (Federal Reserve Bulle- Insurance Agents of Virginia v. Board tin, volume 66, May 1980, page 423) of Governors, No. 80-1611 (4th Cirdenying petitioner's application to cuit, filed September 15, 1980), petiacquire PanNational Group, Inc., El tioners sought review of a Board order Paso, Texas. On February 25, 1981, dated July 24, 1980 (Federal Reserve the court vacated the Board's order, Bulletin, volume 66, August 1980, and on July 10, 1981, remanded the page 668), approving the application case to the Board for reconsideration of Virginia National Bancshares, (638 F.2d 1255). The court held that Inc., Norfolk, Virginia, to engage in the Board had no authority to deny the sale of credit-related property petitioner's application on the grounds and casualty insurance. Petitioners of anticompetitive effects unless the claimed that the Board's action was effects amounted to a violation of the not supported by substantial evidence antitrust laws. The court held that and that approval could not reasonthe Board had not made sufficient ably be expected to produce benefits Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 167 to the public that outweigh the ad- corp Homeowners, Inc., Des Peres, verse effects. Petitioners also claimed Missouri. On March 3, 1981, the that the Board's denial of their request court granted the Board's motion to for a hearing was unlawful. On dismiss the case. April 29, 1981, the court of appeals In Wilshire Oil Company of Texas affirmed the Board's order, holding v. Board of Governors, No. 80-2568 that there was substantial evidence of (D.C. Circuit, filed December 24, benefits to the public and that no 1980), petitioner sought judicial rehearing was necessary because no view of a Board determination dated material facts were in dispute (646 November 17, 1980, that petitioner F.2d 868). continued to be a company subject to In Independent Insurance Agents the Bank Holding Company Act notof America, Inc., and Independent withstanding that petitioner's subsidi- Insurance Agents of Missouri v. Board ary bank, Trust Company of New of Governors, No. 80-1879 (8th Cir- Jersey, reserved the right to require cuit, filed September 19, 1980), peti- 14 days' advance notice of withdrawal tioners sought review of a Board order from its demand deposit accounts. dated August 22, 1980 {Federal Re- Petitioner also brought an action in serve Bulletin, volume 66, September the U.S. District Court for the District 1980, page 799), approving the appli- of New Jersey for declaratory and cation of Mercantile Bancorporation, injunctive relief against an enforce- St. Louis, Missouri, to engage in the sale ment proceeding arising out of the of credit-related property and casualty Board's determination (Wilshire Oil insurance. Petitioners claimed that Company of Texas v. Board of Govthe Board should have held a formal ernors, et al., No. 80-4156, D.N.J., hearing on the application to deter- filed December 31, 1980.) These mine whether approval could reason- cases were dismissed after an agreeably be expected to produce benefits ment between the parties. to the public that outweigh the ad- Pursuant to this agreement, the verse effects. On September 1, 1981, Board issued, on April 2, 1981, its the court of appeals vacated the final order under the Bank Holding Board order and remanded the case to Company Act and the Financial Instithe Board for a formal evidentiary tutions Supervisory Act, in which the hearing (658 F.2d 571). The court Board determined that petitioner conheld that there were unresolved issues tinued to be subject to the Bank Holdof material fact regarding the appli- ing Company Act. Petitioner sought cation that necessitated a formal hear- review of that order in the U.S. Court ing. On November 16, 1981, the of Appeals for the Third Circuit. On court denied the Board's petition for December 31, 1981, the court of a rehearing en bane (664 F.2d 177). appeals affirmed the Board's order. In Martin-Trigona v. Board of (Wilshire Oil Company of Texas v. Governors,No. 80-1739 (D.C. Circuit, Board of Governors, No. 81-1560, filed July 2, 1980), petitioner chal- 3rd Cir., December 31, 1981). On lenged a Board order of June 3, 1980 February 1,1982, the court of appeals (Federal Reserve Bulletin, volume 66, denied petitioner's petition for a re- July 1980, page 587), approving an hearing en bane. application by Citicorp to retain Citi- In Option Advisory Service, Inc. v. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 Litigation Board of Governors, No. 81-4023 (2d March 3, 1981, for plaintiff's failure Circuit, filed February 18, 1981), to prosecute. petitioner challenged the Board's ap- In Merrill v. Federal Open Market proval of the application of Citicorp, Committee et al, No. 75-0736 New York, New York, to acquire (D.D.C, filed May 8, 1975), plaintiff Citibank (South Dakota), N.A. On brought suit under the Freedom of June 5, 1981, the court of appeals Information Act to compel the Comdismissed the case for lack of standing. mittee to disclose immediately upon On December 28, 1981, the U.S. adoption its domestic policy directives Court of Appeals for the Second Cir- and the memoranda of discussion of cuit dismissed Option Advisory Ser- its meetings. Pursuant to 12 C.F.R. vice, Inc. v. Board of Governors, No. 271.5, the Committee routinely delays 81-4174 (2d Circuit, filed September release of the domestic policy directive 24, 1981), a petition to review the adopted at each meeting until shortly Board's order approving the applica- after the next meeting, at which a new tion of Midland Bank Ltd. to acquire directive is adopted. On March 9, Crocker National Bank. On the same 1976, the court ruled that the Comday, the court of appeals dismissed mittee's domestic policy directives Option Advisory Service, Inc. v. must be made available to the public Board of Governors, No. 81-4176 upon adoption and that nonexempt (2d Circuit, filed September 24,1981), portions of the memoranda of discusa petition to review the Board's order sion that can be reasonably segregated approving the application of Credit must also be disclosed to members of and Commerce America Holdings the public upon request (413 F. N.V. to become a bank holding com- Supp. 494). The Committee appealed pany. On January 26, 1982, the the ruling on the domestic policy court of appeals dismissed the petition directive to the U.S. Court of Appeals to review the order approving the for the District of Columbia. That application of J.P. Morgan & Co. to court, on November 10, 1977, acquire a subsidiary in Delaware affirmed the ruling of the district court (Option Advisory Service, Inc. v. (565 F.2d 778). The Board then Board of Governors, No. 81-4248, filed a petition for a writ of certiorari 2d Circuit, filed December 18, 1981). with the U.S. Supreme Court. On June 28, 1979, the Supreme Other Litigation Involving Court vacated the decision of the Challenges to Board court of appeals and remanded the Procedures and Regulations case to the district court for considera- In a case related to the failure of the tion of whether immediate disclosure United States National Bank, San of the Committee's domestic policy Diego, California, Roberts Farms, directives would significantly harm Inc. v. Comptroller of the Currency the U.S. government's monetary policy et al, No. 75-0268 (S.D. Cal., filed functions or its commercial interests; November 20, 1975), plaintiff sought if it would do so, the Committee's damages on the grounds that the fed- present policy of delaying public diseral bank regulatory agencies negli- closure of each directive until a new gently supervised the bank. This case directive is in force would be consiswas dismissed without prejudice on tent with the Freedom of Information Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 169 Act (443 U.S. 340). On remand, the motion for summary judgment or to two parties filed cross motions for dismiss, arguing that the statute does summary judgment that were sup- not offend the appointments clause ported by extensive affidavits and a and that, in any event, plaintiff lacks stipulation covering most of the perti- standing to sue. On October 26, 1979, nent facts. On June 9, 1981, the the court granted the Committee's modistrict court granted the Committee's tion to dismiss for lack of standing motion for summary judgment (516 (84 F.R.D. 114). Plaintiff appealed to F. Supp. 1028). the Court of Appeals for the District In Emch v. United States et al., of Columbia Circuit, and on June 24, No. 77-C-677 (E.D. Wis., filed No- 1981, the court affirmed the lower vember 18, 1977), plaintiff, a share- court's decision with regard to the holder of the parent company of the issue on standing. On November 30, American City Bank & Trust Co., 1981, the Supreme Court denied N.A., Milwaukee, Wisconsin, a failed plaintiff's petition for a writ of cerbank, alleged that the Board and other tiorari (50 U.S.L.W. 3447). bank regulatory agencies were negli- In Gregory et al. v. Board of Govgent in supervising and examining the ernors, No. 79-1787 (D.D.C., filed bank. On May 8, 1979, the court July 27, 1979), plaintiffs sued under dismissed the case without prejudice, the Freedom of Information Act, and on August 15, 1979, it denied claiming that the Board had implaintiff's motion to file an amended properly withheld portions of a staff complaint. Plaintiff appealed to the memorandum containing staff advice U.S. Court of Appeals for the Seventh information from examination reports Circuit, and on September 12, 1980, and confidential commercial informathe court of appeals affirmed the dis- tion that concerned the acquisition of trict court order (630 F.2d 523). a failed bank in which plaintiffs were Plaintiff's writ of certiorari to the shareholders. On March 3, 1980, the Supreme Court was denied on March court partially granted and partially 2, 1981 (450 U.S. 966). denied each of the cross motions for In Riegle v. Federal Open Market summary judgment (496 F. Supp. Committee et al, No. 79-1073 342). The court upheld the Board's (D.D.C., filed July 2, 1979), plaintiff, position respecting the confidentiality a member of the U.S. Senate, sought of information derived from reports of to enjoin the presidents and first vice examination and the confidentiality of presidents of the Federal Reserve advice given to the Board by its staff. Banks from serving as members of the The court, however, ordered disclo- Federal Open Market Committee and sure of certain information in the to enjoin the Committee from permit- memorandum regarding a particular ting such service. Plaintiff alleged commercial loan. The Board appealed that the provision of the Federal the latter ruling to the U.S. Court of Reserve Act governing appointment Appeals for the District of Columbia of the Reserve Bank members of the Circuit (No. 80-1462). The case was Federal Open Market Committee subsequently settled; and on March 2, violates the Appointments Clause of 1981, pursuant to that settlement, the the Constitution, Article II, Section 2, court of appeals remanded the case to Clause 2. The Committee filed a the district court with instructions to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 Litigation vacate the portion of its order that motion for leave to file an amended directed disclosure of commercial loan complaint after judgment. On Febinformation. On March 3, 1981, the ruary 24, 1981, the court denied the district court vacated those portions motion and some of the requests for as moot (515 F. Supp. 113). attorneys' fees. Plaintiff filed a notice In Gordon v. Board of Governors of appeal with the U.S. Court of et al, No. C79-2052A (N.D. Ga., Appeals for the Fifth Circuit (Nos. filed August 31, 1979), petitioner 81-7099 and 81-7277). On July 14, challenged the action of the Board and 1981, the court of appeals dismissed the Federal Reserve Bank of Atlanta both cases—No. 81-7099 from the in declining to investigate plaintiff's December 2, 1980, order, and No. allegation of fraud by two national 81-7277, resulting from the district banks that acted as trustees for cer- court's denial of February 24, 1981, tain real estate syndications in which of plaintiff's motion to file an amended plaintiff apparently invested and lost complaint—as premature. After an money. evidentiary hearing, attorneys' fees On June 19, 1980, the district court were awarded to one defendant on dismissed plaintiff's petition for a writ September 25, 1981. Plaintiff then of mandamus on lack of standing to appealed to the U.S. Court of Appeals sue and denied a petition for rehear- for the Eleventh Circuit (No. 81ing on July 18, 1980. The Fifth Cir- 8017) and defendants cross-appealed. cuit Court of Appeals affirmed the The appeal is consolidated with the lower court decision on April 28, appeal of No. 81-288A, and oral 1981 (645 F.2d 70), and denied a argument is expected in early 1982. petition for rehearing on May 27, In Gordon v. Board of Governors 1981. Plaintiff then filed a petition et al., No. C80-1362A (N.D. Ga., for certiorari with the U.S. Supreme filed August 18, 1980), plaintiff Court (No. 81-553), which was sought treble damages from the Board denied on November 9, 1981. A and three other defendants for alleged petition for reconsideration was filed violations of RICO. On December 2, on November 25, 1981, and denied 1980, the district court, referring to on January 11, 1982. reasons stated in another case (No. In Gordon v. Heimann et al., No. C80-1265A, Gordon v. Heimann C80-1265A (N.D. Ga., filed July 25, et al.) dismissed No. C80-1362A for 1980), plaintiff sought treble damages failure to state a claim upon which from 43 defendants for alleged viola- relief could be granted. Plaintiff tions of the Securities Act of 1933, filed a notice of appeal to the Fifth the Securities Exchange Act of 1934, Circuit on January 2, 1981 (No. and the Racketeer Influenced and 81-7067); the appeal was dismissed Corrupt Organizations Act (RICO). as premature on July 14, 1981, and On December 2, 1980, the court was not renewed. dismissed the complaint because In Gordon v. Heimann et al., No. it failed to state a claim upon 81-288A (N.D. Ga., filed February which relief could be granted. On 15, 1981), plaintiff seeks damages December 11, 1980, several defen- from 44 defendants for alleged violadants filed for attorneys' fees. On tions of RICO. On May 28, 1981, December 12, 1980, plaintiff filed a the court dismissed the complaint as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 171 being barred by res judicata and thus to modify or vacate the order of plaintiff's complaint failed to state a June 11, 1975. On September 23, claim upon which relief could be 1981, the court of appeals affirmed granted. After an evidentiary hear- the lower court's decision and the ing on July 13, 1981, the court in Board's decision not to modify the its order of September 25, 1981, earlier order. awarded attorneys' fees to all de- In Corbin v. United States, No. fendants filing claims. Plaintiff's mo- 209-80C (Ct. Cl., filed May 5, 1980), tion to vacate the judgment and the plaintiff sought damages as a result award of attorneys' fees was denied. of actions of the Comptroller of the On November 24, 1981, plaintiff Currency, the Federal Deposit Insurappealed the district court's order of ance Corporation, and the Federal September 25, 1981, to the U.S. Reserve Bank of New York with Court of Appeals for the Eleventh respect to the failure of Franklin Na- Circuit (No. 81-8018); this appeal tional Bank. On October 8, 1980, was consolidated with No. 81-8017. defendants filed a motion to dismiss Several defendants cross-appealed the or for summary judgment. On August denial of attorneys' fees in No. C80- 7, 1981, this case was dismissed per 1265A (Gordon v. Heimann et al.). curiam because of absence of no Oral argument is expected in 1982. statutory grounds for plaintiff's re- In Crockett v. United States, quest for damages. No. 80-310-CIV-5 (E.D.N.C, filed In Berkovitz et al. v. Government April 4, 1980), plaintiff sought to of Iran, No. C80-0097-WWS (N.D. enjoin various aspects of the U.S. CaL, filed June 13, 1980), plaintiffs government's fiscal and monetary brought suit against the government policy. On April 8, 1981, the court of Iran for damages arising out of the granted the government's motion to murder of Martin Berkovitz, a U.S. dismiss. citizen, and for imposition of a trust In Roussel v. Comptroller of the with respect to any assets of the gov- Currencyetal.,No. 80-1079 (D.D.C., ernment of Iran subject to the control filed April 29, 1980), petitioner of the United States. In September sought declaratory and injunctive 1981, the court entered a stipulated relief against the Board's order of stay of all proceedings pending further June 11, 1975, prohibiting petitioner order of the court. from participating in any manner in In Otero Savings & Loan Associathe conduct of the affairs of a national tion v. Board of Governors et al., No. bank. On October 27, 1980, the dis- 80-K-1066 (D. Colo, filed August trict court dismissed the case for lack 15, 1980), plaintiff sought declaraof jurisdiction. On November 21, tory and injunctive relief, alleging 1980, plaintiff filed a notice of appeal that defendants exceeded their auwith the U.S. Court of Appeals for thority and acted arbitrarily in refusthe District of Columbia Circuit (No. ing to process plaintiff's drafts through 80-2432). This appeal was consoli- the Federal Reserve clearing and coldated with Roussell v. Board of Gov- lection system. On August 15, 1980, ernors, No. 81-1546 (D.C. Circuit, the district court issued a temporary filed May 20, 1981), a petition for restraining order, and on September 3, judicial review of a Board decision not 1980, issued a preliminary injunc- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 Litigation tion. On November 13, 1981, the U.S. 2314, filed October 24, 1980). The Court of Appeals for the Tenth Cir- petitions for review have been concuit ruled that the preliminary injunc- solidated with the Board's appeals tion was properly granted (665 F.2d from the district court ruling. 275). In Nebraska Bankers Association In A.G. Becker, Inc. v. Board of v. Board of Governors et al., No. Governors et al, No. 80-2175 80-L-257 (D. Neb., filed Septem- (D.D.C., filed August 25, 1980), ber 25, 1980), plaintiff sought action plaintiff seeks declaratory and injunc- for declaratory and injunctive relief tive relief, pursuant to the Govern- against defendants' enforcement ment in the Sunshine Act, against the policy, contained in a policy guide, Board for failing to allow the public with respect to reimbursable violato attend meetings at which the Board tions of the Truth in Lending Act considered a petition filed by plaintiff. and Regulation Z. On July 22, 1981, In an opinion dated November 26, the court dismissed this case because 1980, the court granted in substantial of the plaintiff's failure to exhaust part the Board's motion for summary administrative remedies. judgment, holding that the Board had In 9 to 5 Organization for Women acted properly in closing the meetings Office Workers v. Board of Goverto the public but had failed to provide nors, No. 80-2905-C (D. Mass., filed public notice of meetings at the ear- December 30, 1980), plaintiff sued liest practicable time (502 F. Supp. under the Freedom of Information 378). Plaintiff's appeal is pending Act, claiming that the Board unlaw- (No. 81-1493). fully withheld documents containing In A.G. Becker Inc. v. Board of information regarding a wage survey Governors et al, No. 80-2614 conducted by a consortium of em- (D.D.C., filed October 14, 1980), ployers in Massachusetts. On Deand Securities Industry Association cember 21, 1981, the district court v. Board of Governors et al., No. granted summary judgment for the 80-2730 (D.D.C., filed October 24, Board with regard to certain of its 1980), plaintiffs seek review of a claims of exemption. The court Board statement, dated September 26, ordered that other documents be sub- 1980, denying in part plaintiffs' peti- ject to in camera inspection and held tion that the Board prohibit Bankers that a genuine issue of material fact Trust Company, a state member still existed with regard to the remainbank, from selling third-party com- ing documents. On December 28, mercial paper as an agent of the is- 1981, plaintiff filed for a motion for suer. On July 28, 1981, the district reconsideration of the grant of sumcourt invalidated the Board's state- mary judgment for the Board. ment (519 F. Supp. 602); the Board's In St. Rose v. Volcker, No. 81appeals from the court's ruling (Nos. 0423 (D.D.C., filed February 20, 81-2070 and 81-2058) are pending. 1981), petitioner challenged the ac- Plaintiffs also filed petitions for re- tions of the Board and of the Departview of the Board's statement in the ment of the Treasury relating to the Court of Appeals for the District of fiscal and monetary policy of the Columbia Circuit (No. 80-2258, United States. This case was disfiled October 14, 1980, and No. 80- missed, by motion, on June 12, 1981. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 173 In First Bank & Trust Co. v. lack of standing. On January 21, Board of Governors, No. 81-38 1982, the plaintiffs filed an appeal (E.D. Ky., filed February 24, 1981), with the Court of Appeals for the plaintiff seeks declaratory and injunc- Eleventh Circuit. tive relief with respect to the Board's In American Bankers Association determination that plaintiff was not v. Federal Home Loan Bank Board eligible to qualify for the phasing-in et al, No. 81-1933 (D.D.C., filed of required reserves on deposits that August 18, 1981), plaintiff challenged is applicable to nonmember banks the regulations of the Board of Govunder the Monetary Control Act of ernors and of the Federal Home Loan 1980. The Board's motion for sum- Bank Board governing eligibility remary judgment is pending. quirements for negotiable order of In Riggs National Bank v. Board withdrawal (NOW) accounts at deof Governors, No. 81-1242 (D.C. pository institutions. The court, on Cir., filed March 5, 1981), petitioner September 15, 1981, enjoined the sought review of a Board decision, implementation of regulations promdated March 4, 1981, that denied a ulgated by the FHLBB that permitted petition that the Board take enforce- NOW accounts for governmental ment action in a takeover bid. This units and nonprofit organizations uncase was dismissed on the petitioner's less such groups were also eligible motion of April 3, 1981. for NOW accounts under the rules In People of the State of Arkansas of the Federal Reserve Board. v. Board of Governors, No. C81- In Hall v. Board of Governors, 2044 (W.D. Ark., filed March 30, No. C81-1786A (N.D. Ga., filed 1981), plaintiff protested Board September 28, 1981), plaintiff seeks policies that caused high interest rates. declaratory and injunctive relief and This case was dismissed on the damages in connection with an order Board's motion on August 28, 1981. issued by the Board against a bank In Public Interest Bounty Hunters pursuant to the Financial Institutions v. Board of Governors, No. C81- Supervisory Act of 1966. 1184A (N.D. Ga., filed June 25, In Wolf son v. Board of Governors, 1981), plaintiff alleges that various No. 81-913 (M.D. Fla., filed Septem- Board actions violate the Bank Hold- ber 28, 1981), plaintiff seeks declaraing Company Act and the Glass- tory and injunctive relief and damages Steagall Act. The Board's motion to in connection with an order issued by dismiss, filed September 23, 1981, the Board against a bank pursuant to is pending. the Financial Institutions Supervisory In Bank Stationers Association etal. Act of 1966. v. Board of Governors, No. C81- Two cases involving the System's 1417A (N.D. Ga., filed July 27, employment practices were pending 1981), plaintiffs sought declaratory in 1981. In Bollow v. Board of Govand injunctive relief against the fees ernors et al, No. C76-977 (N.D. established by the Board, pursuant Cal., filed May 12, 1976), plaintiff, a to the Monetary Control Act of 1980, former employee of the Federal Refor automated clearinghouse services. serve Bank of San Francisco, sought On December 22, 1981, the court damages against the Board and that dismissed the complaint because of Bank in connection with the termina- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 Litigation tion of plaintiff's employment. On In Hilliard v. Volcker, No. 76-1655 September 23, 1977, the court (D.D.C., filed December 8, 1976), granted the Board's motion for sum- the district court, on January 12, mary judgment, and on July 13, 1981, 1982, after a remand from the court the Court of Appeals for the Ninth of appeals (659 F.2d 1125), found Circuit affirmed that decision (650 no grounds for plaintiff's claim of F.2d 1093). Plaintiff's petition for discrimination and rendered judgcertiorari is pending (No. 81-1224). ment for the Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

175 Legislation Enacted Increases in Debt Ceiling merchants, and consumers with regard to retail sales, usage, merchant During 1981, the Congress tempocost, and pricing. rarily raised the public debt ceiling 3. Title III, consisting of miscelthree times: to $985 billion through laneous amendments, contains the September 30 (Public Law 97-2, following provisions: approved February 7); to $999.8 bil- (a) Clarifies that a creditor, or lion for September 30 only (Public creditor's assignee, who elects to com- Law 97-48, approved September 30); ply with the terms of the Truth in and to $1,079.8 billion, for the period Lending Simplification and Reform October 1, 1981, through Septem- Act (Public Law 96-221, Title VI), ber 30, 1982 (Public Law 97-49, is subject to the terms in the amended approved September 30, 1981). act that pertain to civil liability. (b) Amends the National Bank C ash Discount Act Act to allow a national bank to con- Public Law 97-25, the Cash Discount tinue, until December 31, 1982, to Act, approved July 27, 1981, contains hold title to real estate that it posthe following provisions: sessed on July 27, 1981, if the real 1. Title I amends section 167(b) estate was carried on its books at of the Truth in Lending Act (1) to nominal value on December 31, 1979, provide that discounts offered to in- and if earnings from the real estate duce payment by means other than are separately disclosed in the bank's an open-end credit plan, as well as a financial statements. credit card, do not constitute finance (c) Allows the President to apcharges; (2) to remove the limitation point a person over sixty-four years on the amount of the discount to old to the post of Surgeon General 5 percent of the regular price; and of the United States. (3) to delete the requirement that the disclosures of availability accord with International Investment Survey Board regulations. This title also Act of 1976 amended section 103 of the Truth in Lending Act to include a definition Public Law 97-33, approved August of regular price and nullified existing 7, 1981, which amends the Interna- Federal Reserve rules. tional Investment Survey Act of 1976, 2. Title II extends a current statu- requires the President to conduct a tory prohibition through February 27, benchmark survey on foreign direct 1984, that forbids a seller in any sales investment in the United States for transaction from imposing surcharges calendar years 1980, 1987, and every on the use of credit cards. fifth year thereafter; and on U.S. Title II also directs the Federal direct investment abroad for calendar Reserve to prepare a comparative years 1982, 1989, and every fifth year study on the effect that charge-card thereafter. The legislation requires transactions have on card issuers, that data on portfolio investments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 Legislation Enacted abroad be compiled each year and an ceived from the Federal Savings and analysis provided to the Congress not Loan Insurance Corporation even if later than July 1 of the following year. the institution offers debt or equity The Secretary of Commerce is re- instruments in exchange for the assisquired to estimate the cost of moni- tance; and it specifies that, for tax toring and compiling data on legisla- purposes, the term mutual savings tion that each foreign country has bank includes stock savings banks. enacted to regulate or restrict foreign Title II contains several other tax investment in that country. measures that are unrelated to financial institutions. 3. Title III concerns savings incen- Economic Recovery Tax Act tives for individuals and, among other of 1981 things, excludes from gross income, Public Law 97-34, the Economic Re- for tax purposes, interest on certain covery Tax Act of 1981, approved savings certificates (all savers certifi- August 13, 1981, consists of eight cates) issued by depository institutitles. tions; allows all individuals to have in- 1. Title I pertains to individual dividual retirement accounts (IRAs); income taxes. It reduces certain tax and excludes from gross income, for rates, adjusts taxes on individuals tax purposes, certain automatically rewho are living abroad, allows indi- invested dividends. viduals who do not itemize to deduct Specifically, Title III provides the charitable contributions subject to following new tax benefits. certain percentage limitations, ex- All savers certificates. Individual tends from eighteen months to two returns may reflect a lifetime excluyears the rollover period for the sale sion from gross income of $1,000— and purchase of a principal residence, $2,000 on joint returns—regardless of and makes certain other adjustments the amount of interest earned or the to tax rates and deductions. tax year in which it was earned, on 2. Title II enacts certain business all savers certificates issued during tax incentives including accelerated the period October 1, 1981-Decemdepreciation schedules, modified in- ber 31, 1982. The certificates must vestment tax credits, incentives for have a maturity of one year, and research and development expendi- have an annual investment yield equal tures, and a reduction in the corporate to 70 percent of the comparable yield tax rates of small businesses. on 52-week Treasury bills, and must It contains provisions concerning be available in denominations of at financially troubled savings and loan least $500. Certain other restrictions associations and allows tax-free merg- apply. ers and reorganizations of such insti- Depository institutions offering all tutions if they are supervised by the savers certificates must place in "qualprimary federal or state regulator. ified residential financing" at least This title allows an acquiring financial 75 percent of the lesser of (1) the institution to use some pre-reorgani- proceeds of all savers certificates that zation tax-loss carryovers belonging are issued in a calendar quarter, to an acquired institution; it permits or (2) "qualified net savings," which an assisted institution to exclude from is the amount by which inflows of its gross income any assistance it re- savings and time deposits exceed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 177 outflows in a calendar quarter. Quali- Overseas Private Investment fied residential financing is generally Corporation Amendment Act understood to be mortgage lending of 1981 on one- to four-unit residential prop- Public Law 97-65, approved Octoerty and participation in secondary ber 16, 1981, provides for the conmarkets for residential mortgages. tinuation, for an additional four years, Individual retirement accounts. Efof insurance and guaranties by the fective January 1,1982, all individuals Overseas Private Investment Corporamay place up to $2,000 per year, and tion of U.S. investments that complemarried couples with one income ment U.S. foreign-assistance programs earner may place $2,250, in an indiand that contribute to the economic vidual retirement account. The prindevelopment of less-developed councipal amount and any interest earned tries. The act makes technical are excluded from gross income. changes in the organization and man- Taxes are deferred until the individagement of the OPIC Board of Direcual begins making withdrawals. Other tors, adds civil strife to the political penalties may apply to premature risks that can be insured, and makes withdrawals or distributions. technical changes in the insurance Other. An exclusion from income program, the guaranty program, and is created for certain dividends reinreporting requirements. vested in public utility stock in the tax years 1982-85; the title also clarifies rules on employee stock owner- George Washington ship plans. Commemorative Coin Act 4. Title IV concerns provisions for Public Law 97-104, the George estate and gift taxes; Title V, tax Washington Commemorative Coin straddles; Title VI, the windfall profit Act, approved December 23, 1981, tax on oil; Title VII, tax administrarequires the Secretary of the Treation; Title VIII, miscellaneous pro- sury to mint and issue before Decemvisions pertaining to fringe benefits, ber 31, 1983, up to ten million onetax-exempt obligations of mass transit half dollar coins to commemorate the and volunteer fire departments, tele- 250th anniversary of George Washphone excise taxes, U.S. real property, ington's birth. The coins, which are and foreign investment companies. to be legal tender, will be sold at a price equal to the costs of production, Defense Production Act and minting, distribution, and promotion, Gold Commission plus a surcharge of not more than Public Law 97-47, approved Septem- 20 percent. Proceeds will be used ber 30,1981, extends the Defense Pro- solely to reduce the national debt. duction Act of 1950, 50 U.S.C. App. 2166(a), to September 30, 1982. Farm Credit Administration Section 301 of the Defense Production Act of 1950 is the basis of guar- Public Law 97-111, approved Deantees of loans for defense produc- cember 26, 1981, makes effective on tion. Public Law 97-47 also extends that date the final regulations issued the due date for the Gold Commis- by the Farm Credit Administration to sion's report to the Congress to implement the Farm Credit Act of March 31, 1982. 1971, as amended by the Farm Credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 Legislation Enacted Act Amendments of 1980. The regu- ing institutions or officials; if a change lations pertain to loan policies and in circumstances occurs, the exempted operations—specifically, special lend- interlock must be terminated within ing programs—and expand the au- 15 months. thority of financial institutions, other (c) Section 302 excludes the than institutions in the farm credit following from the term change in system, to borrow from, and discount circumstances: mergers, acquisitions, with, Federal Intermediate Credit an increase in total assets, the estab- Banks. lishment of one or more offices, and a change in management responsi- International Banking Facilities bilities. Public Law 97-110, approved De- (d) Section 302 also authorizes cember 26, 1981, contains the follow- a 10-year exemption from the restricing provisions: tions of Title II of the Financial In- 1. Title I amends the Federal De- stitutions Regulatory and Interest Rate posit Insurance Act to specifically Control Act of 1978 for an individual exclude from federal deposit insur- who is a management official of a ance coverage all international bank- banking organization and of a noning facility deposits, as defined by the banking organization that becomes a Federal Reserve Board. The act also savings and loan holding company. extends federal deposit insurance cov- Section 303 deals with the Alaska erage to branches of insured banks USA Federal Credit Union. that operate in the Trust Territory of Social Security the Pacific Islands. 2. Title II removes the existing Public Law 97-123, approved Destatutory limitation (20 percent of cember 29, 1981, amends the Omniinvestment portfolio) on purchases bus Budget Reconciliation Act of by the Federal Home Loan Mortgage 1981 to restore through the end of Corporation and the Federal National 1981 the minimum benefit under the Mortgage Association of mortgages Social Security Act, which was elimithat are more than one year old. nated effective October 1981. Thus a 3. Title III contains several amend- person who becomes eligible for oldments. age or disability benefits after Octo- (a) Section 301 postpones the ber 1981, but before January 1982, effective date of the Truth in Lending will continue to be entitled to the Simplification Act (Title VI of the statutory minimum benefit; the ex- Depository Institutions Deregulation tension will be financed, in part, by and Monetary Control Act of 1980) extending a withholding of social seuntil September 30, 1982. curity taxes from the first six months (b) Section 302 amends the of certain forms of sick pay. How- Financial Institutions Regulatory and ever, a person who becomes eligible Interest Rate Control Act of 1978 to for old-age or disability benefits after allow a 10-year exemption for indi- January 1982 will receive benefits viduals who were serving as manage- based solely on actual earnings. ment officials of more than one finan- In addition, this act allows intercial institution before November 10, fund borrowing among the Federal 1978, unless a change in circum- Old-Age and Survivors Trust Fund, stances occurs between the interlock- the Federal Disability and Insurance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 179 Trust Fund, and the Federal Hospital that social security payments to pris- Insurance Trust Fund to ensure that oners may be halted. With regard to they remain solvent. This authority active social security accounts, the expires December 31, 1982. Secretary of the Treasury must also The act also provides criminal report to the Congress, within 90 days penalties for the misuse of social of the act's enactment, on a plan for security numbers. And, to carry out identifying improper payments being a congressional decision in 1980, the made in the name of deceased persons Secretary of the Treasury may obtain to prevent payments from continuing information on prisoners from state after death and being illegally received and federal correctional facilities so by another individual. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 Banking Supervision and Regulation One of the Federal Reserve's princi- State Member Banks pal responsibilities is the supervision The Federal Reserve is the primary and regulation of commercial banking federal supervisor and regulator of organizations. In carrying out its state-chartered commercial banks that duties, the Federal Reserve supervises are members of the Federal Reserve and regulates state member banks; System. At the end of 1981, there bank holding companies and their were 1,020 state member banks, nonbank subsidiaries; international accounting for approximately 7 peractivities engaged in by banks and cent of all insured commercial banks. bank holding companies through Because these banks typically were branches, Edge and Agreement cor- larger than the average, they held porations, or other foreign invest- around 18 percent of all insured comments; and the U.S. banking and non- mercial bank assets. banking activities of foreign banks. State member banks are generally Many of the Federal Reserve's activi- examined every 18 months, except ties are conducted in coordination when significant weaknesses or other with other federal and state regulatory conditions call for more frequent agencies. A description of how the examination. In 1981, System per- System carried out these responsibili- sonnel conducted 873 of these examties during 1981 follows. inations, many of them conducted jointly or concurrently with examiners Supervision for from state regulatory agencies. Safety and Soundness Bank Holding Companies Examinations and Inspections During 1981, the number of bank The on-site review of operations is the holding companies increased by 588 primary mechanism for ensuring the to a total of 3,644. These organizasafety and soundness of financial insti- tions control commercial banks that tutions. Examinations or inspections hold about three-fourths of the total of these operations entail (1) an assets of insured commercial banks appraisal of the quality of the insti- in the United States. tution's assets; (2) an evaluation of Most large bank holding compamanagement, along with internal operations, policies, and procedures; (3) an assessment of the key financial the use of specially trained examiners at the Federal Reserve Banks. These regulafactors of capital, earnings, asset and tory responsibilities are covered in the liability management, and liquidity; "Consumer and Community Affairs" secand (4) a review for compliance with tion of this REPORT. Compliance with applicable laws and regulations.1 other statutes and regulations, which is treated in this section, is the responsibility of the Board's Division of Banking Super- 1. The Board's Division of Consumer and vision and Regulation and of the Reserve Community Affairs handles compliance Bank examiners who check for safety and with consumer and civil rights laws through soundness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 181 nies, as well as small companies with banks that engage in banking in the significant nonbank assets, are in- United States through branches, agenspected at least every 18 months; the cies, commercial lending companies, others are inspected at least every and subsidiary banks. In fulfilling three years. The inspection focuses this responsibility, the Federal Reon the operations of the parent hold- serve uses reports of examination ing company and its nonbank sub- made by the appropriate federal regsidiaries because these entities are not ulatory agency for insured branches examined by the federal banking and for federally chartered branches agencies. During the year, System and agencies, or commercial bank staff conducted 1,119 inspections of subsidiaries; and by the appropriate bank holding companies. state bank supervisory authority for state-chartered branches and agen- International Activities cies. While the states have primary Edge and Agreement corporations. examination authority over state- Edge corporations are chartered by chartered uninsured branches and the Board to conduct an international agencies, the Federal Reserve particibanking business. Agreement corpo- pated in the examination of 124 such rations are state-chartered companies offices in 1981. that enter into an agreement with the During the 1970s, foreign entities Board to limit their operations to rapidly expanded their operations in international banking. During 1981, the United States; today they are a the Federal Reserve conducted 171 significant element in the U.S. bankexaminations of Edge corporations ing system. As of December 31, and their branches and of Agreement 1981, some 193 foreign banks opercorporations. ated 375 state-chartered uninsured Overseas operations of U.S. bank- branches and agencies and 24 ing organizations. Examinations of branches insured by the Federal Dethe international operations of state posit Insurance Corporation, and 35 member banks, Edge corporations, branches and agencies chartered by and bank holding companies are con- the Office of the Comptroller of the ducted at the banking organization's Currency. Foreign banks also owned head office in the United States, where a controlling interest in 55 U.S. subthe ultimate responsibility for over- sidiary banks as of June 30, 1981. seas facilities lies. To verify and sup- Altogether, these foreign banks conplement the results of the head-office trolled 13.6 percent of U.S. banking examinations, on-site reviews of im- assets as of September 30, 1981. portant overseas facilities are performed at least every three years. In 1981, the Federal Reserve ex- Specialized Examinations amined 13 foreign branches of state The Federal Reserve conducts certain member banks and 14 overseas subspecialized examinations as discussed sidiaries of Edge corporations and below. bank holding companies. U.S. activities of foreign banks. Electronic Data Processing The Federal Reserve has broad resid- Examinations ual and oversight authority for the The Federal Reserve examines the supervision and regulation of foreign electronic data processing (EDP) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 Banking Supervision and Regulation activities of state member banks, as nies that act as municipal securities well as independent centers that pro- dealers or as clearing agencies. vide EDP services to these banks. Of the 47 state member banks During the year, System EDP exam- registered with the Board as dealing iners conducted 224 on-site reviews in municipal securities for their tradof state member banks and independ- ing accounts, 36 were examined in ent data centers. In addition, the 1981. Federal Reserve received 75 EDP A clearing agency acts as a custoexamination reports that were pre- dian of securities for the settlement pared by other federal agencies under of securities transactions by bookthe Interagency EDP Examination keeping entries. All four of these Program. agencies that were registered with the Board were examined in 1981; two Trust Examinations examinations were conducted jointly The Federal Reserve examines trust with the Securities and Exchange departments of state member banks, Commission. trust companies that are members of the Federal Reserve System, and certain nondepository trust-company Improvements to subsidiaries of bank holding compa- Examinations and Inspections nies. These examinations determine whether the trust functions are con- During the year, the Federal Reserve ducted in accordance with applicable took a number of steps to enhance its fiduciary principles and with other ap- examination and inspection programs. propriate laws and regulations. Dur- Definition of Bank Capital ing the year, 334 institutions that During the year, the Board adopted a exercise trust powers under the broadened definition of bank capital Board's supervision were examined. for determining the adequacy of capital in state member banks. The defini- Examinations of Transfer Agents tion was recommended by the Federal System examiners conduct separate Financial Institutions Examination reviews of state member banks and Council to promote uniformity among bank holding companies that act as federal bank regulators and to provide transfer agents. Transfer agents guidance to commercial banks. Under countersign and monitor the issuance the new definition, bank capital conof securities, register transfers of sesists of two elements: primary capital curities, and exchange or convert and secondary capital. Primary capital securities. During 1981, 135 member comprises common and perpetual prebanks and bank holding companies ferred stock, surplus and undivided that were registered with the Board profits, contingency and other capital of Governors as transfer agents were reserves, mandatory convertible inexamined. struments, and 100 percent of funds Examinations of Municipal Securities set aside as reserves for possible loan Dealers and Clearing Agencies losses. Secondary capital comprises As a result of the Securities Acts limited-life preferred stock and sub- Amendments of 1975, the Board is ordinated notes and debentures; howresponsible for supervising state mem- ever, there are restrictions upon the ber banks and bank holding compa- amount of these less permanent funds Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 183 that may be counted as part of the certain state-chartered banks that are bank's capital structure. members of the Federal Reserve System. Under the program, the Reserve Capital Adequacy Guidelines Banks and the state banking authori- The Federal Reserve and the Office ties examine, in alternate years, the of the Comptroller of the Currency state member banks that they have issued ratio guidelines for assessing the agreed upon. The program was deadequacy of capital in the examina- signed to enhance federal and state tion and supervision of national cooperation, eliminate duplication of banks, state-chartered banks that are effort, and reduce the burden on members of the Federal Reserve Sys- commercial banks. Thus far, the tem, and bank holding companies. Federal Reserve participates in AEPs The objectives of the guidelines are with 17 states, and discussions at to address the long-term decline in year-end were in process to enter into capital ratios, particularly those of AEP agreements with two others. certain large multinational banks; introduce greater uniformity in the Bank Holding Company supervisory assessment of capital ade- Supervision Manual quacy; provide direction for capital During 1981, the Federal Reserve's and strategic planning to banks and Bank Holding Company Supervision holding companies; and permit some Manual was completed and copies reduction of the disparities in capital were made available to banking ratios among banking organizations organizations and the public upon of different sizes. In general, the request. The manual contains Board guidelines apply to sound, well-man- policies, formal inspection procedures, aged organizations and will be applied and special sections on supervisory in a flexible manner that allows for topics that are unique to bank holding consideration of differences in the companies, to nonbanking activities, situations of individual institutions. and to holding company financial analysis. Frequency of Examinations and Inspections Monetary Control Act and The Board adopted a new policy on Regulation D: the frequency of examinations and Examination Procedures inspections. The policy provides for At the request of the Federal Financial extending the time between examina- Institutions Examination Council, the tions of sound companies and empha- Federal Reserve adopted new uniform sizes the supervision of institutions examination procedures for determinthat have problem characteristics and ing the compliance of banks, thrift inthat are thus most in need of frestitutions, and credit unions with the quent on-site reviews. Monetary Control Act of 1980 and with Regulation D. Implementation Alternate Examination Program of these procedures by all five agen- During 1981, the Federal Reserve, in cies at institutions under their jurisconjunction with a number of state diction should assist in the accurate banking authorities, adopted an alter- compilation of monetary aggregates nate examination program (AEP) for by the Federal Reserve. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 Banking Supervision and Regulation Trust Examinations to develop a performance report to To supplement the supervision of the assist in the Systemwide effort to increasing number of nondeposit monitor bank holding companies on trust companies that are subsidiaries an ongoing basis. of bank holding companies, the Board has authorized a formal program of Enforcement Actions and examinations for those trust compa- Civil Money Penalties nies not supervised by any other federal banking agency. In addition, a Under the Financial Institutions Suprogram of limited inspections of pervisory Act, the Board has authorstate member banks, bank holding ity to enter into written agreements companies, and Edge Act corpora- or cease-and-desist actions with state tions that conduct foreign fiduciary member banks, bank holding comactivities has been authorized. Both panies, and persons associated with programs will begin in 1982. such organizations, that engage in unsafe or unsound practices or violate applicable laws or regulations. Surveillance and The Board may also assess civil- Monitoring Program money penalties for violations of a The Federal Reserve System performs cease-and-desist order, of the Bank computer surveillance of member Holding Company Act, or of certain banks on a quarterly basis and of large provisions of the Federal Reserve Act. bank holding companies on a semian- In 1981, the Reserve Banks recomnual basis. Current financial reports mended or initiated 31 enforcement of banks and bank holding companies actions, most dealing with unsafe or are screened periodically at the Board unsound banking practices; 26 were and sent to the Reserve Banks, which completed by year-end. In connecperform the financial analysis and tion with the completed actions, the initiate any corrective action that is Board of Governors issued 12 ceasewarranted. and-desist orders and 2 temporary If surveillance indicates that a bank cease-and-desist orders, and entered or bank holding company is in good into 12 written agreements: 15 infinancial condition and that there is volved banks; 8 involved bank holding no trend toward serious deterioration companies or their subsidiaries; and in the institution's key financialr atios, 3 involved individuals participating in then the time between on-site exam- the affairs of the financial institutions. inations of banks or bank holding In 1981, the Board collected 12 companies may be lengthened. On the civil money penalties totaling $598,other hand, banking organizations 000, and assessed, but did not collect, that surveillance suggests have a poor an additional civil money penalty. Of and deteriorating financial condition the total collected or assessed, 4 were are likely to have their examination paid by banks, 5 were paid by or date accelerated. assessed against bank holding com- During 1981, a major effort was panies, and 4 were paid by individuals. made with the other federal banking In 1981, the Board also issued a agencies to develop a joint uniform Notice of Suspension and an Order bank performance report. In addi- of Removal, based on one individual's tion, the Federal Reserve undertook indictment and subsequent conviction. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 185 The Board made available to the doing so, the Federal Reserve acts public a description of all formal su- on a variety of proposals that directly pervisory actions completed during or indirectly affect U.S. banking structhe year and the reasons for them. ture at the local, regional, and na- This action was taken to achieve the tional levels. The Board also has prifullest public disclosure of informa- mary responsibility for regulating the tion consistent with valid interests of international operations of domestic confidentiality. banking organizations and of the U.S. operations of foreign banks that Staff Training engage in banking in the United States, either directly through a branch System training activities continued or agency, or indirectly through a to emphasize analytical and supersubsidiary commercial lending comvisory themes common to the four pany. In addition, the Board has areas of supervision—examinations, established regulations for the interinspections, applications, and surveilstate banking activities of these forlance—while stressing areas of intereign banks, as well as for foreign dependence. During the year, the banks that control a U.S. subsidiary Federal Reserve conducted 12 bankcommercial bank. ing schools—4 introductory, 5 intermediate, and 3 advanced. In addition, 2 bank holding company application Bank Holding Company Act schools and 1 financial analysis pro- By law, a company must obtain the gram for senior examiners were con- Board's approval to form a bank holdducted. For its consumer examiners, ing company by securing control of the System offered 1 consumer comone or more banks. And, once pliance examination school and 1 adformed, a bank holding company vanced consumer and community must receive the Board's approval affairs seminar. Programs in such before acquiring more banks or respecialized areas as trust activities, lated, nonbanking companies. international banking, electronic data In deciding a bank holding comprocessing, consumer affairs, managepany application, the Board considment, and instructor training were ers the likely effects of the proposal conducted by the Federal Financial on competition, the convenience and Institutions Examination Council. In needs of the community, the appli- 1981, 445 System employees comcant's financial and managerial repleted System programs and 254 comsources, and the prospects of both pleted Examination Council courses. the applicant and the firm to be Various staff from state banking deacquired. partments and several foreign central In 1981, the Board—and, under banks attended the System schools. delegated authority, the Federal Reserve Banks, the Board's Office of the Regulation of Secretary, and the Director of the UJ, Banking Structure Board's Division of Banking Super- The Board of Governors administers vision and Regulation—acted on the Bank Holding Company Act, the 1,916 bank holding company appli- Bank Merger Act, and the Change in cations. The System approved 827 Bank Control Act. In the course of proposals to organize holding com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 Banking Supervision and Regulation Bank Holding Company Decisions by the Federal Reserve, 1981 Direct action Delegated authority Office of Board of Federal Proposal Governors Sec t r h e e tary Reserve Banks Total Approved Denied Approved Approved Permitted Formation of holding company 41 13 777 840 Acquisition Bank 39 9 43 218 309 Nonbank 58 1 9 81 582 731 Merger of holding companies 8 0 2 13 23 Other 9 2 I1 1 13 Total 155 25 64 1,090 582 1,916 1. This proposal was approved by the Direc- Regulation, rather than the Office of the tor of the Division of Banking Supervision and Secretary. panies and denied 13; 300 bank ac- were approved by the Board; 7 by quisitions by existing bank holding the Secretary of the Board under delecompanies were approved, while 9 gated authority; and 31 by the Rewere denied; and 730 requests to ac- serve Banks under delegated authorquire nonbank companies that are ity. As required by law, a description closely related to banking were ap- of each merger is contained in table 19 proved or permitted and 1 rejected. in the Statistical Tables section of Data on holding company decisions this REPORT. are shown in the table. When one of the other two federal banking agencies has jurisdiction over Bank Merger Act a merger, the Board is asked to comment on the competitive factors to The Bank Merger Act requires that assure comparable enforcement of the all proposed bank mergers receive the antimonopoly provisions of the act. prior approval of the appropriate fed- On behalf of the Board, the Reeral bank regulatory agency. If the serve Banks submitted 238 reports surviving bank of the merger is a state on competitive factors to the Compmember bank, the Federal Reserve troller of the Currency and 295 such has primary jurisdiction. reports to the Federal Deposit Insur- Before passing on a bank merger, ance Corporation. the Federal Reserve considers the The Board, along with the Office competitive effects of the proposal of the Comptroller of the Currency and the financial and managerial reand the FDIC, has adopted standard sources and prospects of the existing terminology for assessing competitive and proposed institution, as well as factors in bank merger cases that the community's convenience and should result in greater consistency in needs. The Board must also consider administering the Bank Merger Act. the views of certain other agencies on the competitive factors involved in the transaction. Change in Bank Control Act During 1981, the Federal Reserve The Change in Bank Control Act of approved 43 merger applications: 5 1978 gave the federal banking agen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 187 cies the authority to disapprove the Board approved the opening of changes in the control of banks and 21 foreign branches. bank holding companies. The Fed- By the end of 1981, 156 member eral Reserve is the agency responsible banks were operating 800 branches in for changes in the control of state foreign countries and overseas areas member banks and bank holding com- of the United States, a net increase panies. Factors to be considered in of 11 for the year. One hundred determining whether a transfer of con- twenty-one national banks were optrol should be denied include the erating 674 of these branches, while financial condition, competence, ex- 35 state member banks were operatperience, and integrity of the acquir- ing the remaining 126 branches. ing person, and the effect on com- International Banking Facilities petition. Effective December 3, 1981, the Eleven changes in ownership of the Board amended its Regulations D stock of state member banks were and Q to permit the establishment of reported in 1981, and ninety-one were international banking facilities (IBFs) for holding companies; all but three in the United States. IBFs may be were processed by the Reserve Banks. established, subject to conditions There were no denials. specified by the Board, by U.S. depository institutions, and by Edge and Agreement corporations. These facili- International Activities of ties may also be set up by U.S. U.S. Banking Organizations branches and agencies of foreign The Board has three principal statu- banks. tory responsibilities in connection An IBF is essentially a set of asset with the supervision of the interna- and liability accounts that is segretional operations of U.S. banking gated from other accounts of the organizations: (1) to issue licenses establishing office. In general, defor foreign branches of member banks posits from and credit extended to and regulate the scope of their activi- foreign residents or other IBFs can ties; (2) to charter and regulate Edge be booked at these facilities free from corporations; and (3) to authorize domestic reserve requirements and and regulate overseas investments by limitations on interest rates. member banks, Edge corporations, IBFs will be examined along with and bank holding companies. other parts of the establishing office, and their activities will be reflected Foreign Branches in the supervisory reports submitted of Member Banks to the bank regulatory agencies by Under provisions of the Federal Rethat office. By year-end 1981, 270 serve Act and Regulation K, member offices had established IBFs. banks may establish branches in foreign countries, subject, in most cases, Edge and Agreement Corporations to the Board's prior approval. In re- Under sections 25 and 25(a) of the viewing proposed foreign branches, Federal Reserve Act, Edge and the Board considers the requirements Agreement corporations may engage of the governing statute, the condition in international banking and foreign of the bank, and the bank's experience financial transactions. These corpoin international business. In 1981, rations, which are usually subsidiaries Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 Banking Supervision and Regulation of member banks, provide their owner the Board amended its regulation organizations with additional powers dealing with Edge corporations to in two areas: (1) they may conduct provide that, with Board approval, a deposit and loan business in states subordinated capital notes or debenother than that of the parent, pro- tures, in an amount not to exceed vided that the business is strictly re- 50 percent of nondebt capital, may lated to international transactions; be included for determining capital and (2) they have somewhat broader adequacy in the same manner as for foreign investment powers than mem- a member bank. ber banks, being able to invest in for- The 7 percent standard has, in fact, eign financial organizations, such as led to some added leveraging by Edge finance companies and leasing com- corporations. Nonetheless, 53 of the panies, as well as in foreign banks. 69 banking Edge corporations had In 1981, the Board approved the ratios more than twice the new stanestablishment of 19 Edge corporations dard on September 30, 1981, so their and 1 Agreement corporation and capitalization in relation to risk assets the operation of 47 branches by remained high by international bankestablished Edge corporations. ing standards. Two other important changes aris- Foreign Investments ing from the IBA permitted Edge Under authority of the Federal Recorporations (1) to be owned by serve Act and the Bank Holding Comforeign banks and (2) to establish pany Act, in 1981 the Board authorbranches within the United States. ized 80 foreign investments by By year-end 1981, the Board had member banks, Edge and Agreement authorized foreign banks to own corporations, and bank holding comdirectly or indirectly 17 Edge corpanies, mostly for additional investporations and had allowed 26 Edge ments in financially related comcorporations to operate an aggregate panies. of 80 domestic branches. Capitalization and Activities of Edge Corporations Home-State Designations and Expansion by Foreign Banks The International Banking Act (IBA) removed the statutory limit on liabili- Under the International Banking Act, ties of an Edge corporation under foreign banks that engage in banking which the corporation's debentures, in the United States were allowed to bonds, and promissory notes could conduct a full-service banking and not exceed 10 times the corporation's deposit-taking operation in only one capital and surplus. The Board estab- state, except for grandfathered facililished a new capital requirement of ties in other states. Under the Board's 7 percent of risk assets for Edge cor- regulations, the full-service banking porations engaging in international state is designated the "home state." banking in the United States to permit In 1981, 130 foreign banks chose these corporations to compete more home states: 95 chose New York; 29, effectively with other international California; 2, Illinois; 2, Florida; 1, organizations that are more highly the District of Columbia; and 1, leveraged. Effective July 29, 1981, Massachusetts. A foreign bank may Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 189 continue to expand its full-service 20 percent from 1980 to 1981, the banking operations in its home state, System still acted on 95 percent of but must restrict nongrandfathered these proposals within 90 days of the banking activities in other states. A filing of a complete application. In one-time change in a home state is al- fact, for the last five years, the Fedlowed, provided that banking opera- eral Reserve has completed at least tions in the previous home state that 90 percent of holding company proare not grandfathered be subsequently posals within 90 days. limited. Forty of the 43 bank merger applications were processed within 90 days; the 3 that took longer involved Delegation of Applications one applicant that was involved in In exercising its responsibility to lengthy protest proceedings. The formulate policies and procedures in System also prepared 533 reports on the applications area, the Board dele- competitive factors on proposed merggates certain regulatory functions— ers for the other two banking agenincluding the authority to approve, cies; all but a few were completed but not deny, certain types of appli- within a 30-day limit. Of the 102 cations—to the Reserve Banks and change-of-control notices, 99 were to the Board's Division of Banking handled well within 90 days. Supervision and Regulation and its The System also measures its per- Office of the Secretary. formance in processing international In September 1979, the Board applications against a 90-day stanissued revised rules that delegated dard. During 1981, the Federal Readditional authority to the Reserve serve acted on 267 international ap- Banks to approve applications for plications, 92 percent of which were bank holding companies and bank decided in 90 days or less. mergers. During 1980, the first full During 1981, several changes in year under expanded delegation, 89 procedures were instituted to further percent of all holding company and expedite applications processing and merger applications were acted on to make more efficient use of Board under delegated authority; the pro- and Reserve Bank staff, including the portion during 1981 was about 87 establishment of formalized procepercent. In contrast, only 78 percent dures relating to the handling of prowere processed by the Reserve Banks tested applications and the steamlinin 1978, the last full year before ex- ing of certain internal procedures. panded delegation. The benefits that were expected from broadened dele- Public Notice of Board Decisions gation continue to be achieved: routine cases have been removed from Each action by the Board or its delethe Board's agenda to allow more gated representative on a case involvefficient use of staff time of the Board ing bank holding companies, a bank and of the Reserve Banks. merger, change in control, or international banking is effected by an order or announcement. Orders set Timely Processing of Applications forth the essential facts of the appli- Although the number of holding com- cation, the basis for the decision, and pany applications increased about the decision made. Announcements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 Banking Supervision and Regulation state merely the action taken by the ness and the regulation of banking Federal Reserve. All orders and an- structure. This section describes the nouncements are released immediately enforcement of other laws, regulato the public and are reported in the tions, and rulings. Federal Reserve Bulletin and the weekly H.2 release (Actions of the Bank Secrecy Act Board; Applications and Reports). The Department of the Treasury Announcements of applications and relies on System examiners to verify notices received by the System, but the compliance of state member banks not yet acted on, are also made in the and Edge corporations with the Trea- H.2 release. sury's Financial Recordkeeping and Reporting Regulation, which implemented the Bank Secrecy Act. The Policy Decision on Financial regulation requires financial institu- Factors in Small One-Bank tions to maintain records and reports Holding Company Formations on certain transactions of more than On March 28, 1980, the Board issued $10,000. One purpose of the law is a policy statement designed to facili- to assist law enforcement personnel tate the transfer of ownership of small in identifying transactions that may community banks without diluting involve funds obtained illegally. bank safety and soundness. Under The Federal Reserve, with the that policy the gross capital in the other federal supervisory agencies, subsidiary bank would at no time fall strengthened examination procedures below 8 percent of assets so long as for verifying compliance with the the debt-to-equity ratio of the hold- Bank Secrecy Act. The procedures, ing company was in excess of 30 per- which were revised in cooperation cent. On December 17, 1981, the with the General Accounting Office Board adopted guidelines on capital and the Treasury Department, were adequacy for national banks, state incorporated in the System's examinamember banks, and bank holding tion program in early 1981. The procompanies. The guidelines require cedures focus on a review of the small community banks to maintain a bank's internal systems and controls ratio of primary capital to assets of at and on the testing of selective transacleast 6 percent and a ratio of total tions for ensuring compliance with capital to assets of at least 7 percent. the statute. The Board's policy has thus been revised and requires that the primary Financial Disclosure by and total capital of the subsidiary State Member Banks bank of small one-bank holding com- The Board's Regulation F deals with panies at no time fall below 6 and 7 the disclosure requirements for state percent respectively of total assets. member banks that have securities registered under the Securities Exchange Act of 1934. Seventy-three state member banks, most of which Enforcement of Other Laws are of small or medium size, were and Regulations registered with the Board under this The preceding sections discussed the regulation. These institutions must supervision of bank safety and sound- file certain materials, such as finan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 191 cial reports and proxy statements, nated debt, by the Director of the that are of interest to investors. The Board's Division of Banking Super- Board's staff reviews these filings for vision and Regulation. compliance with the regulation. The disclosure rules under Regula- Stock Repurchases by tion F are substantially similar to Bank Holding Companies those issued by the Securities and A stock repurchase occurs when a Exchange Commission. Effective bank holding company purchases its March 9, 1981, the Board adopted own shares from existing shareamendments to this regulation to con- holders. Often such purchases are form with recent rule changes made financed through borrowings, so that by the SEC. the net effect of the transaction is to increase bank holding company debt Loans to Executive Officers at the very time that its equity is Under section 22 (g) of the Federal decreased. Because relatively large Reserve Act, state member banks repurchases may adversely affect the must include with their quarterly re- financial condition of a bank holding port of condition a list of loans to company and its bank subsidiary, the executive officers during the quarter. Board, by regulation, requires holding The table at the bottom of the page companies to give advance notice of summarizes these data for 1981. repurchases that retire 10 percent or more of their consolidated equity capital. Applications by State Member Banks The Board's authority over state The Federal Reserve reviewed 107 member banks covers the authoriza- such notifications during 1981, all of tion of new branches, investments in which were acted on by the Reserve bank premises that exceed 100 per- Banks on the Board's behalf. cent of capital stock, additions to the capital base from sales of subordi- Securities Regulation nated debt, and waiver of the six months' notice of intention to with- Under the Securities Exchange Act of draw from membership in the Sys- 1934, the Board is responsible for tem. The Federal Reserve employs regulating credit used to purchase or the applications or notifications pro- carry securities. In fulfilling its recess to administer these statutory pro- sponsibility under the 1934 act, the visions. Board imposes limitations on the With few exceptions, these matters amount of credit that may be provided are handled under delegated authority by securities brokers and dealers by the Federal Reserve Banks, or, in (Regulation T), by banks (Regulathe case of proposed sales of subordi- tion U), and by other lenders (Regu- Total loans to executive officers Range of Period covered interest rates charged Number Amount (dollars) (percent) January 1—March 31 1,128 6,206,655 4-24 April 1-June 30 1,124 6,569,274 6-23 July 1-September 30 1,254 8,870,316 5-26 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 Banking Supervision and Regulation lation G). Regulation X extends The Board published revised lists these credit limitations, or margin re- of OTC stocks subject to its margin quirements, to certain borrowers and regulations on April 6 and October 5, certain credit extensions, such as 1981. The April list consisted of credit obtained from foreign lenders 1,307 stocks, while the October list by U.S. citizens. consisted of 1,407. The Board's Di- The SEC, the National Association vision of Banking Supervision and of Securities Dealers, and the national Regulation monitors the market activsecurities exchanges examine brokers ity of all OTC stocks to determine the and dealers for compliance with Regu- stocks that should be placed on this lation T. The three bank supervisory list. agencies examine banks for com- Stocks must meet certain criteria, pliance with Regulation U, with the established by the Board, before they Board being responsible for state can be eligible for the OTC Margin member banks that extend stock- Stock List. On November 19, 1981, secured credit for the purpose of the Board proposed for comment buying margin stock. amendments to those criteria. The The Board, the National Credit Board's proposal would eliminate the Union Administration, and the Farm current requirement that an issuer be Credit Administration examine other organized under the laws of the lenders under their respective juris- United States or a state, thereby dictions for compliance with Regula- making OTC stocks of foreign issuers tion G. At the end of 1981, there eligible for margin credit if they meet were 513 such lenders, 278 of which the other criteria for listing. In addiwere subject to the Board's super- tion, the Board's proposal would revision. During the year, Federal Re- place certain alternative criteria with serve examiners inspected 138 lend- mandatory requirements. Finally, this ers that were subject to Regulation G proposal would relax existing financial (these lenders are inspected on a criteria to make them resemble more biennial basis) for adherence to its closely requirements established by margin requirements. major exchanges. Regulations G and U, in general, Significant amendments and proimpose credit limitations on banks posals to amend the margin regulaand other lenders only when the pur- tions were made in 1981. On June 9, pose of a loan is for the purchase or 1981, the Board amended Regulation carrying of publicly held equity se- T to make clear that the speculative curities and the loan is secured by holding of foreign currency, including such securities. Regulation T limits gold coins, in a margin account is not the amount of credit that brokers and permissible, and that any transactions dealers may extend based on the value in foreign currency should be effected of securities serving as collateral. in accounts insulated from securities This collateral must consist of stocks credit transactions. and bonds traded on national securi- On June 18 and July 10, 1981, the ties exchanges or certain over-the- Board issued for public comment macounter (OTC) stocks and bonds that jor revisions to Regulations G, T, and the Board designates as having char- U as part of the Regulatory Improveacteristics similar to those of stocks ment Project. These proposals would listed on national exchanges. simplify the account structure of Reg- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 193 ulation T, relax certain restrictions on of banks and banking offices by broker-dealer activities, reduce com- charter class are provided in table 18 pliance burdens for banks and other in the Statistical Tables section of this lenders, and simplify the language REPORT. used in the margin regulations. On October 5, 1981, the Board Regulatory Improvement adopted an amendment to Regulation Project and Review of T establishing a separate initial mar- Reporting Requirements gin requirement for customers who The Board's regulations are reviewed write uncovered options on governon a regular basis, under the Regulament securities. The margin is to be tory Improvement Project, and regubased on the maintenance margin relations are eliminated, reduced, or quirement of the exchange that trades simplified as consistent with the law the option. Without this amendment and the public interest. Reporting to Regulation T, brokers and dealers requirements imposed by the Board would have been subject to the existwere reviewed under the Paperwork ing rule for options, which was in- Reduction Act of 1980. In continutended to apply only to options writing the efforts, begun during 1980 to ten on corporate equity securities. reduce the reporting burden on trans- Finally, on November 5, 1981, the fer agents, the Board, together with Board issued for public comment an the other supervisory agencies, amendment to Regulation T that extensively revised the registration would permit brokers or dealers to statements that transfer agents must use U.S. government securities or file. In addition, the Board undertook irrevocable letters of credit as colspecific reviews and eliminated certain lateral when they borrow or lend reporting requirements under Regulasecurities. The present regulation tion P and modified other supervisory requires a deposit of cash as collateral. reports. The Board has also endorsed rec- Federal Reserve Membership ommendations of the Examination At the end of 1981, 5,474 banks were Council to eliminate certain reporting members of the Federal Reserve requirements established by the Fi- System, a net increase of 52 from the nancial Institutions Regulatory and previous year. Member banks oper- Interest Rate Control Act of 1978. ated 25,761 branches on Decem- Details on the Regulatory Imber 31, 1981, a net increase of 1,382 provement Project and the review of for the year. reporting requirements are provided Member banks accounted for 37 in the following sections of this REpercent of all commercial banks in PORT: "Record of Policy Actions of the United States, and for 64 percent the Board of Governors," "Legislaof commercial banking offices. Com- tive Recommendations," and "Reguplete figures on changes in the number latory Simplification." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 Regulatory Simplification This report, required by section 805 In addition, the Federal Reserve of the Financial Regulation Simplifi- has cooperated with the other financation Act of 1980, reviews action cial regulatory agencies through the taken by the Board of Governors to Federal Financial Institutions Examicomply with that act. It also dis- nation Council to avoid conflicts, ducusses the Board's efforts under the plication, and inconsistencies among Regulatory Flexibility Act and the regulations. Board's Statement of Policy Regard- The Board's regulatory activities ing Expanded Rulemaking Proce- during 1981 have concentrated on redures. Compliance with these acts serve requirements of depository inand the Board's policy statement is stitutions and interest on deposits intended to improve regulation. (Regulations D and Q), home mort- Basically, the Financial Regulation gage disclosure (Regulation C), truth Simplification Act (Title VIII of the in lending (Regulation Z), and secu- Depository Institutions Deregulation rities credit transactions (Regulaand Monetary Control Act of 1980) tions G, T, U, and X). Regulations requires that each federal financial of home mortgage disclosure and regulatory agency assure that its fu- truth in lending were revised as reture regulations impose no more quired respectively by congressional burdens than necessary, are adopted extension of the Home Mortgage only after interested persons are heard, Disclosure Act and by the Truth in and are written simply and clearly. Lending Simplification and Reform The act also requires that each agency Act. Work on regulation of securities establish a program to assure periodic credit transactions is being conducted review of its regulations to determine in accordance with the periodic rewhether the regulations meet these views mandated in the Simplification objectives. Act and the Regulatory Flexibility Act and with the Board's periodic review program, which predated the Progress during 1981 acts. Proposed and final regulatory actions presented for the Board's considera- Board Actions and Staff Work tion in 1981 were reviewed by the Reserve Requirements staff of the Regulatory Improvement (Regulation D) Project, which has responsibility for implementing the objectives of the On two occasions the Board extended Simplification Act. The staff also co- for six months the deferral of reordinated periodic reviews of several serve and reporting requirements for Board regulations and continued or any nonmember depository institubegan work on other regulatory mat- tion with total deposits of less than ters not yet brought to the Board for $2 million. This deferral affected action. nearly 18,000 depository institutions, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 195 mostly credit unions, which hold only pretation that had been burdensome V2 to 1 percent of all reservable de- to the public. posits. Thus, for those institutions, the burden of maintaining reserves International Banking Facilities and reporting has been temporarily (Regulations D and Q) eliminated. In the interest of minimizing regulatory burdens on small insti- After extensive discussion in open tutions, the Board requested that the meetings and after public comment, Congress enact legislation that would the Board amended Regulations D permanently exempt small institutions and Q to permit depository institufrom reserve requirements. tions to establish international bank- In addition, the Board sought pub- ing facilities in the United States. lic comment on a staff proposal to Deposits at these facilities, which must introduce essentially contemporane- conduct an essentially international ous reserve requirements on transac- business, are exempt from reserve retion accounts for medium-sized and quirements and from the usual inlarge depository institutions. Consis- terest-rate limits. The Board's efforts tent with requirements of the Simplifi- were directed at permitting depository cation Act, the Board asked for esti- institutions to compete from U.S. mates of the cost of altering deposit offices with the Euromarkets while information systems and for informa- at the same time maintaining the tion on the complications for an insti- effectiveness of its monetary policy tution of managing a contemporaneous instruments. To monitor the impact reserve system. on monetary policy of this relaxation in regulatory restriction, the Board also adopted reporting requirements Interest on Deposits (Regulation Q) for banks establishing these facilities. After considering public comment, the Board clarified, through an interpreta- Home Mortgage Disclosure tion, that individuals may hold nego- (Regulation C) tiable order of withdrawal (NOW) accounts regardless of the purposes that The Board revised its regulation on the funds in these accounts will serve. the reporting of home mortgages. The The Board decided that the burden of language and substance of the new distinguishing between personal and regulation are simplified, and the disbusiness accounts could not be justi- closures now required are believed fied because making such distinctions to be the most useful that can be prowould be impracticable. Also, the vided at reasonable cost. Board broadened the eligibility to The Board advised the Congress hold NOW accounts to a wide range that the burden could be further reof organizations that are specified as duced if the Home Mortgage Disclononprofit in the Internal Revenue sure Act prescribed an exemption level Code and to governmental units, re- based on an institution's portfolio of gardless of organizational form, when home mortgages. The present exempthey use NOW accounts solely for tion level, which is based on the size educational or medical purposes. This of total assets, precludes granting reaction minimizes problems of inter- lief to several thousand small institu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 Regulatory Simplification tions that are relatively inactive in Regulation Z will be reduced by the residential financing. publishing and periodic updating of an Official Staff Commentary. The commentary, which replaces more than 1,500 individual staff interpre- Truth in Lending (Regulation Z) tations, provides an organized com- Under authority granted by the Truth prehensive body of information in in Lending Simplification and Reform relatively simple language. Moreover, Act, the Board (1) reduced the it protects from civil liability any number of required truth-in-lending creditor who acts in conformity with disclosures; (2) made creditor com- it. pliance easier, especially by provid- Later in 1981, the Board asked for ing model forms; (3) limited civil public comment on a proposal to liability of creditors to certain im- amend the definition of "arranger of portant disclosures; (4) emphasized credit" so as to require real estate administrative enforcement rather brokers to provide truth in lending than private litigation, which had con- disclosures to buyers of residential tributed to complex rules and court property when sellers are providing decisions; and (5) clarified complex some or all of the financing. The prolegal questions that produced conflict- posal would have brought under reguing court decisions in the past. lation nearly all real estate brokers The Board simplified Regulation Z and sales persons who are involved further by (1) providing clearer defi- with seller-financed transactions. It nitions and standards of applicability; would also have made sellers poten- (2) making good-faith compliance tially liable for disclosure errors under easier by establishing tolerances for the Truth in Lending Act. In Februsmall errors in some disclosures; (3) ary 1982, after receiving public comreducing the number of disclosures ment, the Board did not adopt the unrelated to credit decisionmaking; proposal and excluded real estate (4) allowing creditors greater flexi- brokers and sales persons from the bility in preparing disclosures to fit definition. The Board intends to rethe nature of a transaction; and (5) view this action early in 1983, deredrafting the language and reorganiz- pending on whether the Congress ing the regulation for clarity and con- clarifies the statutory intent. venience. Despite the costs of adjusting to the Consumer Leasing (Regulation M) simplified regulation, each major change should produce net consumer The consumer leasing provisions forbenefits by substantially reducing the merly in Regulation Z were made into regulatory burden without sacrificing a separate Regulation M without subimportant consumer protections. Pos- stantive modification. The Board issibly the most important single con- sued for comment a proposed Official tribution is the provision of model Staff Commentary intended to apply forms that, if used properly, guaran- and to interpret Regulation M. The tee compliance with the federal law. commentary will be revised in light The burden on institutions of ob- of public comment and further staff taining information to comply with work. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 197 Electronic Fund Transfers tive proposals, adopted a "good (Regulation E) faith" margin requirement for customers who write uncovered options Compliance with the regulation on on government securities. Thus Reguelectronic fund transfers is facililation T now provides for each extated by publication of an Official change, rather than the Board, to set Staff Commentary on Regulation E. the amount that writers of these The commentary is designed to make options must deposit with brokers and compliance easier by providing spedealers. cific answers, in nontechnical lan- The Board also published for comguage, to commonly asked questions. ment a proposal to permit brokers It also provides protection from civil and dealers to use irrevocable letters liability for institutions that comply of credit as collateral in the ordinary with it. course of business, for example, when borrowing securities to complete short sales or to settle transactions when Securities Credit Transactions securities expected to be delivered (Regulations G, T, U, and X) have not been delivered. Use of In 1981, the Board published for letters of credit is viewed favorably comment proposals for a comprehen- by the industry and can be expected sive revision of the regulations that to reduce the net cost of credit used control the use of credit in the pur- by brokers and dealers in clearing chasing of financial instruments. In transactions. January 1982, the Board adopted those proposals that called for greater Bank Holding Companies and freedom for brokers and dealers to Change in Bank Control offer financing in conjunction with (Regulation Y) investment banking services; for changes that narrow the differences The Board added to the list of perin regulation of lending by banks and missible nonbanking activities in by lenders who are neither banks nor which bank holding companies may brokers or dealers; for elimination of engage and is considering further ad- "equity building" devices so that in- ditions. Staff work continued on a vestors have greater latitude to re- complete revision of Regulation Y allocate their portfolios; and for re- under the Board's Regulatory Imduction in the coverage of the U-l provement Project. This work has report form. Other proposals being focused on eliminating applications developed for final action in 1982 whenever possible and improving sysinclude reorganization of the account tem processing of required applicastructure required at brokerage firms tions. Several regulatory proposals and redrafting of the regulations (in- and requests that have been outstandcluding use of terminology consistent ing for some time are also being conwith industry usage). These pro- sidered. In addition, the regulation posals simplify and clarify various will incorporate a number of Board complex provisions. and staff rulings; and it will be re- Separately, the Board, after re- organized and redrafted for clarity ceiving public comment on alterna- and convenience. A proposed regula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 Regulatory Simplification tion for the Board to consider and to Regulatory Service publish for comment is expected in During 1981, the Board published and early 1982. distributed to subscribers both the Federal Reserve Regulatory Service Management Official Interlocks and separate handbooks on consumer (Regulation L) and community affairs, on monetary policy and reserve requirements, and The Board approved proposed on securities credit transactions. The amendments to simplify, clarify, and Regulatory Service provides in a relax the rules that generally prohibit single publication all Board regulaany person from serving as a manage- tions, interpretations, and rulings, as ment official of two or more non- well as statutory provisions and the affiliated depository institutions in the background for, and a summary of, same local area. But the proposals each regulation. Each handbook, will not be published for comment which is designed to meet the needs until changes are made to incorporate of specialists, contains the same infora recent legislative amendment that mation in its area as the Regulatory clarifies the grandfather rights of cur- Service. These publications have imrent management officials. proved the accessibility and useful- Among other things, the proposed ness of Board regulatory materials amendments would aid institutions, to the public. especially small ones, that face a disruptive loss of management because of Survey of Costs and Benefits of the Depository Institutions Manage- Consumer-Protection Reguations ment Interlocks Act. They also would eliminate the need for an institution The Board conducted a voluntary to apply for the statutory maximum survey of banks and other depository grace period in which to terminate institutions to gather data on the beneany interlock that becomes prohibited fits of three consumer protection in the future because of changes in regulations—Regulations E, B, and circumstances. Z—and on the incremental cost to those institutions of complying with them. Survey results have been re- Minimum Security Devices and ceived and edited. The data will be Procedures (Regulation P) tabulated and analyzed in 1982. In separate actions, the Board Also, the Board, working through amended Regulation P, as recom- the Survey Research Center of the mended by the Federal Financial In- University of Michigan, conducted stitutions Examination Council, to surveys to elicit consumers' percepeliminate two report forms that state tions of truth in lending, electronic member banks were required to file. fund transfers, equal credit opportu- The forms concerned security devices nity, and delayed availability of funds and bank robberies and burglaries. deposited in savings and transaction They served no regulatory purpose accounts. Analysis of the results is because the information is available expected to provide a firmer basis for to the Federal Reserve through other simplifying regulation in these areas documents and examinations. and making it more effective. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 Federal Reserve Banks Pricing of Services Pricing of Federal Reserve Services In compliance with the Monetary Service Effective date Control Act of 1980, the Federal National fees Reserve Banks began charging in Wire transfer January 29,1981 1981 for certain financial services. Net settlement January 29, 1981 On the date the Federal Reserve be- Automated clearinghouse1 August 1,1981 gan charging for a service, that service Federal Reserve District or office fees became available to all depository Check clearing and institutions. Member and nonmember collection August 1,1981 Safekeeping, transfer, and institutions alike are subject to the purchase and sale of same fee schedules and terms of securities October 1,1981 Noncash collection October 1,1981 service, as required by the act. Transportation of To permit a smoother transition to currency and coin — January 28,1982 Coin wrapping January 28,1982 the pricing environment for both the Federal Reserve and the private sec- 1. The Federal Reserve Bank of New York has a separate fee structure because the New tor, fees were phased in gradually. York Automated Clearing House is pri- The fees for wire transfers and for vately operated, whereas all other automated net settlement, the first to be intro- clearinghouses are operated by the Federal Reserve. duced, became effective on January 29, 1981, well in advance of the statutory requirement that pricing Federal Reserve services reflect the begin not later than September 1, cost of these efforts. Other opera- 1981. tional and administrative measures to When appropriate, national fee reduce float are under study, and destructures have been adopted; other- velopment of specific alternatives for wise, the fees have been set by Fed- explicit pricing of float will continue eral Reserve District or office. The in 1982. accompanying table indicates the type In February 1981, the Board of fee structure for each service and adopted uniform procedures for the the effective date of pricing. administration of pricing to supple- In accordance with the fee schedule ment the pricing principles announced announced by the Board of Governors by the Board on December 31, 1980: in December 1980, pricing for ser- 1. Clearing balances. Clearing vices other than float was fully im- balances were designed to establish plemented by January 1982. The account relationships between deposi- Board also announced in 1980 a plan tory institutions and the Federal Reto reduce Federal Reserve float serve Banks when reserve balances through operational improvements in are not maintained or are inadequate the collection process, primarily for to support the desired volume of checks. Such improvements have re- priced services. Earnings credits acduced average daily float 50 percent crue on required clearing balances at between 1979 and 1981; the fees for the federal funds rate, and can be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 Federal Reserve Banks used only to pay for priced services. were applied to charges for services At the end of 1981, 579 institutions provided in 1981. had established clearing balances, and One of the primary objectives of required clearing balances totaled the Monetary Control Act is to foster $117 million. a more efficient payments mechanism. 2. Statements, payments, and bill- Before passage of the act, the Federal ing cycles. The Board issued guide- Reserve offered payments services lines for information on statements of without charge to member banks. charges for Federal Reserve services Now, explicit pricing of these services and procedures for payment by de- is fostering efficiency because it gives pository institutions. The Board also depository institutions incentives to established monthly billing cycles that use services in cost-effective ways, are consistent with reserve mainte- and because it gives private sector nance periods and a schedule for state- providers of payments services new ments and payments for services. opportunities to compete. 3. Administration of pricing. To The potential for a shift toward develop a common framework for more efficient use of resources can pricing decisions while permitting Re- be seen in the clearing of commercial serve Banks to respond to local con- checks, which, in terms of resource ditions, the Board adopted interim use, is the largest payments service administrative procedures for the offered by the Federal Reserve Banks. phasing-in of pricing. A policy com- As the chart shows, the volume of mittee, consisting of representatives checks processed by the System had from the Reserve Banks and the been growing steadily; then, beginning Board, was established to advise the in mid-1981, the numbers began to Board on major pricing issues. decline. By the end of 1981, the daily Total revenue for priced services number processed had fallen to about provided in 1981 was $154.1 million. 50 million checks, 22 percent fewer Because pricing was initiated on than the comparable figure for 1980. January 29 and was phased in over Institutions were making greater use the year, revenues for the full year were not realized on any service in Check Processing 1981. Revenue from priced services Millions of checks has been running below target levels Daily averages for the year, and the shortfall is attributable primarily to declines in volume that led to increases in shortrun unit costs. The Board expects that during the fourth quarter of 1982, revenues and costs will generally be brought into balance. Revenues from 50 services were collected either through debits to accounts at the Federal Reserve Banks or through the application of earnings credits on clearing balances; $4 million in such credits 1979 1980 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 201 of processing resources outside the Board. The services that were priced System, apparently in response to the during 1981 were wire transfer of pricing of Federal Reserve check serv- funds and net settlement; check colices, and more checks were being lection and ACH clearing service; collected through channels other than securities safekeeping; purchase and the Federal Reserve, such as through sale of securities; and noncash colleclocal clearinghouses. To the extent tion. The prices for these services that these developments contribute to will be reviewed at least annually to a more efficient allocation of resources ensure that they cover the Federal in the payments mechanism, one of Reserve's costs, and a private-sector the objectives of the Monetary Con- adjustment factor. trol Act has been achieved. Work proceeded on a replacement network for the Federal Reserve Developments in Communications System, with the Payments Mechanism award of a contract for its development and installation. Completion is The volume of payments by checks expected in 1983. Unlike the system and through automated clearingcurrently in use, the new one will be houses (ACHs) continued to increase decentralized, and it will be more during 1981. Last year, total check versatile. It will serve to transfer revolume cleared by Federal Reserve search data in support of monetary Banks expanded by 0.6 percent to policy, as well as to transfer funds and 16.6 billion items, an increase that U.S. government securities. was somewhat smaller than normal, The operating hours for the transfer mainly because of the initiation of and settlement of funds that are transcharges for check services. ACH volmitted over the System's wire network ume increased 32 percent to 300 milwere extended as planned in 1981. lion payments cleared in 1981. This This change made hours uniform advance reflects the continued expannationwide and affords a separate sion of government and commercial period at the end of the day for deposdirect-deposit programs and the growitory institutions to settle their reserve ing public acceptance of these proaccounts. grams. Federal Reserve check float de- Examination creased from a daily average of $4.2 billion in 1980 to an average of The Board's Division of Federal Re- $2.8 billion in 1981. This reduction serve Bank Operations examined the reflects the continuing efforts of the 12 Reserve Banks and their 25 System to reduce float and to imple- branches during 1981, as required by ment improvements that are consis- section 21 of the Federal Reserve Act. tent with a plan adopted by the Board In conjunction with the examinain 1980. tion of the Federal Reserve Bank of During 1981, pricing for Federal New York, the Board's examiners Reserve services was implemented in audited the accounts and holdings compliance with the Monetary Con- related to the Federal Reserve System trol Act of 1980 and in accordance Open Market Account and the forwith pricing principles adopted by the eign currency operations conducted Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 Federal Reserve Banks by that Bank in accordance with on foreign exchange operations. The policies formulated by the Federal foreign exchange loss was attributable Open Market Committee, and fur- primarily to revaluation of assets to nished copies of these reports to the market exchange rates. Also included Committee. The procedures that were in the account was a recovery of followed by the Board's examiners $76 million that was applicable to were surveyed and appraised by a interest and expense on the loan to private firm of certified public ac- the Franklin National Bank, which countants, pursuant to the policy of was assumed by the Federal Deposit having such reviews made annually. Insurance Corporation in 1974. Statutory dividends to member banks totaled $75 million, $4 million Income and Expenses more than in 1980. This rise reflected The accompanying table summarizes an increase in the capital and surplus the income, expenses, and distribution of member banks and a consequent of net earnings of the Federal Reserve increase in the paid-in capital stock Banks for 1981 and 1980. of the Federal Reserve Banks. Current income of $15,508 million Payments to the U.S. Treasury as in 1981 was 21.1 percent higher than interest on Federal Reserve notes that in 1980. The principal changes totaled $14,024 million for the year, were increases of $2,072 million in compared with $11,706 million in income on U.S. government obliga- 1980. This amount consists of all tions and $454 million on foreign net income after dividends and the currencies. Income from priced ser- amount necessary to bring surplus to vices amounted to $154 million. the level of paid-in capital. Current expenses were $897 mil- A detailed statement of the income lion, or 13.4 percent more than in and expenses of each Federal Reserve 1980. Assessments for expenditures Bank during 1981 is shown in table 6, of the Board of Governors amounted and a condensed historical statement to $63 million. appears in table 7, in the Statistical The profit and loss account showed Tables section of this REPORT. A a net deduction of $369 million, detailed statement of assessments and principally because of net losses of expenditures of the Board of Gover- $124 million on sales of U.S. govern- nors appears in "Financial Statement obligations and of $306 million ments," 205-10. Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1981 and 1980 Thousands of dollars Item 1981 1980 Current income 15,508,350 12,802,319 Current expenses 897,114 791,157 Current net income 14,611,236 12,011,162 Net deduction from current net income 368,873 115,386 Earnings credits applied in payment of priced services 4,006 Assessments for expenditures of Board of Governors 63,163 62,231 Net income before payments to U.S. Treasury 14,175,194 11,833,545 Dividends paid 74,574 70,354 Payments to U.S. Treasury (interest on Federal Reserve notes) 14,023,723 11,706,370 Transferred to surplus 76,897 56,821 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 203 Federal Reserve Bank Premises of U.S. government securities increased $2,558 million; loans and During 1981, the Federal Reserve acceptances decreased $57 million Bank of New York sold its surplus and $13 million respectively. real estate property. With the ap- The average rates of interest on proval of the Board of Governors, the holdings increased from 9.73 to 11.13 Los Angeles Branch acquired proppercent on U.S. government securierty for a future building site; and ties, from 12.39 to 14.38 percent on the Federal Reserve Bank of Kansas loans, and from 13.43 to 15.70 per- City acquired adjacent property for cent on acceptances. projected future expansion. Table 8, in the Statistical Tables section of this REPORT, shows the Loan Guarantees for cost and book values of bank prem- Defense Production ises owned and occupied by the Under the Defense Production Act of Federal Reserve Banks, and of real 1950, the Departments of the Army, estate acquired for banking-house Navy, and Air Force; the Defense purposes. Logistics Agency of the Department of Defense; the Departments of Holdings of Securities and Loans Commerce, Interior, Agriculture, and The accompanying table presents Energy; the General Services Adminholdings, earnings, and average in- istration; the National Aeronautics terest rates on loans and securities of and Space Administration; and the the Federal Reserve Banks during the Nuclear Regulatory Commission are past three years. authorized to guarantee loans for de- Average daily holdings of loans fense production that are made by and securities during 1981 amounted commercial banks and other private to $132,238 million, an increase of financing institutions. The Federal $2,488 million over 1980. Holdings Reserve Banks act as fiscal agents of Securities and Loans of Federal Reserve Banks, 1979-81 U.S. Accept- Item and year Total government Loans securities1 ances Millions of dollars Average daily holdings2 1979 119,134 117,564 1,338 232 1980 129,750 128,196 1,420 134 1981 132,238 130,754 1,363 121 Earnings 1979 ... 10,237 10,071 141 25 1980 ... 12,673 12,479 176 18 1981 ... 14,766 14,551 196 19 Percent Average interest rate 1979 8.59 8.57 10.54 10.86 1980 9.77 9.73 12.39 13.43 1981 11.17 11.13 14.38 15.70 1. Includes federal agency obligations. Digitized fo2r. FBRaAsSedE Ron holdings at opening of business. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 Federal Reserve Banks the guaranteeing agencies under the $1,412,333, were outstanding. Of Board's Regulation V. The maxi- that amount, $368,465 was guarmum rate of interest that a financing anteed. institution may charge for a V-loan is the rate that institution currently Volume and charges its most creditworthy business Cost of Operations customers for loans of comparable maturity (unless the governmental Table 9 in the Statistical Tables secguarantor decides that a particular tion of this REPORT shows the volume loan bearing a higher rate of interest of operations in the principal departis necessary for national defense ments of the Federal Reserve Banks purposes). for 1978-81, and table 10 shows the As of December 31, 1981, only cost of the larger operations of the three guaranteed loans, totaling Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 Board of Governors Financial Statements The accounts of the Board for the by Arthur Andersen & Co., indepenyears 1981 and 1980 were examined dent public accountants. AUDITORS' REPORT To the Board of Governors of the Federal Reserve System: We have examined the balance sheets of the Board of Governors of the Federal Reserve System as of December 31, 1981 and 1980, 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, 1981 and 1980, 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 19, 1982. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1981 1980 OPERATING FUND Cash $ 6,164,961 $ 911,190 Receivables and advances 634,532 1,339,004 Stockroom and cafeteria inventories at lower of cost (first-in, first-out) or market 240,040 155,456 Deferred publication costs (Note 3) 334,562 285,132 Total operating fund 7,374,095 2,690,782 PROPERTY FUND, at cost (Note 1) Land and improvements 1,301,314 1,297,829 Buildings 60,787,084 60,337,691 Furniture and equipment 8,085,073 7,734,515 Computer equipment 5,893,872 5,892,842 Total property fund 76,067,343 75,262,877 $ 83,441,438 $ 77,953,659 LIABILITIES AND FUND BALANCES OPERATING FUND Liabilities Accounts payable $ 2,484,847 $ 2,280,725 Accrued payroll and related taxes 1,372,466 740,093 Accrued annual leave (Note 1) 2,694,966 2,479,622 6,552,279 5,500,440 Commitments and contingencies (Notes 1, 2, and 4) Fund balance (Note 1) Balance, beginning of year (2,809,658) (1,186,593) Prior period adjustment to record accrued annual leave (Note 1) — (2,037,466) Assessments over funded expenditures and unfunded accrued annual leave 3,631,474 414,401 Balance, end of year 821,816 (2,809,658) Total operating fund 7,374,095 2,690,782 PROPERTY FUND (Note 1) Fund balance Balance, beginning of year 75,262,877 72,396,637 Additions—at cost 852,955 6,560,478 Disposals—at cost (48,489) (3,694,238) Total property fund 76,067,343 75,262,877 $ 83,441,438 $ 77,953,659 The accompanying notes are an integral part of these balance sheets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Financial Statements 207 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF ASSESSMENTS AND EXPENDITURES For the years ended December 31, 1981 1980 ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS (Note 1) For Board expenses and property additions $ 63,162,700 $ 62,230,800 For expenditures made on behalf of the Federal Reserve Banks for printing, issuance, and redemption of Federal Reserve notes 84,859,336 71,440,704 Total assessments 148,022,036 133,671,504 FUNDED EXPENDITURES (Note 1) Board expenses Salaries 41,014,846 37,069,785 Retirement and insurance contributions (Note 2) 6,227,869 9,835,780 Travel 1,591,343 1,585,661 Professional fees 347,152 675,718 Contractual services 1,179,604 746,497 Printing and binding 1,791,588 1,651,924 Equipment, office space, and other rentals (Note 4) ... 867,466 791,098 Telephone and telegraph 862,981 685,918 Postage 655,030 641,658 Stationery, office, and other supplies 560,350 509,892 Heat, light, and power 1,273,657 966,949 Cafeteria operations, net 442,897 391,384 Repairs and maintenance 788,394 489,082 Books and subscriptions 173,693 162,870 Other _ 690,950 443,494 58,467,820 56,647,710 Board property additions, net of recoveries on disposals of $4,893 in 1981 and $1,833,945 in 1980 (Note 1) 848,062 4,726,533 Expenditures for printing, issuance, and redemption of Federal Reserve notes on behalf of the Federal Reserve Banks (Note 1) 84,859,336 71,440,704 Total funded expenditures 144,175,218 132,814,947 Assessments over funded expenditures 3,846,818 856,557 UNFUNDED ACCRUED ANNUAL LEAVE (Note 1) 215,344 442,156 ASSESSMENTS OVER FUNDED EXPENDITURES AND UNFUNDED ACCRUED ANNUAL LEAVE $ 3,631,474 $ 414,401 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 Financial Statements BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CHANGES IN FINANCIAL POSITION For the years ended December 31, 1981 1980 SOURCES OF FUNDS Assessments levied for Board expenses and property additions $ 63,162,700 $ 62,230,800 Assessments levied for expenditures made on behalf of the Federal Reserve Banks 84,859,336 71,440,704 Recoveries from disposals of property 4,893 1,833,945 Total sources 148,026,929 135,505,449 APPLICATIONS OF FUNDS Board expenses 58,467,820 56,647,710 Expenditures for printing, issuance, and redemption of Federal Reserve notes on behalf of the Federal Reserve Banks 84,859,336 71,440,704 Additions to property Land and improvements 3,485 — Buildings 451,216 199,512 Furniture and equipment 397,224 483,309 Computer equipment 1,030 5,877,657 852,955 6,560,478 Decrease (increase) in accounts payable, accrued payroll and related taxes (836,495) 650,938 Increase (decrease) in receivables, inventories, and deferred costs (570,458) 1,066,191 Total applications 142,773,158 136,366,021 INCREASE (DECREASE) IN CASH 5,253,771 (860,572) CASH BALANCE, beginning of year 911,190 1,771,762 CASH BALANCE, end of year $ 6,164,961 $ 911,190 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 209 NOTES TO FINANCIAL STATEMENTS (2) RETIREMENT PLANS There are two major retirement plans for DECEMBER 31, 1981 AND 1980 employees of the Board. Approximately 86 percent of the employees are covered by the (1) SIGNIFICANT ACCOUNTING POLICIES Federal Reserve Board Plan. All new members In preparing its financial statements, the of the staff who do not come directly from Board of Governors of the Federal Reserve a position in the federal government are System (the Board) has applied accounting covered by this plan. The second plan, the principles which, in management's opinion, Civil Service Retirement Plan, covers all new best reflect its financial position and results employees who come directly from federal of operations. These accounting principles government service. Employee contributions include certain principles which are generally are the same percentage of salary under both accepted for organizations in the private sector plans, and benefits are similar, being based and also certain principles which are generally upon the Civil Service Plan. accepted for governmental units. A summary Under the Civil Service Plan, Board conof significant accounting policies is shown tributions directly match employee payroll below. deductions. Under the Federal Reserve Board Accounting for Assessments, Board Ex- Plan, the Board's contributions for active penses, and Property Additions—Assessments employees are actuanally determined and are made on the Federal Reserve Banks for Board funded in the current period. expenses and additions to property are calcu- The Board's contributions to the retirees' lated based upon expected cash needs and are Cost-of-Living Adjustment (COLA) totaled accrued when assessed. Board expenses and $878,000 in 1981 and $4,550,000 in 1980. The property additions are recorded on the accrual significant decrease in the level of these conbasis of accounting. tributions was primarily attributed to a change Accounting for Assessments and Expendi- in two elements of the Board's policy regarding tures Made on Behalf of the Federal Reserve the retirees' COLA. Banks—Assessments and expenditures made • Prior to 1981, following federal governon behalf of the Federal Reserve Banks for ment practice, the total cost of the retirees' the printing, issuance, and redemption of COLA was computed and funded semi- Federal Reserve notes are recorded on the annually using a terminal funding method. cash basis. This treatment produces results Consistent with congressional actions taken which are not materially different from those in 1981, the COLA is now computed and which would have been produced using the funded on an annual basis. accrual basis of accounting. This change in the method of computing Accounting for Property—The Board does the retirees' COLA had a significant impact not charge depreciation as an operating exon the level of the Board's funding in 1981. pense. Property additions are charged to The first semiannual payment was made in expense in the Operating Fund in the year of March 1981 and reflected the change in the acquisition; recoveries on the disposal of consumer price index that occurred during property are recorded as a reduction of exthe six months ended December 31, 1980. The pense in the Operating Fund in the year of second semiannual payment, which would disposal. When property is acquired or sold, have covered the first six months of 1981, the property accounts and the property fund was eliminated. (The second semiannual balance accounts in the Property Fund are payment made in 1980 was $2,600,000.) increased or decreased at cost. This reduction in payments, however, is a Accounting for Employee Annual Leave— one-time occurrence since the annual pay- In accordance with Statement of Financial ment to be made in 1982 will reflect changes Accounting Standards No. 43, "Accounting for in the consumer price index that oc- Compensated Absences," the Board's policy curred during the twelve months ended with regard to accounting for employee annual December 31, 1981. leave was changed in 1981. As the Statement prescribes, the Board now records the liability • As previously stated, prior to 1981, the for employees' rights to receive compensation Board terminally funded the entire amount for annual leave in the financial statements. of the COLA in the current period. In Accordingly, the accompanying financial state- 1981, this policy was changed so that onements for 1980 have been restated to reflect half of the annual COLA contribution is the liability for vested employee annual leave now currently funded by a lump sum payas of December 31, 1979, and for the incre- ment with the balance of the contribution mental expense for 1980. The current year funded by payments made over a period incremental expense for this liability is pre- of fifteen years, as actuarially determined. sented in the accompanying Statements of (In 1981, contributions of $712,000 were Assessments and Expenditures. deferred.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 Financial Statements Additionally, employees of the Board par- (4) COMMITMENTS AND ticipate in the Federal Reserve System's Thrift CONTINGENCIES Plan. Under this plan, the Board contributes The Board leases office and computer equipa fixed percentage of allowable employee savment and office and storage space under leases ings to employee savings accounts. which may generally be terminated within Board contributions to all retirement plans one year. At December 31, 1981, fixed totaled approximately $5,338,000 in 1981 and future rental commitments were approximately $9,110,000 in 1980. $1,087,000 for 1982. As of January 1, 1981 and 1980 (the dates The Board has been named as a defendant of the most recent actuarial reviews), the acin litigation involving challenges to, or appeals cumulated plan benefits for the Federal from, actions or proposed actions of the Board Reserve Board Plan were as follows. pursuant to statutory requirement or authoriza- As of January 1, tion. Such lawsuits generally seek injunctive or declaratory relief against the Board rather 1981 1980 than monetary awards. It is the opinion of Actuarial present value Board counsel that lawsuits involving monetary of accumulated awards do not represent a material liability plan benefits to the Board. Vested $43,930,769 $43,991,227 The Board is self-insured with regard to Nonvested 2,790,947 3,161,989 (1) a group term life and accident insurance plan for Board officers and (2) losses of its $46,721,716 $47,153,216 building and equipment from fire or other casualties. Coverage for other customarily The assumed rate of return used in de- insured risks, such as workers' compensation termining the present value of accumulated and comprehensive general liability, is carried plan benefits was 9 percent in 1981 and by the Board. 8 percent in 1980. As of January 1, 1981 and 1980, net assets available for benefits exceeded the actuarial (5) FEDERAL FINANCIAL INSTITUTIONS present value of accumulated plan benefits. EXAMINATION COUNCIL The Board is one of five member agencies (3) FEDERAL RESERVE REGULATORY SERVICE of the Federal Financial Institutions Examina- The Board began publication of the Federal tion Council (the Council). During 1981 and Reserve Regulatory Service in 1981. This 1980, the Board paid $113,730 and $42,656, monthly looseleaf service contains Board regu- respectively, in assessments for operating exlations, interpretations, staff rulings, and other penses of the Council. regulatory materials. The service is distributed The Board serves as custodian for the without charge throughout the Federal Reserve Council's cash. It also processes accounting System. It is also sold to depository institu- transactions, including payroll for most emtions, legal firms, and others. Subscription ployees, and performs other administrative revenues in the amount of $711,490 were rec- services for the Council, which are reimbursed. ognized in 1981 and used to offset prior years' The Board is not reimbursed for the costs development costs and a portion of the current of personnel who serve on the Council and year publication costs. The remaining publica- on the various task forces and committees of tion costs of $334,562 have been deferred and the Council. The costs associated with these will be amortized against 1982 subscription contributed services are included in the acrevenues. companying financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

212 Tables 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1981 Thousands of dollars ASSETS Gold certificate account 11,151,256 Special drawing rights certificate account 3,318,000 Coin 376,575 Loans and securities Loans to depository institutions 1,603,564 Acceptances held under repurchase agreements 194,755 Federal agency obligations Bought outright 9,125,364 Held under repurchase agreements 268,910 U.S. government securities Bought outright Bills 49,359,015 Notes 59,978,412 Bonds 18,400,517 Total bought outright 127,737,944 Held under repurchase agreement 3,216,090 Total U.S. government securities 130,954,034 Total loans and securities 142,146,627 Cash items in process of collection Transit items 8,752,734 Other cash items 1,882,978 Total cash items in process of collection 10,635,712 Bank premises Land 90,888 Buildings (including vaults) 352,312 Building machinery and equipment 124,343 Construction account 87,140 Total bank premises 563,795 Less depreciation allowance 156,502 407,293 Bank premises, net 498,181 Other assets Furniture and equipment 215,364 Less depreciation 68,548 Total furniture and equipment, net 146,816 Denominated in foreign currencies i 5,128,423 Interest accrued 2,227,841 Premium on securities 266,989 Due from Federal Deposit Insurance Corporation 428,000 Overdrafts 172,327 Prepaid expenses 55,788 Suspense account 182,469 Real estate acquired for banking-house purposes 12,189 All other 99,885 Total other assets 8,720,727 Total assets 176,847,078 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 213 I .—Continued LIABILITIES Federal Reserve notes Outstanding (issued to Federal Reserve Banks) 151,032,813 Less held by Federal Reserve Banks 19,127,745 Total Federal Reserve notes, net 131,905,068 Deposits Depository institutions 25,227,595 U.S. Treasury—general account 4,300,773 Foreign—official accounts 504,559 Other deposits Officers' and certified checks 39,682 International organizations 220,096 All other2 531,072 Total other deposits 790,850 Deferred availability cash items 8,880,357 Other liabilities Exchange-translation account —123,961 Unearned discount 474 Discount on securities 2,705,752 Sundry items payable 28,441 Suspense account 147,752 All other 1,160 Total other liabilities 2,759,618 Total liabilities 174,288,820 CAPITAL ACCOUNTS Capital paid in 1,279,129 Surplus 1,279,129 Other capital accounts3 Total liabilities and capital accounts 176,847,078 1. Includes $103.9 million in U.S. government 3. During the year, this item includes undissecurities held under repurchase agreement against tributed net income, which is closed out on receipt of foreign currencies and $1,881.6 million Dec. 31; see table 7 in the Statistical Tables in foreign currencies warehoused for the U.S. section of this REPORT. y f ^e ' £» T t£S the Federal p account pending payment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

2. Statement of Condition of Each Federal Reserve Bank, December 31, 1981 and 1980 Millions of dollars Total Boston New York Philadelphia Cleveland Richmond Item 1981 1980 1981 1980 1981 | 1980 1981 1980 1981 1980 1981 1980 ASSETS 11,151 11,161 1,017 577 3,160 3,013 531 560 805 847 1,147 961 Special drawing rights certificate account 3,318 2,518 165 128 951 665 141 121 253 201 288 229 377 397 20 27 18 24 19 19 38 49 46 42 Loans 1,604 1,594 77 106 559 663 212 37 19 70 102 189 Other 0 215 0 0 0 0 0 17 0 132 0 0 195 776 0 0 195 776 0 0 0 0 0 0 Federal agency obligations Bought outright 9,125 8,739 388 399 2,657 2,272 327 379 662 660 729 718 Held under reDurchase agreement 269 525 0 0 269 525 0 0 0 0 0 0 U.S. government securities 127,738 119,299 5,437 5,450 37,188 31,010 4,571 5,179 9,274 9,013 10,198 9,799 Held under repurchase agreements 3,216 2,029 0 0 3,216 2,029 0 0 0 0 0 Total loans and securities 142,147 133,177 5,902 5,955 44,084 37,275 5,110 5,612 9,955 9,875 11,029 10,706 Cash items in process of collection 10,636 15,504 313 403 705 2,351 397 425 383 479 1,730 3,035 Bank premises 498 457 98 100 23 20 52 53 27 24 99 89 Other assets Denominated in foreign currencies2 5,129 5,104 141 145 1,386 1,374 191 195 397 414 256 255 All other 3,592 3,177 125 122 1,296 751 140 151 197 294 222 252 Interdistrict Settlement Account 0 0 +287 -82 + 656 +2,859 -256 -837 -1,066 -322 + 562 + 219 Total assets 176,848 171,495 8,068 7,375 52,279 48,332 6,325 6,299 10,989 11,861 15,379 15,788 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

LIABILITIES Federal Reserve notes 131,906 124,241 6,995 6,191 39,633 35,601 5,287 5,276 8,972 9,463 12,046 10,786 Deposits Depository institutions 3 25,228 27,456 602 743 5,075 6,521 664 576 1,259 1,529 1,301 1,637 U.S. Treasury—General account 4,301 3,062 0 0 4,301 3,062 0 0 0 0 0 0 Foreign—Official accounts 505 411 9 10 267 145 12 14 25 30 16 18 All other I 791 617 12 11 540 437 10 8 20 16 31 24 Total deposits 30,825 31,546 623 764 10,183 10,165 686 598 1,304 1,575 1,348 1,679 Deferred availability cash items 8,800 11,037 278 257 949 1,384 159 237 339 437 1,656 2,989 Other liabilities and accrued dividends4 2,759 2,265 106 97 876 570 89 96 182 196 197 210 174,290 169,089 8,002 7,309 51,641 47,720 6,221 6,207 10,797 11,671 15,247 15,664 Total liabilities CAPITAL ACCOUNTS Capital paid in 1,279 1,203 33 33 319 306 52 46 96 95 66 62 Surplus 1,279 1,203 33 33 319 306 52 46 96 95 66 62 Other capital accounts 0 0 0 0 0 0 0 0 0 0 0 0 Total liabilities and capital accounts 176,848 171,495 8,068 7,375 52,279 48,332 6,325 6,299 10,989 11,861 15,379 15,788 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes Issued to Federal Reserve Bank by Federal Reserve Agent and outstanding 151,033 140,184 7,885 7,007 43,654 38,710 7,374 6,515 9,882 10,225 13,348 12,006 Less held by issuing Bank, and forwarded for redemption5 19,127 15,943 890 816 4,021 3,109 2,087 1,239 910 762 1,302 1,220 Federal Reserve notes, net6 131,906 124,241 6,995 6,191 39,633 35,601 5,287 5,276 8,972 9,463 12,046 10,786 Collateral held by Federal Reserve for notes issued to Bank Gold certificate account 11,151 11,161 1,017 577 3,160 3,013 531 560 805 847 1,147 961 Special drawing rights certificate account 3,318 2,518 165 128 951 665 141 121 253 201 288 229 Other eligible assets 0 0 0 0 0 0 0 0 0 0 0 0 U.S. government and agency securities 117,437 110,562 5,813 5,486 35,522 31,923 4,615 4,595 7,914 8,415 10,611 9,596 Total collateral 131,906 124,241 6,995 6,191 39,633 35,601 5,287 5,276 8,972 9,463 12,046 10,786 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, 1981 and 1980—Continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 1981 1980 1981 1980 1981 1980 1981 1980 1981 1980 1981 1980 1981 1980 ASSETS 436 465 1,171 1,722 450 465 189 225 534 501 628 572 1,083 1,253 98 79 519 411 129 106 48 42 154 111 192 132 380 293 Coin 43 38 23 23 29 24 17 12 31 44 26 30 67 65 Loans To deDositorv institutions . . •>.. 44 81 399 183 49 51 11 25 60 88 57 46 15 55 Other 0 0 0 3 0 0 0 9 0 50 0 1 o 3 Acceptances held under repurchase agreement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Federal agency obligations 290 317 1,393 1,373 338 351 136 156 417 409 571 519 1,217 1,186 Held under reDurchase agreement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 U.S. government securities Bought outright1 4,059 4,323 19,501 18,746 4,734 4,794 1,911 2,131 5,842 5,591 7,992 7,080 17,031 16,183 Held under repurchase agreement 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4,393 4,721 21,293 20,305 5,121 5,196 2,058 2,321 6,319 6,138 8,620 7,646 18,263 17,427 Cash items in process of collection 1,571 2,041 1,011 1,730 632 656 451 699 1,212 1,521 1,528 L370 703 794 Bank premises 34 35 17 16 14 14 28 28 22 22 14 70 43 Other assets Denominated in foreign currencies 2 377 379 738 729 151 150 161 160 216 215 306 294 809 794 All other 151 157 468 7 417 135 102 52 84 141 126 254 157 411 564 Interdistrict Settlement Account -434 -392 -930 -967 -730 -391 -211 -448 + 767 -71 + 1,542 +401 -187 + 31 Total assets 6,669 7,523 24,310 24,386 5,931 6,322 2,793 3,123 9,396 8,607 13,110 10,615 21,599 21,264 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

LIABILITIES Federal Reserve notes 3,142 3,670 19,534 19,437 4,532 4,835 1,463 1,807 6,652 5,758 8,666 7,198 14,984 14,219 Deoosits Depository institutions3 1,842 1,852 3,358 3,495 662 742 764 655 1,422 1,350 2,930 2,312 5,349 6,044 U S Treasury—General account 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Foreign 24 27 47 52 10 11 10 11 14 15 20 21 51 57 All other 8 8 78 39 17 9 3 5 15 12 22 19 35 29 Total deposits 1,874 1,887 3,483 3,586 689 762 111 671 1,451 1,377 2,972 2,352 5,435 6,130 Deferred-availability cash items 1,360 1,667 554 672 544 569 420 529 1,064 1,269 1,149 790 328 237 Other liabilities and accrued dividend* 99 119 379 337 92 84 39 40 115 99 155 127 430 290 Total liabilities 6,475 7,343 23,950 24,032 5,857 6,250 2,699 3,047 9,282 8,503 12,942 10,467 21,177 20,876 CAPITAL ACCOUNTS Capital paid in .... 97 90 180 177 37 36 47 38 57 52 84 74 211 194 Surplus 97 90 180 177 37 36 47 38 57 52 84 74 211 194 Other capital accounts 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total liabilities and capital accounts 6,669 7,523 24,310 24,386 5,931 6,322 2,793 3,123 9,396 8,607 13,110 10,615 21,599 21,264 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes Issued to Federal Reserve Bank by Federal Reserve Agent and outstanding 5,270 5,678 21,111 21,021 5,546 5,606 1,995 2,265 7,891 6,750 10,121 8,216 16,956 16,185 Less held by issuing Bank, and forwarded for redemption5 2,128 2,008 1,577 1,584 1,014 771 532 458 1,239 992 1,455 1,018 1,972 1,966 Federal Reserve notes, net6 3,142 3,670 19,534 19,437 4,532 4,835 1,463 1,807 6,652 5,758 8,666 7,198 14,984 14,219 Collateral held by Federal Reserve Agent for notes issued to Bank Gold certificate account 436 465 1 171 1,722 450 465 189 225 534 501 628 572 1,083 1,253 Special drawing rights certificate account 98 79 519 411 129 106 48 42 154 111 192 132 380 293 Other eligible assets 0 0 0 0 0 0 0 0 0 0 0 0 0 0 U.S. government and agency securities 2,608 3,126 17,844 17,304 3,953 4,264 1,226 1,540 5,964 5,146 7,846 6,494 13,521 12,673 Total collateral 3,142 3,670 19,534 19,437 4,532 4,835 1,463 1,807 6,652 5,758 8,666 7,198 14,984 14,219 1. Includes securities loaned—fully guaranteed by U.S. government securities 4. Includes exchange-translation account reflecting the monthly revaluation at pledged with Federal Reserve Banks—and excludes (if any) securities sold and market exchange rates of foreign exchange commitments. scheduled to be bought back under matched sale-purchase transactions. 5. Beginning September 1980, Federal Reserve notes held by the Reserve Banks 2. Includes U.S. government securities held under repurchase agreement against are exempt from the collateral requirement. receipt of foreign currencies and foreign currencies warehoused for the U.S. 6. Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve Treasury. Assets shown in this line are revalued monthly at market exchange Banks other than the issuing Bank. rates. 7. Includes special investment account at Chicago of Treasury bills maturing 3. Includes reserves of all depository institutions. within 90 days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 Tables 3. Federal Reserve Bank Holdings of U.S. Government and Federal Agency Securities, December 31, 1979-81 Millions of dollars U.S. government securities—Total 130,954 121,328 117,458 9,626 3,870 Within 90 days 29,126 28,279 26,841 847 1,438 91 days to 1 year 37,417 30,187 37,230 7,230 -7,043 1-5 years 36,025 34,505 27,864 1,520 6,641 5-10 years 11,752 13,354 12,774 -1,602 580 Over 10 years 16,634 15,002 12,748 1,632 2,254 Held outright 1 Treasury bills 49,359 43,688 45,244 5,671 -1,556 Treasury notes—Total 59,978 58,718 56,494 1,260 2,224 Jan. 31, 1980—K V/2 403 -403 Feb. 15, 1980—G 61/2 1,512 -1,512 Feb. 29, 1980—L 75/8 399 -399 Mar. 31, 1980—C IVi 809 —809 Apr. 30, 1980—N VA 457 -457 May 15, 1980—A 6% 5,273 -5,273 May 31, 1980—P 8 177 -177 June 30, 1980—D 75/8 322 -322 859 -859 June 31, 1980—R '.'.'.'.'.'.'.'.'., 8V2 714 —714 Aug. 15, 1980—B 9 2,435 -2,435 63/4 688 -688 Aug. 31, 1980—S ..'.'.'.'.'.'.'.'.'. 83/8 461 -461 Sept. 30, 1980—E 6% 153 -153 T 85/8 725 —725 Oct. 31, 1980—U 8% 354 -354 Nov. 15, 1980—J 700 -700 N D o ec v . . 3 3 1 0 , , 1 1 9 9 8 8 0 0 — — F V 9 5 1/ % 4 30 3 7 3 - - 3 3 0 3 7 W 97s 538 -538 Jan. 31, 1981—P 934 461 383 -461 78 Feb. 15, 1981—A 7 374 351 -374 23 C 73/a 1,101 1,074 -1,101 27 Feb. 28, 1981—Q 934 426 397 —426 29 Mar. 31, 1981—H 67s 226 218 -226 8 R 95/8 733 698 —733 35 Apr. 30, 1981—S 934 261 159 -261 102 May 15, 1981—D 73/8 191 185 -191 6 M 71/2 1,071 1,041 -1,071 30 May 31, 1981—T 93/4 411 313 -411 98 June 30, 1981—J 634 80 80 —80 0 U 332 306 —332 26 July 31, 1981—V 93/8 351 311 -351 40 Aug. 15, 1981—F 75/8 364 343 -364 21 8% 1,364 1,301 -1,364 63 Aug. 31, 1981—W ''.'.'.'.'. *.'.'.'.'. 95/8 571 563 -571 8 Sept. 30, 1981—K 6?4 181 131 -181 50 101/8 408 405 -408 3 Oct. 31, 1981—Y .!.'.'!.'"!.'!! 125/8 596 527 -596 69 Nov. 15, 1981—B 7% 1,600 1,600 -1,600 0 G 7 119 116 -119 3 Nov. 30, 1981—Z 121/8 649 594 -649 55 Dec. 31, 1981—L 7V4 177 167 —177 10 AB 113/8 577 571 -577 6 Jan. 31, 1982—N 111/2 490 462 0 28 462 Feb. 15, 1982—D 61/8 64 59 59 0 Feb. 28, 1982—P 137/8 591 545 0 46 545 Mar. 31, 1982—G 7% 247 245 245 2 0 Q 15 640 632 0 8 632 Apr. 30, 1982—R 113/8 525 496 0 29 496 May 15, 1982—A 8 1,447 1,447 1,447 0 0 E 7 53 53 53 0 0 K 91/4 1,041 1,019 1,018 22 1 May 31, 1982—S 9% 411 359 0 52 359 June 30, 1982—H 8*4 119 119 115 0 4 T 85/8 714 705 0 9 705 July 31, 1982—U 8% 1,073 1,000 0 73 1,000 Aug. 15, 1982—B 8VB 1,162 1,162 1,162 0 0 M 9 1,074 1,074 1,068 0 6 Aug. 31, 1982—V llH 570 570 0 0 570 Digitized for FR N O N Se A o o c p t v v S . t . . . 3 E 3 1 3 1 0 5 R 0 , , , , 1 1 1 1 9 9 9 9 8 8 8 8 2 2 2 2 — — — — X J Y C W "'.'.'.'.'.'.'.'.. Y 1 1 7 8 7 1 3 1 V 3 % % % V / » 8 % 4 2 7 3 5 7 5 3 7 8 5 8 5 9 0 0 0 4 7 2 3 5 7 3 7 2 5 6 6 9 0 0 0 4 7 2 6 7 2 0 0 0 4 0 7 3 1 2 0 0 0 5 6 4 5 3 2 1 5 6 1 0 0 2 0 4 2 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 219 U.S. government securities—Cont. Treasury notes—Cont Dec. 31, 1982—L 93/s 459 459 459 0 0 Z 15H 428 350 0 78 350 Jan. 31, 1983—M 135/8 542 0 0 542 0 Feb. 15, 1983—A 8 2,144 2,144 2,138 0 6 Feb. 28, 1983—N 13% 489 0 0 489 0 Mar. 31, 1983—D 9V4 12 12 9 0 3 P 125/8 888 0 0 888 0 Apr. 30, 1983—Q 141/2 313 0 0 313 0 May 15, 1983—C 7% 113 113 95 0 18 G 11% 861 851 837 10 14 May 31, 1983—R 155/8 505 0 0 505 0 June 30, 1983—E 8% 426 426 408 0 18 S 145/8 475 0 0 475 0 July 31, 1983—T 15% 361 0 0 361 0 Aug. 15, 1983—K 9V4 3,189 3,189 0 0 3,189 J 11% 1,081 1,079 0 2 1,079 Aug. 31, 1983—U 16V4 640 0 0 640 0 Sept. 30, 1983—F 93/4 284 284 284 0 0 V 16 441 0 0 441 0 Oct. 31, 1983—W 15¥t 606 0 0 606 0 Nov. 15, 1983—B 7 101 101 101 0 0 L 9% 1,991 1,935 0 56 1,935 Nov. 30, 1983—X 121/8 669 0 0 669 0 Dec. 31, 1983—H IO1/2 221 221 156 0 65 Y 13 600 0 0 600 0 Feb. 15, 1984—A 71/4 3,913 3,913 3,913 0 0 Mar. 31, 1984—D 14Y4 533 531 0 2 531 May 15, 1984—C 91/4 69 69 69 0 0 G 13^ 505 500 0 5 500 K 15% 751 0 0 751 0 June 30, 1984—E 8% 505 505 0 0 505 Aug. 15, 1984—B VA 385 385 385 0 0 13i/4 810 0 0 810 0 Sept. 30, 1984—¥".'.'.'.'.'.'.'.'.'.'. 121/8 339 339 0 0 339 Nov. 15, 1984— M L 1 14 6 % 1 1 , , 0 1 5 8 3 9 0 0 0 0 1 1 , , 0 1 5 8 3 9 0 0 Dec. 31, 1984—H 14 309 252 0 57 252 Feb. 15, 1985—A 8 1,448 1,448 1,448 0 0 Mar. 31, 1985—G 133/8 378 0 0 378 0 May 15, 1985—C 103/8 38 38 38 0 0 D 143/8 261 260 0 1 260 June 30, 1985—H 14 250 0 0 250 0 Aug. 15, 1985—B 8*4 1,624 1,624 1,624 0 0 95/8 79 79 0 0 79 Sept. 30, 1985—J '.'.'.'.'.'.'.'..'.' .*'. 15% 288 0 0 288 0 Nov. 15, 1985—F 113/4 5 0 0 5 0 Dec. 31, 1985—K 141/8 154 0 0 154 0 Feb. 15, 1986—C 131/2 17 0 0 17 0 May 15, 1986—A 7% 1,158 1,158 1,137 0 21 D 1334 22 0 0 22 0 Aug. 15, 1986—B 8 1,987 1,987 1,987 0 0 Nov. 15, 1986—E 13% 22 0 0 22 0 F 16Vs 29 0 0 29 0 Feb. 15, 1987—B 9 1,659 1,657 1,659 0 2 May 15, 1987—C 12 498 498 0 0 498 Nov. 15, 1987—A 75/8 616 616 616 0 0 Jan. 15, 1988—C 123/8 5 0 0 5 0 Apr. 15, 1988—D 13V4 117 0 0 117 0 May 15, 1988—A 81/4 1,754 1,754 1,751 0 3 July 15, 1988—E 14 18 0 0 18 0 Oct. 15, 1988—F 153/8 121 0 0 121 0 Nov. 15, 1988—B 834 1,139 1,139 1,130 0 9 May 15, 1989—A WA 459 459 451 0 8 Nov. 15, 1989—B 1034 1,942 1,942 422 0 1,520 Aug. 15, 1990—A 1034 1,186 1,186 0 0 1,186 Nov. 15, 1990—B 13 644 220 0 424 220 May 15, 1991—A 14Vi 324 0 0 324 0 Aug. 15, 1991—B 14% 444 0 0 444 0 Nov. 15, 1991—C 141,4 400 0 0 400 0 Treasury bonds—Total , 18,401 16,893 14,553 1,508 2,340 1975-85—May 4*4 156 156 156 0 0 1978-83—June 3V4 87 87 87 0 0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 Tables 3. Federal Reserve Bank Holdings of U.S. Government and Federal Agency Securities, December 31, 1979-81—Continued Millions of dollars U.S. government securities—Cont. Treasury bonds—Total—Cont. 1980—Feb 4 0 0 266 0 -266 Nov 31/2 0 0 74 0 -74 1981—Aug 0 124 123 — 124 1 1982—Feb 63/8 386 386 386 0 0 1984—Aug 63/8 355 355 355 0 0 1985—May 3YA 47 47 47 0 0 1986—Nov 6Ya 310 310 310 0 0 1987-92—Aug 4i/4 509 509 509 0 0 1988-93—Feb 4 24 24 24 0 0 Aug 71/2 384 384 384 0 0 1989-94—May 4Vs 77 77 77 0 0 1990—Feb 31/2 84 84 84 0 0 May 8V4 342 342 342 0 0 1992—Aug VA 92 92 92 0 0 1993—Feb V 6V A 4, 1 7 3 0 6 1 7 3 0 6 1 7 3 0 6 0 0 0 0 Aug. .. 8y 132 131 118 1 13 Nov. .. 159 159 144 0 15 1993-98—May 157 157 157 0 0 1994-99—May 8V2 1,004 1,004 1,004 0 0 1994—Feb. .. 9 97 84 60 13 24 Aug. .. 8?4 52 42 32 10 10 Nov. .. lOVs 49 34 0 15 34 2 2 2 0 0 1995— M Fe a b y . ... 1 I 1 O 2 0 5 3 1 / / / 8 8 2 3 2 2 1 8 8 2 2 2 8 7 8 2 0 0 0 4 0 6 5 2 2 8 8 2 7 Nov 11V4 32 0 0 32 0 1995-2000—Feb. 7% 585 585 566 0 19 1996-2001— A A u u g g . . 8 83/8 2, 4 0 8 5 9 4 2, 4 0 8 5 9 3 2, 4 0 8 4 8 2 0 1 11 1 2001—May 13i/8 16 0 0 16 0 Aug 13% 44 0 0 44 0 Nov 1534 55 0 0 55 0 1998—Nov 31/2 31 31 31 0 0 2000-05—May ... 8V4 1,493 1,493 1,493 0 0 2002-07—Feb. ... 75/8 1,389 1,389 1,389 0 0 Nov. .. 7% 265 265 265 0 0 2003-08—Aug. .. 749 749 747 0 2 Nov. .. 1,534 1,534 1,534 0 0 2004-09—May .. 9VB 633 633 633 0 0 Nov. .. 10% 820 820 326 0 494 2005-10—Feb. .. 1134 522 512 0 10 512 May .. 10 1,070 1,070 0 0 1,070 Nov. .. 1234 526 159 0 367 159 2006-11—May ... 13% 680 0 0 680 0 Nov. .. 14 337 0 0 337 0 Held under RPs 3,216 2,029 1,168 1,187 861 Federal agency obligations Held outright—Total 9,125 8,739 8,216 386 523 Banks for Cooperatives 21 35 35 — 14 0 Export-Import Bank 16 16 16 0 0 Federal Farm Credit Banks 1,960 1,459 951 501 508 Federal Home Loan Banks 2,500 2,426 2,271 74 155 Federal Home Loan Mortgage Corporation 5 0 0 5 0 Federal Intermediate Credit Banks 59 75 97 -16 -22 Federal Land Banks 840 988 1,163 —148 -175 Farmers Home Administration ... 163 187 196 —24 -9 Federal National Mortgage Association 3,312 3,305 3,237 68 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 269 525 494 -256 31 1. Excludes securities sold under matched agree- NOTE. Details may not add to totals because of ments, and securities held under repurchase rounding. agreements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 221 B mk I-, di?,a<" of Social Shuu-lenn Trt . .«..!•>' ,-Uv ' 'iv I'n UJ1 S L I^ 1<>" Millions of dollars Date "]" Amount Date Amount Date Amount Date Amount 1972 1973 1975 1977 Sept. 12 38 Sept. 15 319 Mar. 15 820 Sept. 30 2,500 161 319 16i 820 Oct. 1 2,500 1973 17 832 2i 2,500 Aug. 15 351 1974 3i 2,500 Sept. 7 73 Nov. 6 131 Aug. 5 656 8 73 6 965 1979 91 73 1975 7 474 Mar. 31 2,600 10 42 Mar. 11 626 11 204 11 485 12 1,043 12 543 Apr. li 2,600 12 169 13 315 13 399 2 1,283 14 319 14 820 15 481 3 376 1. Sunday or holiday. prevailing discount rate of the Federal Reserve NOTE. Under authority of section 14(b) of the Bank of New York. For data for earlier years, Federal Reserve Act. beginning with 1942, see previous ANNUAL RE- Throughout the period shown the interest rate PORTS. No holdings after 1979 nor on other dates paid on such securities was VA percent below the not shown. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 Tables 5 Millions of dollars Type of transaction Jan. Feb. Mar. Apr. U.S. GOVERNMENT SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 1,100 Gross sales 3,865 Exchange 0 Redemptions 1,000 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 462 Exchange 0 Redemptions 0 1 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -462 Exchange 0 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 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 0 1,607 357 0 0 0 0 0 0 0 23 0 990 878 -1,936 -1,385 0 0 0 0 0 0 -990 -878 1,211 1,385 0 0 0 400 0 0 0 325 1,100 0 3,865 380 1,000 0 61,427 30,819 63,062 31,651 6,108 0 8,137 0 oooo oooo 1,141 0 0 0 115 0 522 -261 0 469 0 -522 261 164 0 0 0 89 0 0 0 1,607 1,977 0 0 0 0 32,003 37,251 30,441 37,295 1,623 9,458 1,246 9,835 -4,159 452 422 1,644 0 0 15 652 494 1,211 1,177 437 1,268 -525 -3 42 -58 0 0 0 0 -776 0 298 -298 -776 0 298 -298 5,460 450 762 1,287 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 223 I June I May Aug. j Sept. | Oct. | Nov. P Dec. |" Total oooo 295 1,325 1,713 1,753 241 1,765 2,170 13,899 90 0 333 945 1,157 0 0 6,746 0 0 0 0 0 0 0 0 0 100 0 500 200 16 0 1,816 0 0 122 0 0 0 0 80 317 0 0 0 0 0 0 0 0 23 2,900 833 1,073 2,807 628 425 1,389 887 13,794 -1,281 -823 -351 -2,430 -599 0 -3,047 -754 -12,869 0 0 0 0 0 0 0 0 0 0 0 607 0 0 0 100 526 1,702 0 0 0 0 0 0 0 0 0 -1,724 -833 -1,073 -820 -628 -425 -1,057 -887 -10,299 681 823 351 1,724 599 0 2,325 754 10,117 0 0 64 0 0 0 0 165 393 0 0 0 0 0 0 0 0 0 -1,176 0 0 -1,987 0 0 -332 0 -3,495 300 0 0 400 0 0 400 0 1,500 0 0 182 0 0 0 0 108 379 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 300 0 0 305 0 0 322 0 1,253 790 295 2,301 1,713 1,753 241 1,865 3,049 16,690 0 90 0 333 945 1,157 0 0 6,769 0 0 100 0 500 200 16 0 1,816 45,658 51,106 69,972 54,329 52,055 58,581 42,012 54,098 589,312 43,492 52,607 69,309 55,917 51,555 58,372 41,900 54,044 589,647 1,219 3,509 23,217 7,199 0 3,902 9,505 14,180 79,920 1,219 3,509 21,599 8,817 0 3,902 7,709 12,760 78,733 -1,376 1,706 3,155 1,350 -192 -1,325 3,534 4,415 9,626 OO* 0 0 26 186 691 186 691 OO* 5,182 4,822 OO* 0 0 494 0 494 0 0 0 0 0 33 15 10 4 108 864 0 787 1,607 1,647 13,320 1,225 0 787 1,288 1,697 13,576 -26 360 -360 -33 -15 802 -54 130 0 0 0 0 0 0 0 0 0 0 0 453 -453 0 0 744 -549 -582 0 0 453 -453 0 0 744 -549 -582 -1,376 1,680 3,968 536 -225 -1,340 5,080 3,812 9,175 * Less than $500,000. Account; all other figures increase such holdings. Digitized foNrO FTRE.A SSaElRes , redemptions, and negative figures Details may not add to totals because of rounding. http://frasreedru.sctel ouhioslfdeidng.os rgo/ f the System Open Market Federal Reserve Bank of St. Louis

224 Tables 6. Income and Expenses of Federal Reserve Banks, 1981 Dollars Item Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 196,331,509 9,362,575 45,353,928 11,439,935 15,236,123 Acceptances 18,712,312 18,712,312 U.S. government securities 14,551,098,804 628,660,113 4,167,757,056 549,249,289 1,062,401,528 Foreign currencies 577,370,665 15,702,157 158,993,196 21,313,703 44,290,531 Priced services 154,103,355 9,423,912 24,102,288 5,626,703 9,836,160 All other 10,733,008 401,769 4,575,228 213,369 638,632 Total 15,508,349,653 663,550,526 4,419,494,008 587,842,999 1,132,402,974 CURRENT EXPENSES Salaries and other personnel expenses .... 432,015,516 27,804,277 93,748,943 21,383,725 25,965,099 Retirement and other benefits 114,682,239 7,640,992 23,624,777 6,139,862 7,364,623 Fees 9,321,086 348,694 3,428,729 379,826 378,963 Travel 13,824,536 709,876 1,911,345 456,343 970,377 Postage and other shipping costs 99,837,683 5,348,375 13,249,112 4,183,558 7,206,175 Communications 17,066,723 1,063,781 3,804,729 817,121 960,961 Materials and supplies 37,178,034 2,329,943 7,157,958 1,888,866 2,152,532 Building expenses Taxes on real estate .. 16,016,014 2,945,563 2,797,787 1,340,142 884,462 Property depreciation1 12,163,592 1,913,411 592,446 1,481,039 822,134 Utilities 18,801,492 2,151,978 3,862,640 1,946,101 1,127,192 Rent 10,921,262 456,529 6,476,699 25,054 171,060 Other 9,574,540 530,219 1,863,871 837,748 436,312 Equipment Rentals 46,000,529 1,779,381 7,580,261 1,339,269 3,873,504 Depreciation 24,136,555 1,756,650 4,995,667 1,667,484 1,436,909 Repairs and maintenance3 ... 15,913,291 805,215 3,762,612 868,579 660,034 Cost of Federal Reserve currency .. 82,924,013 5,065,377 15,979,925 3,968,334 5,058,443 All other 19,183,158 1,751,536 2,941,228 842,991 1,471,781 Recoveries -4,604,352 -304,306 -975,512 -429,333 -37,183 Expenses capitalized3 .. -2,475,768 -124,601 -154,260 Total4 969,042,481 63,972,890 196,803,217 49,136,709 60,749,118 Reimbursements -71,928,076 -7,038,434 -18,152,139 -3,997,364 -5,597,428 Net expenses .... 897,114,405 56,934,456 178,651,077 45,139,345 55,151,690 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 225 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 20,183,192 6,872,846 30,154,475 7,884,168 7,466,473 18,732,638 8,847,852 14,797,304 1,164,394,436 478,113,008 2,226,833,457 549,026,607 228,392,614 666,257,777 891,720,713 1,938,292,206 28,620,552 42,076,420 82,499,886 16,834,636 17,956,945 24,129,645 34,586,775 90,366,219 10,532,966 18,277,346 23,794,221 8,071,572 9,096,704 11,632,636 10,860,788 12,848,059 855,115 702,256 1,153,198 301,897 346,931 202,576 509,962 832,075 1,224,586,261 546,041,876 2,364,435,237 582,118,880 263,259,667 720,955,272 946,526,090 2,057,135,863 32,429,806 36,853,183 55,495,501 22,522,717 18,849,950 27,664,892 25,631,576 43,665,847 8,981,798 10,095,130 15,055,819 5,988,004 4,612,185 7,359,311 6,059,583 11,760,155 362,138 579,196 792,431 597,147 435,042 429,070 543,714 1,046,136 1,217,586 1,327,223 1,941,338 625,441 810,063 1,168,549 955,118 1,731,277 10,780,904 9,680,821 13,795,706 6,515,474 4,473,450 7,094,432 6,768,812 10,740,864 1,213,187 1,759,650 2,112,829 668,250 845,641 1,045,456 1,073,751 1,701,367 3,471,559 3,732,057 4,851,945 2,173,596 1,274,685 2,707,171 2,467,399 2,970,323 1,249,670 989,263 2,143,327 392,203 1,702,380 461,808 505,581 603,828 2,725,290 863,843 559,792 461,312 852,286 718,764 474,082 699,193 1,433,043 1,671,607 1,870,429 957,745 639,320 995,459 1,061,378 1,084,600 996,785 127,482 1,193,903 260,810 71,170 35,924 156,555 949,291 951,206 986,473 1,678,012 367,551 501,001 452,558 624,940 344,649 5,583,045 5,309,408 6,646,711 2,843,586 1,846,902 2,142,872 2,891,651 4,163,939 1,746,231 1,626,484 1,954,681 996,302 1,030,148 2,378,566 1,785,408 2,762,025 1,304,854 1,378,331 1,426,608 886,180 572,998 1,233,240 1,331,266 1,683,374 9,974,194 6,198,267 10,251,878 3,069,797 1,211,177 4,879,439 5,904,801 11,362,381 1,210,098 1,617,817 2,168,148 656,843 1,056,460 1,096,936 1,764,466 2,604,854 -837,926 -451,523 -649,494 -436,911 -90,564 -269,357 -86,352 -35,891 -180,485 -287,487 -596,633 -62,902 -68,712 -660,106 -176,859 -163,723 81,175,3214 84,057,225 122,692,931 49,483,145 40,625,582 60,934,984 59,736,870 99,674,489 -5,162,709 -5,161,016 -8,098,344 -3,217,310 -2,021,586 -3,489,821 -2,768,745 -7,223,180 76,012,612 78,896,210 114,594,587 46,265,835 38,603,996 57,445,163 56,968,125 92,451,309 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 Tables 6. Income and Expenses of Federal Reserve Banks, 1981—Continued Dollars Item Total Boston New York Philadelphia | Cleveland PROFIT AND LOSS Current net income .... 14,611,235,248 606,616,070 4,240,842,931 542,703,654 1,077,251,284 Additions to current net income 82,580,165 439,424 76,354,576 458,270 450,961 Deductions from current net income Losses on sales of U.S. government securities 124,008,397 5,457,018 34,318,309 4,874,159 9,171,623 Losses on foreign currency transactions5 305,991,850 8,567,772 78,027,922 11,627,690 24,173,356 All other 21,452,907 922,676 15,598,419 142,963 186,189 Total deductions 451,453,154 14,947,466 127,944,650 16,644,812 33,531,168 Net deductions from current net income 368,872,989 14,508,042 51,590,074 16,186,542 33,080,207 Earnings credits applied in payment of priced services .... 4,006,196 577,927 130,755 174,136 137,957 Assessment for expenditures of Board of Governors6 63,162,700 1,728,700 16,066,500 2,402,000 4,970,500 Net earnings before payments to U.S. Treasury 14,175,193,363 589,801,401 4,173,055,602 523,940,976 1,039,062,620 Dividends paid 74,573,806 2,001,083 18,797,197 2,798,463 5,756,998 Payments to U.S. Treasury Reserve notes) .... 14,023,722,907 587,480,068 4,141,581,905 514,110,063 1,032,044,272 Transferred to surplus 76,896,650 320,250 12,676,500 7,032,450 1,261,350 Surplus, January 1 1,202,232,200 33,114,250 306,006,800 45,954,150 95,189,950 Surplus, December 31 1,279,128,850 33,434,500 318,683,300 52,986,600 96,451,300 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 227 Richmond | Atlanta | Chicago | St. Louis Minneapolis j Kansas City Dallas San Francisco 1,148,573,648 467,145,665 2,249,840,650 535,853,045 224,655,673 663,510,109 889,557,965 1,964,684,554 453,086 456,602 396,067 485,484 467,120 461,357 711,194 1,446,024 10,031,986 4,195,583 19,186,911 4,774,349 2,020,949 5,736,024 7,574,644 16,666,842 15,605,584 22,949,389 44,980,802 9,179,755 9,791,739 13,157,650 18,665,503 49,264,688 143,719 203,991 2,049,918 34,034 233,850 304,090 228,956 1,404,102 25,781,289 27,348,963 66,217,631 13,988,138 12,046,538 19,197,764 26,469,103 67,335,632 25,328,203 26,892,361 65,821,564 13,502,654 11,579,418 18,736,407 25,757,909 65,889,608 415,413 511,247 1,565,810 4,359 206,213 31,360 199,807 51,212 3,236,800 4,735,700 9,246,000 1,876,900 2,091,100 2,731,200 3,900,200 10,177,100 1,119,593,232 435,006,357 2,173,207,276 520,469,132 210,778,942 642,011,142 859,700,049 1,888,566,634 3,841,323 5,637,026 10,748,301 2,211,992 2,736,631 3,280,922 4,745,886 12,017,984 1,111,570,209 422,218,381 2,159,222,575 516,514,190 199,273,611 633,479,120 844,715,263 1,861,513,250 4,181,700 7,150,950 3,236,400 1,742,950 8,768,700 5,251,100 10,238,900 15,035,400 61,685,200 90,077,950 176,818,700 35,725,850 38,074,150 51,793,450 73,527,600 194,264,150 65,866,900 97,228,900 180,055,100 37,468,800 46,842,850 57,044,550 83,766,500 209,299,550 1. This item includes depreciation of furniture, Banks for operation of the Federal Reserve furnishings and fixtures, which was reported under Communications System. equipment in earlier years. 5. This item includes unrealized gains and 2. Reported under "All other" in earlier years. losses. 3. This item includes expenses for labor and 6. For additional details, see the last three materials temporarily capitalized and charged to pages of the section "Board of Governors, activities when the products are consumed. Financial Statements." 4. The total expense for Richmond has been NOTE. Details may not add to totals because adjusted to exclude $3,437,662, which was allo- of rounding. cated to the expenses of other Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 Tables 7. Income and Expenses of Federal Reserve Banks, 1914-81 Dollars Assessments of Pe R ri e o s d e , r v o e r B Fe a d n e k ral C in u c r o r m en e t e C x u p r e r n e s n e t s d N ed e u t c a ti d o o d r n i s ti o (— ns ) exp B en o d a i r t d u r o e f s of Governors All Banks 1914-15 2,173,252 2,018,282 5,875 302,304 1916 .. 5,217,998 2,081,722 — 193,001 192,277 1917 .. 16,128,339 4,921,932 -1,386,545 237,795 1918 .. 67,584,417 10,576,892 -3,908,574 382,641 1919 .. 102,380,583 18,744,815 -4,673,446 594,818 1920 .. 181,296,711 27,548,505 -3,743,907 709,525 1921 .. 122,865,866 33,722,409 -6,314,796 741,436 1922 .. 50,498,699 28,836,504 -4,441,914 722,545 1923 .. 50,708,566 29,061,539 -8,233,107 702,634 1924 .. 38,340,449 27,767,886 -6,191,143 663,240 1925 .. 41,800,706 26,818,664 -4,823,477 709,499 1926 .. 47,599,595 26,628,458 -3,637,668 721,724 1927 .. 43,024,484 26,739,327 —2,457,792 779,116 1928 .. 64,052,860 26,207,133 —5,026,029 697,677 1929 .. 70,955,496 28,909,469 -4,861,642 781,644 1930 .. 36,424,044 27,533,141 —93,136 809,585 1931 .. 29,701,279 26,322,110 311,451 718,554 1932 .. 50,018,817 25,562,571 — 1,413,192 728,810 1933 .. 49,487,318 28,422,677 — 12,307,074 800,160 1934 .. 48,902,813 27,869,374 —4,430,008 1,372,022 1935 .. 42,751,959 30,171,545 — 1,736,758 1,405,898 1936 .. 37,900,639 28,194,457 485,817 1,679,566 1937 .. 41,233,135 27,052,234 -1,631,274 1,748,380 1938 .. 36,261,428 27,186,684 2,232,134 1,724,924 1939 .. 38,500,665 27,025,391 2,389,555 1,621,464 1940 .. 43,537,805 27,461,466 11,487,697 1,704,011 1941 .. 41,380,095 31,123,609 720,636 1,839,541 1942 .. 52,662,704 36,877,718 — 1,568,208 1,746,326 1943 .. 69,305,715 41,129,934 23,768,282 2,415,630 1944 .. 104,391,829 46,879,564 3,221,880 2,296,357 1945 .. 142,209,546 46,376,762 -830,007 2,340,509 1946 .. 150,385,033 54,975,323 -625,991 2,259,784 1947 .. 158,655,566 62,753,308 1,973,001 2,639,667 1948 .. 304,160,818 69,466,518 -34,317,947 3,243,670 1949 .. 316,536,930 74,235,176 -12,122,274 3,242,500 1950 .. 275,838,994 77,138,071 36,294,117 3,433,700 1951 .. 394,656,072 91,373,589 —2,127,889 4,095,497 1952 .. 456,060,260 100,572,489 1,583,988 4,121,602 1953 .. 513,037,237 109,415,220 — 1,058,993 4,099,800 1954 .. 438,486,040 105,558,331 -133,641 4,174,600 1955 .. 412,487,931 105,865,923 —265,456 4,194,100 1956 .. 595,649,092 115,842,696 —23,436 5,339,800 1957 .. 763,347,530 124,306,103 —7,140,914 7,507,900 1958 .. 742,068,150 131,804,455 124,175 5,917,200 1959 .. 886,226,116 138,232,106 98,247,253 6,470,600 1960 .. 1,103,385,257 147,348,575 13,874,702 6,533,700 1961 .. 941,648,170 155,009,475 3,481,628 6,265,100 1962 .. 1,048,508,335 169,481,234 -55,779 6,654,900 1963 .. 1,151,120,060 179,700,557 614,835 7,572,800 1964 .. 1,343,747,303 188,740,689 725,948 8,655,200 1965 .. 1,559,484,027 195,713,790 1,021,614 8,576,396 1966 .. 1,908,499,896 198,379,526 996,230 9,021,600 1967 .. 2,190,403,752 209,351,250 2,093,876 10,769,596 1968 .. 2,764,445,943 228,152,172 8,519,996 14,198,198 1969 .. 3,373,360,559 259,953,236 -557,553 15,020,084 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 229 Payments to U.S. Treasury Transferred Transferred Div p i a d i e d nds Franchise Under Fed In e t r e a r l e R st e s o e n rve (s t e o c t s i u o r n p l 1 u 3 s b) ( t s o e c su ti r o p n l u 7 s ) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5,654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,068 6,307,035 10,850,605 -659,904 6,552,717 3,613,056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 297,667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 —54,456 17,617,358 8,429,936 141,465 —4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,237,362 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,223,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25,569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 —465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 Tables 7. IlKV Dollars Assessments for Period, or Federal Current Current Net additions expenditures of Reserve Bank income expenses deductions ( —) Board of Governors 1970 3,877,218,444 300,145,586 11,441,829 21,227,800 1971 3,723,369,921 344,550,798 94,266,075 32,634,002 1972 3,792,334,523 379,371,852 -49,615,790 35,234,499 1973 5,016,769,328 450,705,676 -80,653,488 44,411,700 1974 6,280,090,965 506,424,874 -78,487,237 41,116,600 1975 6,257,936,784 551,488,714 -202,369,615 33,577,201 1976 6,623,220,383 606,948,264 7,310,500 41,827,700 1977 6,891,317,498 623,859,582 -177,033,463 47,366,100 1978 8,455,390,401 652,617,206 -633,123,486 53,321,700 1979 10,310,148,406 693,559,531 -151,148,220 50,529,700 1980 12,802,319,335 791,157,259 -115,385,855 62,230,800 1981 15,508,349,653 897,114,405 -372,879,185 63,162,700 Total 1914-81 .... 115,099,962,524 10,917,086,333 -1,675,835,814 714,539,108 Aggregate for each Bank, 1914-81 Boston 5,484,923,330 741,189,709 -65,222,551 29,487,286 New York 29,948,069,669 2,292,913,784 -384,585,340 189,626,986 Philadelphia 5,818,205,528 589,170,804 -71,547,957 36,264,218 Cleveland 9,036,425,391 787,168,679 -144,779,012 62,446,490 Richmond 8,695,923,527 870,760,030 -103,873,530 37,120,076 Atlanta 5,467,815,927 876,934,783 -113,506,835 48,218,860 Chicago 18,158,041,653 1,443,480,078 -276,598,504 105,705,872 St. Louis 4,489,106,874 607,061,195 -62,100,081 23,613,072 Minneapolis 2,421,737,542 433,175,865 -44,009,404 19,169,015 Kansas City 4,826,042,463 659,576,024 -72,349,388 29,662,709 Dallas 5 667,689,409 570,854,415 -100,158,697 39,141,573 San Francisco 15,085,981,211 1,044,800,967 -237,104,516 94,082,951 Total 115,099,962,524 10,917,086,333 -1,675,835,814 714,539,108 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 Tables 8. Bank Premises of Federal Reserve Banks and Branches, December 31, 1981 Dollars Federal Cost Reserve Net Other or B B a r n a k nch Land ( B i v n u a c i u l l d u lt i d n s i ) g n 1 s g B c e u h q i i l n u d e i i p r n y m g a e m n nt d a- Total2 v b a o l o u k e es r t e a a t l e3 Boston 21,635,436 79,159,148 5,425,128 106,219,711 98,081,987 Annex 27,840 89,202 44,538 161,580 142,846 New York ... 3,436,277 21,877,777 13,202,880 38,516,934 19,280,083 Annex , 477,863 1,136,219 745,855 2,359,936 665,489 Buffalo 887,844 2,812,991 1,660,438 5,361,274 2,796,691 Philadelphia . 1,876,601 51,803,403 5,030,660 58,710,664 51,583,442 Cleveland 1,074,281 6,471,564 4,431,169 11,977,014 3,766,400 1,224,363 Cincinnati 1,997,249 13,537,723 7,521,727 23,056,699 16,024,116 Pittsburgh 1,658,376 6,387,134 3,585,701 11,631,211 6,804,960 Richmond 3,912,575 55,625,519 14,314,313 73,852,406 67,850,734 Annex 522,733 3,725,466 3,616,991 7,865,190 4,609,143 Baltimore 4,618,738 21,852,556 1,203,478 27,674,773 25,382,048 Charlotte 347,071 1,085,276 901,967 2,334,314 1,233,514 1,675,944 Atlanta 1,202,255 5,954,751 3,558,580 10,715,586 5,783,299 Birmingham . 2,358,632 1,905,770 1,027,604 5,292,006 3,634,906 Jacksonville . 164,004 1,706,794 778,505 2,649,303 911,212 951,793 Annex 107,925 76,236 15,843 200,003 157,351 Miami 3,547,571 11,770,782 2,101,877 17,420,230 16,918,424 Nashville 592,342 1,558,205 1,175,891 3,326,439 1,573,111 New Orleans 3,080,344 2,754,272 1,476,257 7,310,873 5.105.788 283,753 Chicago 4,511,942 16,244,443 11,420,610 32,176,996 14,472,399 Annex 53,066 302,249 93,916 449,230 377,767 Detroit 797,734 3,048,942 1,972,024 5,818,700 2,628,101 St. Louis 700,378 4,123,015 3,823,399 8,646,792 3,050,843 Little Rock ... 1,051,214 2,318,793 1,023,475 4,393,482 3,143,522 Louisville 700,075 2,859,819 1,165,909 4,725,803 2,540,157 Memphis 1,135,623 4,230,254 2,126,755 7,492,632 5,622,497 Minneapolis .. 1,394,384 26,932,538 7,692,189 36,019,112 27,267,138 Helena , 224,090 202,278 61,906 488,274 347,340 Kansas City . 1,338,737 11,681,270 5,425,542 18,445,548 11,027,073 935,551 Denver 2,997,746 3,235,572 2,362,438 8,595,755 5,655,006 Oklahoma City 646,386 2,382,828 1,702,342 4,731,556 3,549,129 Omaha 1,030,226 1,771,628 817,215 3,619,068 2,102,380 2,335,310 Dallas 3,729,268 4,945,955 3,653,592 12,328,814 7,327,888 El Paso , 262,477 1,204,450 393,301 1,860,228 1,467,379 Houston 2,049,064 1,688,720 775,069 4,512,853 3,683,679 San Antonio . 448,596 1,400,390 570,846 2,419,833 1,773,337 San Francisco 12,436,775 49,021,381 2,174,233 63,632,389 59,026,013 Annex 247,201 131,114 62,078 440,393 345,605 Los Angeles . 644,238 4,760,685 2,406,800 7,811,722 4,306,905 4,781,849 Portland 207,381 1,680,096 649,432 2,536,908 1,970,092 Salt Lake City 480,222 1,995,026 916,067 3,391,315 2.221.789 Seattle , 274,772 1,999,800 1,234,879 3,509,452 1,969,544 Total 90,887,550 439,452,034 124,343,417 654,683,001 498,181,127 12,188,562 1. Includes expenditures for construction at 3. Includes acquisitions for banking-house pursome offices pending allocation to appropriate poses, and Bank premises formerly occupied and accounts. being held pending sale. 2. Excludes charge-offs of $17,698,968 before NOTE. Details may not add to totals due to 1952. rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 in I*, mvjipal Departments of k nks. Operation 1981 1980 1979 1978 Millions of pieces1 Loans . (2) (2) (2) (2) Currency received and counted 10,277 9,432 8,839 8,537 Currency verified and destroyed 3,510 3,197 2,969 2,621 Coin received and counted 17,023 17,700 18,756 18,654' Checks handled U.S. government checks 683 705 718 721 Postal money orders 126 117 117 125 All other 15,827 15,716 15,067 14,107 Issues, redemptions, and exchanges of U.S. government securities 188 301 335 281 Transfers of funds 54 43 35 29 Food stamps redeemed 2,625 2,541 1,730 1,906 Amounts (millions of dollars) 236,532 267,957 220,628 138,928 Currency received and counted 117,901 104,333 93,119 81,175 Currency verified and destroyed 24,912 20,183 22,638 16,443 Coin received and counted 3,184 2,703 2,765 2,495 Checks handled U.S. government checks 611,403 598,569 511,044 439,907 Postal money orders 6,030 6,164 6,323 5,534 All other 7,739,086 8,050,724r 8,514,670 7,111,254 Issues, redemptions, and exchanges of U.S. government securities 12,728,458 10,326,013r 8,186,706r 8,036,749 Transfers of funds 93,968,246 78,594,862 64,231,109 50,482,656 Food stamps redeemed 9,547 9,268 7,779 7,251 1. Packaged items handled as a single item are 2. Number handled (in thousands): 1981, 36; counted as one piece. 1980, 25; 1979, 38; 1978, 31. r Revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 233 Departments of Operation 1981 1980 1979 1978 Millions of pieces1 Loans () () () () Currency received and counted 10,277 9,432 8,839 8,537 Currency verified and destroyed 3,510 3,197 2,969 2,621 Coin received and counted 17,023 17,700 18,756 18,654' Checks handled U.S. government checks 683 705 718 721 Postal money orders 126 117 117 125 All other 15,827 15,716 15,067 14,107 Issues, redemptions, and exchanges of U.S. government securities 188 301 335 281 Transfers of funds 54 43 35 29 Food stamps redeemed 2,625 2,541 1,730 1,906 Amounts (millions of dollars) Loans 236,532 267,957 220,628 138,928 Currency received and counted 117,901 104,333 93,119 81,175 Currency verified and destroyed , 24,912 20,183 22,638 16,443 Coin received and counted 3,184 2,703 2,765 2,495 Checks handled U.S. government checks , 611,403 598,569 511,044 439,907 Postal money orders 6,030 6,164 6,323 5,534 All other 7,739,086 8,050,724 ' 8,514,670 7,111,254 Issues, redemptions, and exchanges of U.S. government securities 12,728,458 10,326,013 r 8,186,706 r 8,036,749 Transfers of funds 93,968,246 78,594,862 64,231,109 50,482,656 Food stamps redeemed 9,547 9,268 7,779 7,251 1. Packaged items handled as a single item are 2. Number handled (in thousands): 1981, 36; counted as one piece. 1980, 25; 1979, 38; 1978, 31. r Revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 Tables 10. Principal Operations of Federal Reserve Banks—Expense, Ratio of Expense for Each Operation to Total Expenses, and Average Number of Employees, 1978-81 Expenses in thousands of dollars; number of employees in thousands; ratios in percent Operation and item 1981 P 1980 1979 1978 Check clearing operations *• Expense 348,991 322,912 279,094 259,983 Ratio to total expenses 36.01 37.3 36.6 36.4 Average number of employees 6.4 6.5 6.3 6.3 Currency function Expense 213,083 193,123 180,974 187,864 Ratio to total expenses 21.99 22.3 23.7 26.3 Average number of employees 1.7 1.8 1.9 2.0 Fiscal agency operations Expense 93,404 92,348 83,521 76,837 Ratio to total expenses 9.64 10.7 11.0 10.7 Average number of employees 1.8 1.9 1.9 1.9 Bank supervision Expense 99.818 85,913 67,752 58,303 Ratio to total expenses 10.30 9.9 8.9 8.2 Average number of employees 1.7 1.6 1.4 1.3 Other operations 2 Expense 213,746 171,674 150,878 131,713 Ratio to total expenses 22.06 19.8 19.8 18.4 Average number of employees 2.1 1.9 2.2 2.2 General administration and support s Average number of employees 10.2 9.9 9.4 9.8 Total expenses 969,042 865,970 762,219 714,700 Less reimbursements 71,928 74,812 68,786 62,084 Net expenses 897,114 791,157 693,433 652,616 1. Includes automated clearinghouse and noncash NOTE. Comparability with earlier periods is collections. affected by the following accounting changes: 2. Includes mainly economic research and statis- Before 1980, "Other operations" include the extics, foreign operations, and lending and credit. pense of monitoring reserve accounts and de- 3. General administration and support costs are pository institution accounting, which are now allocated to each operation. classified in "Bank supervision" and "General administration and support" respectively. Also, p Preliminary. beginning 1981, the method of funding supplemental benefits for retirees was changed. 11. Number and Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1981 President Other officers Employees Total Federal Reserve Bank (including Annual Annual Number Annual Num- Annual branches) (d s o a l l l a a r r y s) N b u e m r - ( s d a o la ll r a i r e s s ) F ti u m ll e - P ti a m rt e - ( s d a o l l a l r a i r e s s ) ber ( s d a o la ll r a ie rs s ) Boston 100,000 51 2,306,700 1,328 200 25,676,728 1,580 28,083,428 New York ... 130,000 137 7,223,000 4,075 95 82,591,531 4,308 89,944,531 Philadelphia . 72,000 41 1,822,150 1,066 91 19,030,842 1,199 20,924,992 Cleveland ... 94,000 44 1,846,000 1,317 69 22,156,550 1,431 24,096,550 Richmond ... 87,000 68 2,862,500 1,911 98 28,889,044 2,078 31,838,544 Atlanta 95,000 69 2,932,265 2,125 18 32,668,944 2,213 35,696,209 Chicago 110,000 81 3,566,700 2,854 156 47,578,549 3,092 51,255,249 St. Louis 87,000 44 1,846,365 1,254 87 20,376,574 1,386 22,309,939 Minneapolis . 80,000 37 1,552,500 997 2 16,293,370 1,037 17,925,870 Kansas City . 78,200 55 2,250,000 1,551 62 24,123,635 1,669 26,451,835 Dallas 72,000 41 1,646,300 1,423 31 22,188,940 1,496 23,907,240 San Francisco 110,000 86 3,796,385 2,041 79 37,067,784 2,207 40,974,169 Total 1415,200 754 33,650,865 21,942 988 378,642,491 23,696 413,408,556 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 235 12. Fu.,.. ._.,.,. Percent per annum Loans to depository institutions Federal Reserve Short-term Extended credit2 Bank adjustment credit and seasonal First 60 days Next 90 days After 150 credit1 of borrowing of borrowing days Boston 12 12 13 14 New York I I( / t Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City \f \f \ Dallas San Francisco 12 12 13 14 1. Rates applied to short-term advances for the 2. Applicable to advances when exceptional cirpurpose of meeting temporary funding require- cumstances or practices involve only a particular ments and to longer-term advances made to depository institution and to advances when an smaller institutions for the purpose of meeting institution is under sustained liquidity pressures. seasonally recurring needs for funds. See sections See section 201.3(b)(2) of Regulation A. 201.3(a) and 201.3(b)(l) of Regulation A. pository Institutions Percent of deposits Through July 13,1966 Net demand deposits9 Time deposits Effective date1 Cen ci t t r y a l b a re n s k e s rve Res b e a r n ve k s city C b o a u n n k t s ry ( o a f l l b c a l n a k ss s e ) s 1917—June 21 13 10 7 1936—Aug. 16 191/2 15 IOV2 1937—Mar. 1 22*A 17Vi 12V4 5V4 May 1 26 20 14 6 1938—Apr. 16 223/4 17V4 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 71/2 1949—May 5,1 24 21 15 7 June 30, July 1 . 20 14 6 Aug. 1 13 11, 16 .... 19V6 12 18 23 19 25 22Yi I8I/2 Sept. 1 22 18 1951—Jan. 11, 16 23 19 13 6 25, Feb. 1 . 24 20 14 1953—July 9, 1 22 19 13 1954—June 24, 16 .... 21 '5" July 29, Aug. 1 20 18 12 1958—Feb. 27, Mar. 1 191/2 171/2 II1/2 Mar. 20, Apr. 1 19 17 11 Apr. 17 I81/2 24 18 I61/2 1960—Sept. 1 I71/2 Nov. 24 12 Dec. 1 16V6 1962—July 28 Oct. 25, Nov. 1 DigitizedF foorr nFoRteAs SseEeR e nd of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 Tables 13. Reserve Requirements of Depository Institutions—Continued Percent of deposits July 14, 1966, through Nov. 8, 1972 (deposit intervals in millions of dollars) Net demand Time deposits* deposits2 (all classes of banks) EffectiveJ date1 Reserve Country Other city banks banks time Savings 0-5 Over5 0-5 Over 5 0-5 OverS 1966—July 14, 21 161/2 5 125 45 45 5 Sept 8 11 6 1967—Mar. 2 31/2 31/2 16 3 3 1968—Jan. 11, 18 I61/2 17 12 12i/2 1969—Apr. 17 17 171/2 12i/2 13 1970—Oct. 1 5 Nov 9, 1972., through Nov 12, 1980 (deposit intervals in millions of dollars) Net demand deposits2*6 Time and savings deposits* Time ^ 0-5, by <3ver 5, by Effective date 0-2 2-10 10- 100- Over Sav- maturity maturity 100 400 400 ings d 3 1 a 7 0 y - 9 s 4 d 1 y t a 8 r o y 0 s s . 4 m y o o r r r s e . d 3 1 a 0 7 y - 9 s 4 d 1 y t a 8 o r y 0 s s . 4 m y o o r r r s e . 1972—Nov. 9 .... 8 10 12 I61/28 171/2 35 35 55 16 13 1973 July 19 IO1/2 12V2 131/2 18 1974 Dec 12 171/2 6 3 1975—Feb. 13 .... 7V2 10 12 13 I61/2 Oct 30 3 1° 3 I9 1976—Jan 8 3 21/28 21/2 9 Dec. 30 .... 7 91/2 113/4 12?4 161/4 Beginning Nov. 13, 1980 Depository institution requirements after implementation of the Type of deposit, and Monetary Control Act10 deposit interval Percent | Effective date Net transaction accounts n $0-$25 million 3 11/13/80 Over $25 million 12 11/13/80 Nonpersonal time deposits12 By original maturity 3 11/13/80 Less than 4 years 0 11/13/80 4 years or more Eurocurrency liabilities All types 0 11/13/80 1. Reserves required during the period from banks—in excess of 4 and 2V2 percent of net inception of the Federal Reserve System until demand deposits effective Dec. 1, 1959, and Aug. June 20, 1917, were not strictly comparable with 25, 1960, respectively; central reserve city and later requirements; they were based on aggregate reserve city banks—in excess of 2 and 1 percent amounts of deposits, and reserve balances with the effective Dec. 3, 1959, and Sept. 1, 1960, respec- Reserve Banks were increased in stages. tively. All institutions were allowed to count all When two dates are shown, the first applies to vault cash as reserves effective Nov. 24, 1960. the change at central reserve or reserve city banks In graduated requirement schedules, each deposit and the second to the change at country banks. interval applies to that part of the deposits of each 2. Demand deposits subject to reserve require- bank. ments, beginning Aug. 23, 1935, were total demand Beginning Oct. 16, 1969, Regulation M required deposits minus cash items in process of collection reserves against (a) net balances due from domesand demand balances due from domestic banks tic offices to their foreign branches and (b) (also minus war loan and Series E bond accounts foreign-branch loans to U.S. residents; Regulation during the period Apr. 13, 1943—June 30, 1947). D imposed a similar requirement against (c) bor- All required reserves were held on deposit with rowings from foreign banks by domestic offices of Federal Reserve Banks from June 21, 1917, until a member bank. Limited reserve-free base amounts late 1959. Since then, member banks were allowed were originally permitted under Regulation M but to count vault cash as reserves, as follows: country were eliminated for (b) effective June 21, 1973, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 237 ntinued and were lowered in steps for (a) and (c) until were as follows: 8 percent for (a) and (b) from eliminated effective Mar. 4, 1974. Beginning June June 21 through Oct. 3, 1973, and for (c) from 21, 1973, loans aggregating $100,000 or less to any July 12 through Oct. 3, 1973; 11 percent from U.S. resident were excluded from computations, as Oct. 4 through Dec. 26, 1973; and 8 percent from were total loans of a bank to U.S. residents if not Dec. 27, 1973, through Sept. 18, 1974. Beginning exceeding $1 million. The applicable reserve per- Sept. 19, the 8 percent requirement applied only centage, which was originally 10 percent, was to those obligations in (a), (b), and (c) with increased to 20 percent on Jan. 7. 1971; reduced initial maturities of less than 120 days, and effecto 8 percent on June 21, 1973, to 4 percent on tive Dec. 12, 1974, the remaining marginal reserve May 22, 1975, and to zero on Aug. 24, 1978. was removed on this type of obligation issued to Effective Dec. 1, 1977, the reserve required against mature in less than 4 months. For details, see deposits that foreign branches of U.S. banks use "Record of Policy Actions of the Board of for lending to U.S. residents was reduced to 1 per- Governors" in 1973 and 1974 ANNUAL REPORTS. cent, and on Aug. 24, 1978, it was reduced to Effective with the reserve maintenance period zero. For details see Regulations D and M as beginning Oct. 25, 1979, a marginal reserve redescribed in "Record of Policy Actions of the quirement of 8 percent was added to managed Board of Governors," in previous ANNUAL RE- liabilities in excess of a base amount. This mar- PORTS. ginal requirement was increased to 10 percent 3. Authority of the Board of Governors to beginning Apr. 3, 1980, was decreased to 5 percent classify or reclassify cities as central reserve cities beginning June 12, 1980, and was reduced to zero was terminated effective July 28, 1962. beginning July 24, 1980. Managed liabilities are defined as large time deposits, Eurodollar borrow- 4. Time deposits such as Christmas and vacaings, repurchase agreements against U.S. governtion club accounts became subject to the same ment and federal agency securities, federal funds requirements as savings deposits, effective Jan. 5, borrowings from nonmember institutions, and cer- 1967. Negotiable order of withdrawal (NOW) tain other obligations. In general, the base for the accounts were defined in the Board's Regulation Q marginal reserve requirement was originally the as savings deposits beginning Jan. 1, 1974. Effec- greater of (a) $100 million or (b) the average tive with the reserve computation period beginning amount of the managed liabilities held by a mem- Nov. 16, 1978, domestic deposits of Edge corpora- ber bank, Edge corporation, or family of U.S. tions were subject to the same reserve requirements branches and agencies of a foreign bank for the as deposits of member banks. two statement weeks ending Sept. 26, 1979. For 5. This rate had been established in the earlier the computation period beginning Mar. 20, 1980, structure. It remained the same in the new struc- the base was lowered by (a) 7 percent or (b) the ture established this date. decrease in an institution's U.S. office gross loans 6. Effective Nov. 9, 1972, a new criterion was to foreigners and gross balances due from foreign adopted to designate reserve cities, and on the offices of other institutions between the base same date requirements for reserves against net period (Sept. 13-26, 1979) and the week ending demand deposits of member banks were restruc- Mar. 12, 1980, whichever was greater. For the tured to provide that each member bank maintain computation period beginning May 29, 1980, the reserves related to the size of its net demand base was increased by IV2 percent above the base deposits. The new reserve city designations were used to calculate the marginal reserve in the as follows: A bank having net demand deposits statement week of May 14-21, 1980. In addition, of more than $400 million was considered to have beginning Mar. 19, 1980, the base was reduced to the character of business of a reserve city bank, the extent that foreign loans and balances declined. and the presence of the head office of such a bank constituted designation of that place as a reserve 8. The 16Vi percent requirement applied only city. Cities in which there were Federal Reserve for one week and solely to former reserve city Banks or branches were also reserve cities. Any banks. For other banks, the 13 percent requirebank, wherever located, having net demand de- ment was continued in this deposit interval. posits of $400 million or less was considered to 9. The average of reserves on savings and other have the character of business of banks outside of time deposits had to be at least 3 percent, the reserve cities and was permitted to maintain legal minimum at that time. reserves at ratios set for banks not in reserve 10. For existing nonmember banks and thrift cities. institutions, there is a phase-in period ending 7. Beginning Nov. 2, 1978, a supplementary Sept. 3, 1987. For existing member banks the reserve requirement of 2 percent was added to phase-in period is about three years, depending the existing requirements for time deposits of on whether their new reserve requirements are $100,000 or more and for certain other liabilities. greater or less than the old requirements. For This supplementary requirement was eliminated existing agencies and branches of foreign banks, with the maintenance period beginning July 24, the phase-in ends Aug. 12, 1982. All new institu- 1980. tions will have a two-year phase-in beginning with From June 21, 1973, through Dec. 11, 1974, the date that they open for business. member banks, except as noted below, were sub- 11. Transaction accounts include all deposits on ject to a marginal reserve requirement against which the account holder is permitted to make increases in the aggregate of the following types withdrawals by negotiable or transferable instruof obligations: (a) outstanding time deposits of ments, payment orders of withdrawal, and tele- $100,000 or more, (b) outstanding funds obtained phone and preauthorized transfers (in excess of by the bank through issuance by a bank's affiliate three per month) for the purpose of making payof obligations subject to the existing reserve re- ments to third persons or others. quirements on time deposits, and (c) beginning 12. In general, nonpersonal time deposits are July 12, 1973, funds from sales of finance bills. time deposits, including savings deposits, that are For the period June 21 through Aug. 29, 1973, not transaction accounts and in which the bene- (a) included only single-maturity time deposits. ficial interest is held by a depositor that is not a The requirement applied to balances above a spec- natural person. Also included are certain transified base, but was not applicable to banks ferable time deposits held by natural persons and having obligations of these types aggregating less certain obligations issued to depository institution than $10 million. Including the basic requirement offices located outside the United States. For (5 percent during the entire period), requirements details, see section 204.2 of Regulation D. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 Tables 14. Maximum Interest Rates Payable on Time and Savings Deposits at Federally Insured Institutions ] Percent per annum Savings and loan associations and Commercial banks mutual savings banks (thrift institutions) Type and maturity In effect Previous In effect Previous of deposit Dec. 31, 1981 maximum Dec. 31, 1981 maximum Percent Eff d e a c t t e ive Percent Eff d e a c t t e ive Percent Eff d e a c t t e ive Percent Eff d e a c t t e ive Savings 5i/4 7/1/79 5 7/1/73 51/2 7/1/79 51/4 (2) Negotiable order of withdrawal accounts3 51/4 12/31/80 5 1/1/74 5*4 12/31/80 5 1/1/74 Time accounts* Fixed ceiling rates by maturity5 14-89 days* 5VA 8/1/79 5 7/1/73 (7) (7) 90 days to 1 year 5% 1/1/80 5*4 7/1/73 6 1/1/80 53A (2) 2 2 1 * t t o i o t 2 2 o V y 4 i e y y a e e r a a s8 r r s s 8 8 6 6 b 1 /2 7 7 l/ / / i 1 1 /l / / i 7 7 3 3 5 5 5 V 3 Y / 2 4 4 1 1 1 / / / 2 2 2 1 1 1 / / / 7 7 7 0 0 0 66 6 1/2 % / ( < 2 ( ) ' 2) 6 53 6 / 4 1 1 / 1 / 2 2 / 1 2 1 / 1 / 7 7 / 0 7 0 0 4 to 6 years9 7*4 11/1/73 (io) 71/2 11/1/73 (io) 6 to 8 years9 7V2 12/23/74 7V4 11/1/73 7% 12/23/74 71/2 11/1/73 8 years or more9 7% 6/1/78 (?) 8 6/1/78 (?) Issued to governmental units (all maturities)*1 Individual retirement 8 6/1/78 73/4 12/23/74 8 6/1/78 7?4 12/23/74 accounts and Keogh (H.R. 10) plans (3 years or more)11.1** 8 6/1/78 734 7/6/77 8 6/1/78 734 7/6/77 Special variable ceiling rates by maturity 6-month money market time deposits13 (14) (14) (14) (14) (14) (14) (14) (14) 12-month all savers certificates (15) (15) (15) (15) (15) (15) (15) (15) 2Vz years to 4 years .. (16) (16) (17) (17) (16) (16) (17) (17) Accounts with no ceiling rates Individual retirement accounts and Keogh (H.R. 10) plans (18 months or more) (18) (18) (18) (IS) (18) (18) (18) (18) 1. For the history of interest rate ceilings before the minimum maturity or notice period for time 1981, see previous editions of the ANNUAL REPORT. deposits at mutual savings banks was decreased 2. July 1, 1973, for mutual savings banks; from 30 to 14 days. July 6, 1973, for savings and loan associations. 6. Effective Oct. 30, 1980, the minimum maturity 3. For authorized states only. Federally insured or notice period for time deposits at commercial commercial banks, savings and loan associations, banks was decreased from 30 to 14 days. cooperative banks, and mutual savings banks in 7. No separate account category. Massachusetts and New Hampshire were first per- 8. No minimum denomination. Until July 1, mitted to offer negotiable order of withdrawal 1979, a minimum of $1,000 was required for sav- (NOW) accounts on Jan. 1, 1974. Authorization ings and loan associations, except in areas where to issue NOW accounts was extended to similar mutual savings banks permitted lower minimum institutions throughout New England on Feb. 27, denominations. This restriction was removed for 1976, in New York State on Nov. 10, 1978, and in deposits maturing in less than 1 year, effective New Jersey on Dec. 28, 1979. Authorization to Nov. 1, 1973. issue NOW accounts was extended to similar 9. No minimum denomination. Until July 1, institutions nationwide effective Dec. 31, 1980. 1979, the minimum denomination was $1,000 ex- 4. For exceptions with respect to certain foreign cept for deposits representing funds contributed to time deposits see the Bulletin for October 1962, an individual retirement account (IRA) or a p. 1279; August 1965, p. 1084; and February 1968, Keogh (H.R. 10) plan established pursuant to p. 167. the Internal Revenue Code. The $1,000 minimum 5. Effective Nov. 10, 1980, the minimum notice requirement was removed for such accounts in period for public unit accounts at savings and December 1975 and November 1976 respectively. loan associations was decreased to 14 days, and 10. Between July 1, 1973, and Oct. 31, 1973, the minimum maturity period for time deposits at certificates maturing in 4 years or more with minisavings and loan associations in excess of $100,000 mum denominations of $1,000 had no ceiling; howwas decreased to 14 days. Effective Oct. 30, 1980, ever, the amount of such certificates that an insti- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 239 14.—Continued tution could issue was limited to 5 percent of its gross income is generally authorized for interest total time and savings deposits. Sales in excess income from ASCs. of that amount, as well as certificates of less than 16. Effective Aug. 1, 1981, commercial banks $1,000, were limited to the 6V2 percent ceiling on may pay interest on any variable ceiling nontime deposits maturing in 2Vi years or more. Ef- negotiable time deposit with an original maturity fective Nov. 1, 1973, ceilings were reimposed on of 2V£ years to less than 4 years at a rate not to certificates maturing in 4 years or more with mini- exceed VA of 1 percent below the average 2Vi-year mum denomination of $1,000. There is no limita- yield for U.S. Treasury securities as determined tion on the amount of these certificates that banks and announced by the Treasury Department imcan issue. mediately before the date of deposit. Thrift insti- 11. Accounts subject to fixed-rate ceilings. See tutions may pay interest on these certificates at a note 8 for minimum denomination requirements. rate not to exceed the average 2Vi-year yield for 12. Effective Jan. 1, 1980, commercial banks are Treasury securities as determined and announced permitted to pay the same rate as thrift institutions by the Treasury Department immediately before e o r n n m IR en A t a a l n u d n i K ts e o w g h h e n ac c su o c u h n ts d e a p n o d s it a s c c a o r u e n t p s l a o c f e d g o i v n - t 2 h 1 e /£ -y d e a a te r y o i f e ld d e f p o o r si T t. r ea I s f u ry th e s ec a u n r n i o ti u e n s ce is d le a s v s e r t a h g a e n the new 21A-year or more variable-ceiling certifi- 9.50 percent, commercial banks may pay 9.25 percent and thrift institutions 9.50 percent for these cates or in 26-week money market certificates deposits. These deposits have no required miniregardless of the level of the Treasury bill rate. mum denominations, and interest may be com- 13. Must have a maturity of exactly 26 weeks pounded on them. The ceiling rates of interest at and a minimum denomination of $10,000, and which they may be offered vary biweekly. must be nonnegotiable. 14. Commercial banks and thrift institutions 17. Between Jan. 1, 1980, and Aug. 1, 1981, were authorized to offer money market time commercial banks, and thrift institutions were deposits effective June 1, 1978. These deposits authorized to offer variable ceiling nonnegotiable have a minimum denomination requirement of time deposits with no required minimum denomi- $10,000 and a maturity of 26 weeks. The ceiling nation and with maturities of 2V& years or more. r d a is te c o o u f n t in r t a e t r e e st ( a o u n ct i t o h n e se a v d e e r p a o g s e i ) t s o i n s in m d o e s x t e d re c to e n t t h ly e m Ef e fe rc c i t a iv l e b J a a n n k . s 1 w , a 1 s 9 8 34 0 , p th e e rc e m n a ta x g im e u p m o in ra t te b e f l o o r w c o th m e issued 26-week U.S. Treasury bills. Interest on average yield on 2^-year U.S. Treasury securities; these certificates may not be compounded. Effec- the ceiling rate for thrift institutions was VA pertive for all 6-month money market certificates centage point higher than that for commercial issued beginning Nov. 1, 1981, depository institu- banks. Effective Mar. 1, 1980, a temporary ceiling tions may pay rates of interest on these deposits of 11 % percent was placed on these accounts at indexed to the higher of (1) the rate for 26-week commercial banks and 12 percent on these accounts Treasury bills established immediately before the at savings and loan associations. Effective June 2, date of deposit (bill rate) or (2) the average of 1980, the ceiling rates for these deposits at comthe four rates for 26-week Treasury bills estab- mercial banks and savings and loans was increased lished for the 4 weeks immediately prior to the VL percentage point. The temporary ceiling was date of deposit (4-week average bill rate). Rate retained, and a minimum ceiling of 9.25 percent ceilings are determined as follows: for commercial banks and 9.50 percent for thrift institutions was established. 18. Effective Dec. 1, 1981, depository institutions Bill rate or 4-week Commercial bank were authorized to offer time deposits not subject average bill rate ceiling to interest rate ceilings when the funds are de- 7.50 percent or below 7.75 percent posited to the credit of, or in which the entire Above 7.50 percent V4 of 1 percentage beneficial interest is held by, an individual purpoint plus the suant to an IRA agreement or Keogh (H.R. 10) higher of the bill plan. Such time deposits must have a minimum rate or 4-week maturity of 18 months, and additions may be made average bill rate to the time deposit at any time before its maturity without extending the maturity of all or a portion Thrift ceiling of the balance of the account. 7.25 percent or below 7.75 percent NOTE. Before Mar. 31, 1980, the maximum Above 7.25 percent, but V2 of 1 percentage rates that could be paid by federally insured combelow 8.50 percent point plus the mercial banks, mutual savings banks, and savings higher of the bill and loan associations were established by the rate or 4-week Board of Governors of the Federal Reserve Sysaverage bill rate tem, the Board of Directors of the Federal Deposit 8.50 percent or above, 9 percent Insurance Corporation, and the Federal Home but below Loan Bank Board under the provisions of 12 CFR 8.75 percent 217, 329, and 526 respectively. Title II of the 8.75 percent or above VA of 1 percentage Depository Institutions Deregulation and Monepoint plus the tary Control Act of 1980 (P.L. 96-221) transferred higher of the bill the authority of the agencies to establish maxirate or 4-week mum rates of interest payable on deposits to the average bill rate Depository Institutions Deregulation Committee. The maximum rates on time deposits in denomina- 15. Effective Oct. 1, 1981, depository institutions tions of $100,000 or more with maturities of are authorized to issue all savers certificates 30-89 days were suspended in June 1970; such (ASCs) with a 1-year maturity and an annual deposits maturing in 90 days or more were susinvestment yield equal to 70 percent of the average pended in May 1973. For information regarding investment yield for 52-week U.S. Treasury bills previous interest rate ceilings on all types of acas determined by the auction of 52-week Treasury counts, see earlier issues of the Federal Reserve bills held immediately before the calendar week in Bulletin, the Federal Home Loan Bank Board which the certificate is issued. A maximum lifetime Journal, and the Annual Report of the Federal exclusion of $1,000 ($2,000 on a joint return) from Deposit Insurance Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 Tables 15. Margin Requirements1 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) PflFprtivp daft* Margin Convertible Short sales, Writing options, stocks bonds Tonly T only 2 1934—Oct. 1 , 25—45 (3) 1936—Feb. 1 25—55 (3) Apr. 1 55 (3) 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—July 28 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 Board. Regulation T was adopted effective Oct. 15, Board of Governors pursuant to the Securities 1934; Regulation U, effective May 1, 1936; Regu- Exchange Act of 1934, limit the amount of credit lation G, effective Mar. 11, 1968; and Regulation to purchase and carry "margin securities" and X, effective Nov. 1, 1971. "margin stock" (as defined in the regulations) 2. The margin is expressed as a percent of the when such credit is collateralized by securities. current market value of the stock underlying the Margin requirements are the difference between option. the market value (100 percent) and the maximum 3. The requirement was the margin "customarily loan value of collateral as prescribed by the required" by the brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 241 »r,\* Commercial Banks 'v ; • s> i Bar* hi«i«i - !iis: vi». W8O Asset and liability items shown in millions of dollars Insured commercial banks Insured Item Member banks nonmember Total banks Total National State June 30, 1981 Loans and investments, total 1,254,571,029 896,067,568 698,592,975 197,474,593 358,503,461 Loans Gross 935,553,555 688,311,079 536,851,518 151,459,561 247,242,476 Net 906,260,065 668,195,340 521,259,373 146,935,967 238,064,725 Investments 319,017,474 207,756,489 161,741,457 46,015,032 111,260,985 U.S. Treasury securities .. 104,382,813 66,067,542 50,435,342 15,632,200 38,315,271 Other2 214,634,661 141,688,947 111,306,115 30,382,832 72,945,714 Cash assets, total 205,066,605 169,062,440 115,727,269 53,335,171 36,004,165 Deposits, total 1,210,828,280 861,728,681 664,509,663 197,219,018 349,099,599 75,305,463 72,033,364 40,430,167 31,603,197 3,272,099 Other demand 332,152,869 244,425,471 182,438,569 61,986,902 87,727,398 Other time 803,369,913 545,269,825 441,640,915 103,628,910 258,100,088 Total equity capital 113,288,136 81,288,350 62,998,092 18,290,258 31,999,786 Number of banks 14,444 5,471 4,453 1,018 8,973 June 30, 1980 Loans and investments, total 1,137,899,290 815,134,218 641,660,799 173,473,419 322,765,072 Loans Gross 849,548,408 623,637,546 492,304,272 131,333,274 225,910,862 Net 819,927,797 602,774,607 475,462,861 127,311,746 217,153,190 Investments 288,350,882 191,496,672 149,356,527 42,140,145 96,854,210 U.S. Treasury securities .. 90,638,568 58,912,022 45,378,492 13,533,530 31,726,546 Other2 197,712,314 132,584,650 103,978,035 28,606,615 65,127,664 Cash assets, total 196,704,163 164,373,729 110,197,362 54,176,367 32,330,434 Deposits, total 1,100,988,977 785,704,783 604,478,507 181,226,276 315,284,194 Interbank 70,651,127 67,649,942 36,801,835 30,848,107 3,001,185 Other demand 352,756,160 259,576,575 197,034,172 62,542,403 93,179,585 Other time 677,581,696 458,478,279 370,642,513 87,835,766 219,103,417 Total equity capital 102,247,834 73,899,486 57,175,790 16,723,696 28,348,348 Number of banks 14,395 5,407 4,426 981 8,988 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

242 Tables 17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-81, and Month-End 1981 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding U.S. government Spesecurities cial Treadraw- sury Total B ri o o g u u h g t t - 1 h 0 t r u c H e h n p e a d u l s e d r e r -Loans Float i ot A he ll r 2 R F a O e e s d s s th e e e r e t r v s a r 3 e l Total s G to o c l k d * c r i i e c i a g n r a c h t g t - i e t f s - s r i t o c e a n n u u n g c r t d - - 5 y agree- counts ment 239 239 0 1,766 199 294 2,498 2,873 1,795 300 300 0 2,215 201 575 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 1,563 3,373 1,842 436 436 0 618 78 273 1,405 3,642 1,958 134 80 •4 723 27 355 1,238 3,957 2,009 540 536 4 320 52 390 1,302 4,212 2,025 375 367 8 643 63 378 1,459 4,112 1,977 315 312 3 637 45 384 1,381 4,205 1,991 617 560 57 582 63 393 1,655 4,092 2,006 228 197 31 1,056 24 500 1,809 3,854 2,012 511 488 23 632 34 405 1,583 3,997 2,022 739 686 43 251 21 372 1,373 4,306 2,027 817 775 42 638 20 378 1,853 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 2,486 10,125 2,476 2,430 2,430 0 3 39 28 2,500 11,258 2,532 2,564 2,564 0 10 19 19 2,612 12,760 2,637 2,564 2,564 0 4 17 16 2,601 14,512 2,798 2,484 2,484 0 7 91 11 2,593 17,644 2,963 2,184 2,184 0 3 80 2,274 21,995 3,087 2,254 2,254 0 3 94 10 2,361 22,737 3,247 6,189 6,189 0 6 471 14 6,679 22,726 3,648 11,543 11,543 0 5 681 10 12,239 21,938 4,094 18,846 18,846 0 80 815 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 44 143 808 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 243 Factors absorbing reserve funds Deposits, other than member bank reserves, with Cur- Trea- Federal Reserve Banks Other Member bank Other Federal reserves rency sury Federal Reserve in cash Reserve liacir- hold- ac- bilities cula- ings6 counts3 and tion capitala With Cur- Trea- For- Federal rency Re- Exsury eign Other Reserve and quired8 cess8 Banks coin7 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 20,499 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 1,312 821 767 750 106 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 in 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 2,544 18,988 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 For notes see last two pages of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 Tables 17. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-81, and Month-End 1981—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. government cial Treasecurities * draw- sury Period u H n e d l e d r Loans Float1 ot A he ll r 2 F O ed th e e r r al Total s G to o c ld k4 c ri e i g r n h t g i t f s - r o c e u u n r t c - - y Bought repur- Reserve icate stand- Total out chase assets 3 ac- ing5 right10 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 47,177 13,159 0 6,317 1967 49,150 48,980 170 141 2,576 164 0 52,031 11,982 0 6,784 1968 52,937 52,937 0 186 3,443 58 0 56,624 10,367 0 6,795 1969 57,154 57,154" 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 67,918 10,732 400 7,149 1971 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 71,230 71,119 111 1,981 3,974 106 1,260 78,551 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 92,208 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 1980 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981P .... 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1981 P Jan. .. 125,908 125,908 0 1,304 2,280 0 9,836 139,328 11,159 2,518 13,886 Feb. .. 126,358 126,358 0 1,249 1,545 0 10,047 139,199 11,156 2,518 13,939 Mar. .. 126,822 126,388 434 656 3,261 298 10,235 141,272 11,154 2,818 14,002 Apr. .. 128,407 128,407 0 2,333 2,156 0 10,556 143,452 11,154 2,818 14,061 May .. 127,031 127,031 0 1,366 2,542 0 9,601 140,540 11,154 2,818 14,111 June .. 128,711 128,711 0 1,010 2,506 0 10,707 142,934 11,154 3,068 14,155 July .. 132,226 130,248 1,978 1,027 1,251 453 9,694 144,651 11,154 3,068 14,350 Aug. .. 133,216 133,216 0 1,254 2,229 0 9,032 145,731 11,154 3,068 14,234 Sept. .. 132,991 132,991 0 2,486 2,811 0 9,297 147,585 11,152 3,318 14,315 Oct. .. 131,651 131,651 0 924 1,690 0 9,652 143,917 11,152 3,318 13,651 Nov. .. 135,987 133,872 2,115 232 2,177 744 10,124 149,264 11,152 3,318 13,679 Dec.p . 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1. Beginning with 1960, figures reflect a minor 6. This category consists of the coin and paper change in concept; see Federal Reserve Bulletin, currency held by the Treasury, as well as any vol. 47 (Feb. 1961), p. 164. gold in excess of the gold certificates issued to 2. Data consist principally of acceptances and, the Reserve Bank. until Aug. 21, 1959, industrial loans, authority for 7. Between Dec. 1, 1959, and Nov. 23, 1960, which expired on that date. part of the amount was allowed as reserves; 3. Before Apr. 16, 1969, this category includes thereafter all was allowed. the total of Federal Reserve Bank capital paid in, 8. These figures are estimated through 1958. surplus, other capital accounts, and other liabilities Before 1929, they were available only on call and accrued dividends less the sum of bank dates (in 1920 and 1922, the call dates were premises and other assets, and was reported as Dec. 29). Beginning Sept. 12, 1968, the amount is based on close-of-business figures for the re- "Other Federal Reserve accounts"; thereafter, serve period 2 weeks previous to the report date. "Other Federal Reserve assets" and "Other Federal 9. Beginning Dec. 1, 1966, these securities in- Reserve liabilities and capital" are shown sepaclude federal agency obligations held under rerately. purchase agreements and beginning Sept. 29, 1971, 4. Before Jan. 30, 1934, data include gold held federal agency issues bought outright. in Federal Reserve Banks and in circulation. 10. Includes, beginning 1969, securities loaned— 5. These figures include currency and coin (other fully guaranteed by U.S. government securities than gold) issued directly by the Treasury. The pledged with Federal Reserve Banks—and excludes largest components are fractional and dollar coins. (if any) securities sold and scheduled to be For details see the regular table, "Currency and bought back under matched sale-purchase trans- Coin in Circulation," in the Treasury Bulletin. actions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 245 17,—Continued Factors absorbing reserve funds Deposits,other than member bank Member bank Cur- Trea- reserves,with u _ Other reserves11 rency sury Federal Reserve Banks utner Jve- Federal in cash Federal quiredReserve t c c i u i o r l n - a- hn i ro n tii g Hu s - c R co e a u s c e n - r t v s e 3 a c & n le c a e r s - c b a i a p H1 li n 1 i t a t d i a a e - l s 3 F W ed i e t r h al r C en u c r- y Re- Ex- Trea- For- Other Reserve and quired8 cess8-12 sury eign Banks coin7 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 653 —773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9812 72,497 317 2,542 251 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 3,113 418 1,275 M 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 —1,10314 93,717 460 110,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 —893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 131,113 451 3,038 573 515 0 0 4,579 26,621 13,767 40,221 278 131,833 464 2,284 422 337 0 0 4,737 26,734 12,925 39,479 287 133,915 494 3,032 474 313 0 0 4,855 26,164 12,777 39,642 -595 134,991 508 4,460 476 311 0 0 4,674 26,063 13,596 41,089 -1,342 136,460 506 2,288 346 275 0 0 4,444 24,304 13,793 39,855 — 1,671 138,080 478 2,923 338 536 0 0 5,330 23,626 13,858 40,830 —3,269 138,287 448 2,922 285 472 0 0 4,798 26,011 14,171 40,392 — 154 138,534 450 2,595 256 502 0 45 4,805 27,000 14,164 40,831 381 138,508 457 2,520 420 843 0 63 5,379 27,180 15,649 41,009 1,860 138,847 447 3,550 547 573 0 82 5,112 23,590 15,293 40,521 -1,613 142,683 445 3,475 535 715 0 99 6,011 24,213 15,412 41,230 -1,583 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 11. Beginning November 1979, includes reserves ticipation by nonmember institutions in the Federal of member banks, Edge Act corporations, and Reserve System's program of credit restraint. U.S. agencies and branches of foreign banks. As of Dec. 12, 1974, the amount of voluntary Beginning Nov. 13, 1980, includes reserves of all nonmember bank and foreign-agency and branch depository institutions. deposits at Federal Reserve Banks that are asso- 12. Beginning with the week ending Nov. 15, ciated with marginal reserves are no longer re- 1972, figures include $450 million of reserve defi- ported. However, two amounts are reported: (1) ciencies on which Federal Reserve Banks are deposits voluntarily held as reserves by agencies allowed to waive penalities for a transition period and branches of foreign banks operating in the in connection with bank adaptation to Regulation United States, and (2) Eurodollar liabilities. J as amended, effective Nov. 9, 1972. Allowable 14. Beginning with the week ending Nov. 19, deficiencies (beginning with first statement week 1975, figures are adjusted to include waivers of of quarter) included are (in millions): 1973— penalties for reserve deficiencies, in accordance Ql, $279; Q2, $172; Q3, $112; Q4, $84; and 1974 with change in Board policy that became effective —Ql, $67, and Q2, $58. The transition period Nov. 19, 1975. ended after the second quarter of 1974. NOTE. For a description of figures and dis- 13. Beginning July 1973, this item includes cer- cussion of their significance, see "Member Bank tain deposits of domestic nonmember banks and Reserves and Related Items," Section 10 of foreign-owned banking institutions held with mem- Banking and Monetary Statistics, 1941-1970 (Board ber banks and redeposited in full with Federal of Governors of the Federal Reserve System, Reserve Banks in connection with voluntary par- Sept. 1, 1976), pp. 507-23. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 Tables 18. Changes in Number of Banking Of]ices in the United Stales, 1981 Commercial banks (including stock savings Mutual banks and nondeposit trust companies) savings T a y n p d e c o h f a o n f g fi e ce b A an l k l s Member Nonmember banks Total Total Na- State Insured Non- Insured Nontional insured insured Banks, Dec. 31, 1980 15,296 14,836 5,422 4,425 997 9,000 414 323 137 Changes during 1981 New banks 268 267 124 99 25 75 68 1 Ceased banking operation . -1 — 1 -1 Suspensions -1 -1 Placed in receivershio -2 -2 _ 4 -1 Banks converted into branches -213 -198 -85 -71 -14 "111 -2 -14 -1 Other -20 -19 -9 — 7 -2 — 9 ~1 — 1 Interclass changes Nonmember to national 14 14 . -14 Nonmember to state 23 23 -23 . State member to 9 -9 State member to nonmember -2 -2 2 . National to state -2 2 National to non- -10 -10 . 10 . National to noninsured -3 -3 . 3 . Noninsured to insured 24 -24 Insured mutual to federal -4 Net change 27 46 52 29 23 -72 66 7 -26 Dec. 31,1981 15,323 14,882 5,474 4,454 1,020 8,928 4801 330 111 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 247 18.—Continued Commercial banks (including stock savings Mutual banks and nondeposit trust companies) savings T a y n p d e c o h f a o n f g fi e ce ba A n l k l s Member Nonmember banks Total Total ti N on a a - l State Insured in N su o r n e - d Insured in N su o r n e - d Branches and additional offices, Dec. 31,1980 s 41,477 38,353 24,379 19,620 4,759 13,923 51 2,744 380 Changes during 1981 De novo 2,326 2,175 1,233 908 325 932 10 139 12 Banks converted . 209 194 130 110 20 64 14 1 Discontinued -364 -332 -212 -161 -51 -119 -1 -32 Sale of branch ... -2 -2 3 -3 -2 lnterclass changes Nonmember to national . . 280 280 -280 Nonmember to state member ... 53 53 -53 State member to national ... 25 -25 State member to nonmember -9 -9 9 National to state member -81 81 National to nonmember -123 -123 123 Noninsured to insured mutual .... 128 -128 Insured mutual to federal mutual -139 -139 Insured nonmember to insured mutual -4 -4 4 Other 40 21 30 17 13 Q 14 5 Net change 2,070 2,052 1,382 978 404 661 9 128 -110 Dec. 31,19812 43,547 40,405 25,761 20,598 5,163 14,584 60 2,872 270 Banking facilities Dec. 31,19803 156 156 135 124 11 21 Changes during 1981 Established 2 Discontinued -5 -5 -4 -3 -1 -1 Net change .. -3 -3 -2 -1 -1 -1 Dec. 31,19813 153 153 133 123 10 20 1. As of Dec. 31, 1981, includes 14 state mem- 3. Data include facilities provided at military and ber noninsured and 2 noninsured national trust other government establishments through arrangecompanies. ments made by the Treasury. 2. Figures exclude banking facilities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 Tables 19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1981 American Bank of Commerce, Albuquerque, New Mexico, to merge with Republic Bank, Albuquerque, New Mexico SUMMARY REPORT BY THE ATTORNEY GENERAL (Undated) The acquiring bank, American Bank of Commerce (Applicant), is a subsidiary of Bank Securities, Inc. (BSI), a holding company that owns eight banks throughout New Mexico. BSI has total consolidated deposits of $376,787,000, which represents 7.68 percent of statewide totals. Applicant operates eight offices, all in Albuquerque. BSI's other subsidiary, First State Bank of Rio Rancho (First Bank), was the only bank in neighboring Sandoval County until October 1980. First Bank operates four offices, with total deposits of $34.1 million, and holds 1.8 percent of the total deposits in the Sandoval-Bernalillo area. Republic Bank operates three offices, and has total deposits of $36.5 million, including $12.9 million in demand deposits of individuals, partnerships, and corporations (IPC). The relevant market for consideration of the competitive effects of this merger is the Albuquerque standard metropolitan statistical area, which consists of Bernalillo and Sandoval Counties. The "Albuquerque Ranally Metro Area," as defined by the Rand McNally Commercial Atlas, consists of only parts of Bernalillo County (but includes all of Albuquerque) and Sandoval County. If the relevant market is defined to include both counties, the merger would have the effect of eliminating direct competition and of intensifying concentration in the market. BSI's two subsidiaries, Applicant and First Bank, have a 7.5 percent share of the total deposits of the Bernalillo-Sandoval market; the resulting bank would have 9.5 percent. However, even if the relevant geographic market were, as Applicant contends, Bernalillo County exclusively, the market shares would still be significant. Consummation of the proposed merger would eliminate direct competition between the fourth and eighth largest banks in Albuquerque, as measured by total deposits; and the resulting bank would have 7.8 percent of total deposits, 7.6 percent of IPC demand deposits, and 8 percent of net loans in Bernalillo County. Applicant, with 5.7 percent of total deposits, is the fourth largest bank in the area. The top three firms control 78.3 percent of total deposits and 77.4 percent of IPC demand deposits. The top four control 84 percent of total deposits and 82.4 percent of IPC demand deposits. The bank to be acquired, Republic Bank, is the eighth largest institution as measured by total deposits (2 percent), and the seventh largest as measured by net loans (2.4 percent) and by IPC demand deposits (2.6 percent). The merger would have an adverse effect on competition. BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (2/5/81) American Bank of Commerce, Albuquerque, New Mexico (Applicant), with assets of $117 million, proposes to merge Republic Bank, Albuquerque, New Mexico (Bank), with assets of $40 million. Applicant is a subsidiary of Bank Securities, Inc., Albuquerque (BSI), which ranks fourth among New Mexico's commercial banking organizations, with 7.7 percent of deposits. Two of BSI's subsidiary banks compete in the relevant Albuquerque Ranally Metro Area, where BSI holds 7.4 percent of market deposits and ranks fourth among twelve commercial banking organizations. If the merger is consummated, BSI would hold 9.3 percent of area deposits and would continue to rank fourth. While the proposed merger would eliminate some competition within the market, BSI would remain substantially smaller in absolute size and market share than the three larger banking organizations. Moreover, numerous independent banking alternatives would remain. Consequently, the merger would not have a significant effect on competition in the relevant area. The Board also concludes that the financial and managerial resources and prospects of the institutions involved, as well as the banking factors, are consistent with approval. The bank resulting from the proposed merger will be able to offer increased lending limits and other expanded services to its customers. In particular, it will offer trust services, the convenience of automatic teller machines, and a debit-card system, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 249 19.—Continued services previously unavailable from Bank. The Board believes that considerations relating to the convenience and needs of the communities to be served support approval and are sufficient to outweigh any slightly adverse competitive effect. Accordingly, the Board finds that consummation of the proposal is consistent with the public interest. The Carroll County Trust Company, Conway, New Hampshire, to merge with Lafayette National Bank, Littleton, New Hampshire SUMMARY REPORT BY THE ATTORNEY GENERAL (1/29/81) The proposed transaction would not have a substantial effect on competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2/17/81) The Carroll County Trust Company (Applicant), with assets of $41 million, proposes to merge Lafayette National Bank (Bank), with assets of $47 million. Applicant is a subsidiary of Indian Head Banks, Inc., Nashua (IHB), which ranks first among New Hampshire's commercial banking organizations, with 18.0 percent of the deposits. After the merger, IHB would control 19.4 percent of state deposits. Applicant's three offices are in the Conway market, while Bank's five offices are in the Littleton market. None of IHB's commercial banking subsidiaries is represented in the Littleton market, where Bank ranks first among six such organizations, with 42 percent of total deposits ($76 million). Three savings banks in the Littleton area hold IPC time and savings deposits that range from $19 million to $77 million. Further, the Littleton area does not appear to be attractive for the establishment of de novo branches. Therefore, the competitive effect of the proposal would not be sufficiently adverse for disapproval. Both IHB and Applicant are in satisfactory condition, and the condition of the resulting bank would be satisfactory. The proposal would improve the level of services at the offices now operated by Bank. Among the new or expanded services to be offered are industrial revenue loans, lease financing, automatic teller machines, and trust services. Convenience and need factors lend weight to approval. First Virginia Bank-Colonial, Richmond, Virginia, to merge with The Peoples Bank of Hanover County, Mechanicsville, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (4/27/81) The proposed transaction would have no effect on competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4/28/81) First Virginia Bank-Colonial (Applicant), with assets of $65 million, proposes to merge The Peoples Bank of Hanover County (Bank), with assets of $16 million. Applicant is a subsidiary of First Virginia Banks, Inc., Falls Church (FVB), which ranks seventh among Virginia's commercial banking organizations, with about 7 percent of the deposits held by banking offices in the state. The relevant market in this proposal is the Richmond area, where FVB controls less than 2 percent of all deposits. If the proposed merger is consummated, the resulting bank would hold less than 3 percent of area deposits. The merger would have no significant adverse effects on competition, and would improve the level of services available at the offices now operated by Bank. The financial and convenience and need factors are consistent with approval. United Virginia Bank, Richmond, Virginia, to merge with The First and Merchants National Bank of Radford, Radford, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 Tables 19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1981—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (6/25/81) United Virginia Bank (Applicant), with assets of $3.5 billion, proposes to merge The First and Merchants National Bank of Radford (Bank), with assets of $66 million. Applicant is a subsidiary of United Virginia Bankshares Incorporated, Richmond (UVB), a one-bank holding company that ranks first among banking organizations in the state. If the proposed merger takes place, UVB's share of banking deposits in Virginia will increase from 13.7 to 13.9 percent. Proponents' closest offices are about 40 miles apart. Applicant is not represented in the unconcentrated Radford market, where Bank, with 14.9 percent of area deposits, ranks second among nine banks. The proposed merger would not have a significant effect on competition. Applicant proposes to expand the level of trust services available to Bank's customers and to provide investment advisory services through an affiliate. Business and commercial interests in the Radford market should benefit from higher loan limits and from various forms of secured lending, including financing for equipment, inventory, and accounts receivable and most types of cash management services. Applicant also plans to install automated teller machines in the Radford market. The banking factors are consistent with approval. Chemical Bank, New York, New York, to acquire certain assets and assume certain liabilities of a branch of Bankers Trust Company, New York, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (10/2/81) The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9/17/81) Chemical Bank (Applicant), with assets of $41 billion, proposes to acquire certain assets and assume certain liabilities of the branch of Bankers Trust Company (BTC) at 76 East 161st Street, The Bronx. Deposits at the branch amount to $14 million. The relevant market in this case is the New York metropolitan banking market. Applicant ranks fourth among 106 commercial banks in this relatively unconcentrated market, with 11.7 percent of the area's commercial bank deposits. The proposal, which is part of a BTC plan to sell most of its retail branches, would not have a significant effect on competition. Inasmuch as this branch of BTC is the only commercial bank office serving the neighborhood surrounding Yankee Stadium and The Bronx County Courthouse, the proposal would insure continued availability of retail banking services in that area. Considerations of convenience and need factors, including those relating to the Community Reinvestment Act, are consistent with approval. The proposed transaction would have no effect on Applicant's generally satisfactory condition. The Merrill Trust Company, Bangor, Maine, to acquire the assets and assume the liabilities of The National Bank of Gardiner, Gardiner, Maine SUMMARY REPORT BY THE ATTORNEY GENERAL (10/2/81) The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10/6/81) The Merrill Trust Company (Applicant), with assets of $340 million, proposes to acquire The National Bank of Gardiner (Bank), with assets of $14 million. Applicant is a banking subsidiary of Merrill Bankshares Company, Bangor (Merrill), which ranks fourth among commercial banking organizations in Maine, with 13.4 percent of total deposits. The proposed acquisition would not alter Merrill's rank in Maine, and the resulting organization would hold 13.8 percent of deposits in the state. The sole office of Bank is in the Augusta banking market, where six of the state's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 251 ten largest commercial banking organizations are represented. Although Applicant is not represented in this market, another banking subsidiary of Merrill, Federal Trust Company, Waterville (Federal), with deposits of $44 million, maintains four offices there. The nearest offices of Federal and Applicant to Bank are about 30 and 50 miles away respectively. Merrill ranks third among eight commercial banking organizations in the Augusta market, with 15 percent of area deposits. While the proposed acquisition would not alter Merrill's rank in this market, the resulting organization would control 19 percent of area deposits. In Maine, savings banks and savings and loan associations are permitted to accept demand deposits and to make commercial loans with certain restrictions. Almost threefourths of Bank's deposits are in the time and savings category. Because of the small size of Bank, and because many commercial banking organizations and thrift institutions —eight mutual savings banks and savings and loan associations and 31 credit unions— compete in the Augusta area, the proposed acquisition would not have a substantial adverse effect on competition. With respect to convenience and need factors, if the proposed acquisition is accomplished, Applicant plans to provide at the Gardiner office the following services that are not offered by Bank: NOW accounts, automatic overdraft credit lines, letters of credit, repurchase agreements, municipal finance, trust accounts, IRA and Keogh accounts, and government-backed loans. Bank has experienced financial and managerial problems that have reduced its effectiveness as a competitor. The financial and managerial resources and prospects of the proposed organization would benefit the operations at the office now occupied by Bank without diminishing Applicant's prospects. 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 organization. Isabella Bank and Trust, Mount Pleasant, Michigan to merge with The Blanchard State Bank, Blanchard, Michigan SUMMARY REPORT BY THE ATTORNEY GENERAL (8/7/81) The proposed transaction would not have a substantial effect on competition. BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10/7/81) Isabella Bank and Trust (Applicant), with assets of $75 million, proposes to merge The Blanchard State Bank (Bank), with assets of $13 million. Proponents' closest offices are 16 miles apart. Both banks operate offices in the Isabella-Clare banking market, where Applicant, with 27.0 percent of area deposits, ranks first among nine banking organizations. The resulting bank from the proposed merger would hold 29.6 percent of the area's commercial bank deposits. However, several large Michigan bank holding companies together control more than half of the deposits in this market. Further, five thrift institutions, including one that is larger than Applicant, operate offices in the same area. While the Board continues to view commercial banking as the relevant line of commerce in determining the competitive effects of a proposal, the Board notes that numerous savings and loan associations and credit unions operate in this banking market and that their activities further diminish the competitive effects of this proposal. Accordingly, the Board finds that consummation of the proposal will have only slightly adverse effects on competition. Ordinarily, the combined market shares of Applicant and Bank might raise some concern about the elimination of existing competition, but several facts in the record indicate that market shares alone do not reflect the effects of this application on competition. Applicant's share of market deposits has declined over the past several years, and Bank's share in the Isabella-Clare banking market has declined even more substantially over the same period. Moreover, the aggregate share of area deposits held by the four and the seven largest banking organizations has also declined significantly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 Tables 19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1981—Continued Bank's office in Six Lakes, Michigan, competes in the Montcalm County banking market, which is adjacent to the Isabella-Clare banking market. Applicant currently maintains no offices in the Montcalm County market, and the Board concludes that consummation would not result in the loss of any significant amount of existing or potential competition in that market. The Board also notes that Bank is not a dominant organization within its banking market, where it ranks last of eight banking organizations and holds less than 3 percent of the commercial bank deposits. The financial and managerial resources and prospects of Applicant and Bank are considered satisfactory. In connection with the proposed transaction, Applicant intends to provide Bank with assistance in trust services, data processing, foreign currency transactions, and the solicitation of credit-card customers. Thus, considerations relating to the convenience and needs of the communities to be served are regarded as sufficient to outweigh any slightly adverse competitive effects. The Prineville Bank, Prineville, Oregon, to acquire certain assets and assume substantially all of the liabilities of High Lakes Community Bank, LaPine, Oregon SUMMARY REPORT BY THE ATTORNEY GENERAL (No report received. Requests for reports on the competitive factors were dispensed with, as authorized by the Bank Merger Act, to permit the Reserve Bank to act immediately to safeguard depositors of High Lakes Community Bank.) BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10/23/81) The Prineville Bank (Applicant), with assets of $5 million, proposes to acquire certain assets and assume substantially all of the liabilities of High Lakes Community Bank (Bank), with assets of $4 million. On the basis of information before the Reserve Bank, it is apparent that an emergency situation exists that, pursuant to the provisions of the Bank Merger Act, requires the Reserve Bank to act immediately, so as to safeguard Bank's depositors. City Bank and Trust Company, Moberly, Missouri, to merge with Higbee Savings Bank, Higbee, Missouri SUMMARY REPORT BY THE ATTORNEY GENERAL (10/23/81) The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11/2/81) City Bank and Trust Company (Applicant), with assets of $73 million, proposes to merge Higbee Savings Bank (Bank), with assets of $2 million. Applicant is a subsidiary of Central Bancompany, Jefferson City, which ranks seventh in the state among commercial banking organizations, with 2.6 percent of the deposits. In the relevant Randolph County banking market, Applicant ranks first among five commercial banks, with 46.6 percent of area deposits. If the proposed merger were consummated, Applicant would hold 48.2 percent of market deposits. The bank with the second largest share of deposits is a subsidiary of Missouri's third largest commercial banking organization. Three savings and loan associations, with total deposits ranging from $27 million to $1.9 billion, are represented in Randolph County. Applicant's main office and facility are situated 11 and 13 miles respectively north of Bank's sole office. Because Bank is a small institution with a declining share of market deposits, it is not viewed as a significant competitor in its market. Further, Bank is located in a sparsely populated area near the edge of the Randolph County market. If the proposed merger is completed, the resulting bank plans to offer NOW accounts, 24-hour automatic teller machines, and trust accounts at the Higbee office; and banking hours at the Higbee office will be extended. Banking factors and the convenience and need factors, including Community Reinvestment Act considerations, lend weight to approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 253 K- I jna;:'kL The Connecticut Bank and Trust Company, Hartford, Connecticut, to merge with The National Bank of New England, East Haddam, Connecticut SUMMARY REPORT BY THE ATTORNEY GENERAL (10/30/81) The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (12/16/81) The Connecticut Bank and Trust Company (Applicant), with assets of $3.1 billion, proposes to merge The National Bank of New England, East Haddam (Bank), with assets of $7 million. Applicant is the sole banking subsidiary of CBT Corporation, Hartford, which is the largest commercial banking organization in Connecticut, with 18.6 percent of the deposits. The proposal would increase CBT Corporation's share of deposits in the state by 0.1 percent. Bank's only office is about eight miles from the nearest office of Applicant. The relevant area in the case is the Hartford market, where Applicant ranks first among 24 commercial banking organizations, with 35.9 percent of area commercial bank deposits. The bank resulting from the proposed merger would hold 36 percent of market deposits. However, thrift institutions control 77 percent of deposits held by commercial banks and thrift organizations in the Hartford area; and home office protection would be removed from East Haddam after this merger. With respect to convenience and needs, Applicant proposes to offer the following new services at the East Haddam office of the resulting bank: trust services, international banking services, residential mortgage loans, and pension and profit-sharing services. The convenience and need factors, including Community Reinvestment Act considerations, lend slight weight to approval of the application. The banking factors are consistent with approval. The Connecticut Bank and Trust Company, Hartford, Connecticut, to merge with The Southington Bank and Trust Company, Southington, Connecticut SUMMARY REPORT BY THE ATTORNEY GENERAL (12/11/81) The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (12/31/81) The Connecticut Bank and Trust Company (Applicant), with assets of $3.1 billion, proposes to merge The Southington Bank and Trust Company (Bank), with assets of $48 million. Applicant is the sole banking subsidiary of CBT Corporation, Hartford, which is the largest commercial banking organization in the state, with 18.6 percent of the deposits. If the proposed merger took place, CBT Corporation would hold 19.0 percent of the deposits held by commercial banking offices in Connecticut. Proponents' closest offices are 3.6 miles apart. The relevant market in the proposal is the Hartford market, where Applicant, with 35.9 percent of area deposits, ranks first among 24 commercial banking organizations. If the proposed merger were consummated, the resulting institution would hold 36.9 percent of area deposits. However, 38 mutual savings banks and savings and loan associations plus 155 credit unions operate in this area. Further, thrift institutions hold more than one and one-half times the deposits of commercial banks. The financial condition of the two banks is satisfactory, as would be that of the resulting bank. Applicant proposes to expand trust and international services at the offices presently operated by Bank if the proposed merger is consummated. Bank does not offer government-insured or government-guaranteed mortgages, which would also be available at the Southington offices of the continuing bank. Convenience and need factors, including considerations under the Community Reinvestment Act, lend slight weight to approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 Tables 19. M 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 will have no effect on competition. The Board of Governors, the Federal Reserve Bank, or the Secretary of the Board of Governors, 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 Name of bank, type of transaction, Assets approval by and other banks involved1 of dollars) Re B se o r a v r e d B o a r nk Fidelity Union Trust Company, Newark, New Jersey 1,274 2-27-81 Merger National Bank of New Jersey, Piscataway, New Jersey .... 258 Exchange Bank and Trust Company of Florida, Tampa Florida 522 3-11-81 Merger Exchange National Bank of Pinellas County, Clearwater, Florida 114 Exchange National Bank of Pasco County, Holiday Florida 35 The Harter Bank & Trust Company, Canton, Ohio 452 3-20-81 Merger 33 The First National Bank at Carrollton, Carrollton, Ohio .... First Virginia Bank of Roanoke Valley, Roanoke, Virginia .. 64 4-9-81 Merger First Virginia Bank-West, Narrows, Virginia 49 Central Trust Company Rochester New York, Rochester, New York 438 7-6-81 Merger The Citizens Central Bank, Arcade, New York 101 Central Bank of Birmingham, Birmingham, Alabama 845 11-17-81 Merger 41 Central Bank of Auburn, N.A., Auburn, Alabama Central Bank of Alabama, N.A., Decatur, Alabama 883 Central Bank of Dothan, N.A., Dothan, Alabama 13 Central Bank of Eufaula, Eufaula, Alabama 25 Central Bank of Walker County, Jasper, Alabama 28 Central Bank of Mobile, N.A., Mobile, Alabama 70 Central Bank of Montgomery, Montgomery, Alabama 163 Central Bank of St. Clair County, Springville, Alabama 11 Central Bank of Tuscaloosa, N.A., Tuscaloosa, Alabama .... 16 Central Bank of Uniontown, Uniontown, Alabama 14 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 255 Nam a e n d o f o b th a e n r k , b a ty n p k e s o in f v o tr l a v n e s d a x ction, o ( f m A d i s l o s li l e o l t a n s r s s) ap B D p o r a a o t r v e d a o o l f b r y Reserve Bank AmeriTrust Company, Cleveland, Ohio 4,950 12-1-81 Merger AmeriTrust Company of Northeastern, Ohio, N.A., Ashtabula, Ohio 120 AmeriTrust Company of Stark County, Canton, Ohio 195 AmeriTrust Company of Jefferson County, Steubenville, Ohio 87 Ohio Citizens Bank, Toledo, Ohio 609 12-16-81 Merger The Farmers and Merchants Deposit Company, Swanton, Ohio 20 1. Each proposed transaction was to be effected under the charter of the first-named bank. The table is in chronological order of approval. 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 holding company. In such cases, the Summary Report by the Attorney General indicates that the transaction will 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, the merger would have no effect on competition. The Board of Governors, the Federal Reserve Bank, or the Secretary of the Board of Governors, 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. Nam a e n d o f o b th a e n r k , b a ty n p k e s o in f v t o r l a v n e s d a 1 ction, o ( f m A d i s l o s li l e o l t a n s r s s) ap B D p o r a a o t r v e d a o l o f b r y Reserve Bank The Peoples Bank of Leslie, Leslie, Michigan 22 1-16-81 Merger New Peoples State Bank of Leslie, Leslie, Michigan Gaylord State Bank, Gaylord, Michigan 67 3-27-81 Merger GSB Bank, Gaylord, Michigan Sussie State Bank, Forest Hill, Maryland 5-28-81 Merger The Forest Hill State Bank, Forest Hill, Maryland . 46 Miles State Bank, St. Michael's, Maryland 5-28-81 Merger St. Michael's Bank, St. Michael's, Maryland 13 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 Tables 19. Mergers, Consolidations, Acquisitions of Assets or Assumptions of Liabilities Approved by the Board o! Governors, 198 {-—Continued Assets Date of Name of bank, type of transaction, approval by and other banks involved1 (millions Board or of dollars) Reserve Bank Gravois Avenue Bank, St. Louis, Missouri 6-4-81 Merger Gravois Bank, St. Louis County, Missouri 152 First Interstate Bank of Great Falls, Great Falls, Montana .. 94 6-15-81 Merger New Montana Bank, Great Falls, Montana 47 West Main Street Bank, Patchogue, New York 7-14-81 Merger Island State Bank, Patchogue, New York 107 Mimbres Valley Bank, Deming, New Mexico 46 10-6-81 Merger New Bank of Mimbres Valley, Deming, New Mexico First Virginia Bank-Alleghany, Covington, Virginia 10-12-81 Merger The Covington National Bank, Covington, Virginia 49 First Virginia Bank-Damascus, Damascus, Virginia (2) 12-4-81 Merger The Bank of Damascus, Inc., Damascus, Virginia 34 The FTB Fourth Bank, Mason, Ohio C) 12-28-81 Merger The First-Mason Bank, Mason, Ohio 28 Big Apple Bank, Richmond, Virginia (2) 12-29-81 Merger The Suburban Bank, Richmond, Virginia 11 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

257 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 Direc lanes and Meeting* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 Directories and Meetings Board of Governors of the Federal Reserve System December 31,1981 Term expires PAUL A. VOLCKER of New Jersey, Chairman1 January 31, 1992 FREDERICK H. SCHULTZ of Florida, Vice Chairman1 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 STAFF DIRECTOR JOSEPH R. COYNE, Asst. to the Board FOR FEDERAL RESERVE BANK DONALD J. WINN, Asst. to the Board ACTIVITIES ANTHONY F. COLE, Special Asst. to the THEODORE E. ALLISON, Staff Director Board HARRY A. GUINTER, Asst. Director for WILLIAM R. MALONI, Special Asst. to Contingency Planning the Board FRANK O'BRIEN, JR., Special Asst. to the OFFICE OF THE SECRETARY Board WILLIAM W. WILES, Secretary JOSEPH S. SIMS, Special Asst. to the Board BARBARA R. LOWREY, Asst. Secretary JAMES MCAFEE, Asst. Secretary JAMES L. STULL, Manager, Operations Review Program THEODORE E. DOWNING, JR., Asst. Secretary 4 OFFICE OF STAFF DIRECTOR FOR MONETARY AND LEGAL DIVISION FINANCIAL POLICY MICHAEL BRADFIELD, General Counsel STEPHEN H. AXILROD, Staff Director ROBERT E. MANNION, Deputy General EDWARD C. ETTIN, Deputy Staff Director Counsel MURRAY ALTMANN, Asst. to the Board J. VIRGIL MATTINGLY, JR., ASSOC. General Counsel STANLEY J. SIGEL, Asst. to the Board NORMAND R.V. BERNARD, Special Asst. GILBERT T. SCHWARTZ, ASSOC. General to the Board Counsel MICHAEL E. BLEIER, Asst. General Counsel OFFICE OF STAFF DIRECTOR MARYELLEN A. BROWN, Asst. to the FOR MANAGEMENT General Counsel TONY J. SALVAGGIO, Acting Staff Director2 DIVISION OF RESEARCH JOHN M. DENKLER, Staff Director* AND STATISTICS EDWARD T. MULRENIN, Asst. Staff Director JAMES L. KICHLINE, Director JOSEPH S. ZEISEL, Deputy Director JOSEPH W. DANIELS, SR., Director of Equal Employment Opportunity MICHAEL J. PRELL, ASSOC. Director ROBERT A. EISENBEIS, Senior Deputy Assoc. Director JARED J. ENZLER, Senior Deputy Assoc. 1. The designations as Chairman and Vice Director Chairman expire on Aug. 6, 1983, and July 27, ELEANOR J. STOCKWELL, Senior Deputy 1983, respectively, unless the services of these Assoc. Director members of the Board shall have terminated sooner. 2. On loan from the Federal Reserve Bank of Dallas. 4. On loan from the Federal Reserve Bank Digitized fo3r. FROAn SleEaRve of absence. of Chicago. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 261 DIVISION OF RESEARCH DIVISION OF BANKING AND STATISTICS—Continued SUPERVISION AND REGULATION DONALD L. KOHN, Deputy Assoc. JOHN E. RYAN, Director Director FREDERICK R. DAHL, ASSOC. Director J. CORTLAND G. PERET, Deputy Assoc. DON E. KLINE, ASSOC. Director Director WILLIAM TAYLOR, ASSOC. Director HELMUT F. WENDEL, Deputy Assoc. JACK M. EGERTSON, Asst. Director Director ROBERT A. JACOBSEN, Asst. Director MARTHA BETHEA, Asst. Director ROBERT S. PLOTKIN, Asst. Director JOE M. CLEAVER, Asst. Director THOMAS A. SIDMAN, Asst. Director ROBERT M. FISHER, Asst. Director SAMUEL H. TALLEY, Asst. Director DAVID E. LINDSEY, Asst. Director LAURA M. HOMER, Securities Credit Officer LAWRENCE SLIFMAN, Asst. Director FREDERICK M. STRUBLE, Asst. Director STEPHEN P. TAYLOR, Asst. Director DIVISION OF CONSUMER AND LEVON H. GARABEDIAN, Asst. Director COMMUNITY AFFAIRS (A dministration) JANET O. HART, Director GRIFFITH L. GARWOOD, Deputy Director DIVISION OF INTERNATIONAL JERAULD C. KLUCKMAN, ASSOC. Director FINANCE GLENN E. LONEY, Asst. Director EDWIN M. TRUMAN, Director DOLORES S. SMITH, Asst. Director ROBERT F. GEMMILL, ASSOC. Director CHARLES J. SIEGMAN, ASSOC. Director DIVISION OF PERSONNEL LARRY J. PROMISEL, Senior Deputy DAVID L. SHANNON, Director Assoc. Director JOHN R. WEIS, Asst. Director DALE W. HENDERSON, Deputy Assoc. CHARLES W. WOOD, Asst. Director Director SAMUEL PIZER, Staff Adviser RALPH W. SMITH, JR., Asst. Director DIVISION OF SUPPORT SERVICES DONALD E. ANDERSON, Director ROBERT E. FRAZIER, ASSOC. Director DIVISION OF FEDERAL WALTER W. KREIMANN, ASSOC. Director RESERVE BANK OPERATIONS CLYDE H. FARNSWORTH, JR., Director LORIN S. MEEDER, ASSOC. Director OFFICE OF THE CONTROLLER WALTER ALTHAUSEN, Asst. Director JOHN KAKALEC, Controller CHARLES W. BENNETT, Asst. Director GEORGE E. LIVINGSTON, Asst. Controller RICHARD B. GREEN, Asst. Director EARL G. HAMILTON, Asst. Director DIVISION OF DATA PROCESSING ELLIOTT C. MCENTEE, Asst. Director CHARLES L. HAMPTON, Director DAVID L. ROBINSON, Asst. Director P.D. RING, Adviser BRUCE M. BEARDSLEY, Deputy Director HOWARD F. CRUMB, Acting Adviser5 UYLESS D. BLACK, ASSOC. Director6 GLENN L. CUMMINS, Asst. Director NEAL H. HILLERMAN, Asst. Director C. WILLIAM SCHLEICHER, JR., Asst. Director ROBERT J. ZEMEL, Asst. Director 5. On loan from the Federal Reserve Bank of New York. 6. On leave of absence. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 Directories and Meetings Federal Open Market Corunntiee December 31,1981 Members PAUL A. VOLCKER, Chairman (Board of Governors) ANTHONY M. SOLOMON, Vice Chairman (elected by Federal Reserve Bank of New York) EDWARD G. BOEHNE (elected by Federal Reserve Banks of Boston, Philadelphia, and Richmond) ROBERT H. BOYKIN (elected by Federal Reserve Banks of Atlanta, St. Louis, and Dallas) E. GERALD CORRIGAN (elected by Federal Reserve Banks of Minneapolis, Kansas City, and San Francisco) LYLE E. GRAMLEY (Board of Governors) SILAS KEEHN (elected by Federal Reserve Banks of Chicago and Cleveland) J. CHARLES PARTEE (Board of Governors) EMMETT J. RICE (Board of Governors) FREDERICK H. SCHULTZ (Board of Governors) NANCY H. TEETERS (Board of Governors) HENRY C. WALLICH (Board of Governors) Officers STEPHEN H. AXILROD, JOSEPH E. BURNS, Staff Director Associate Economist MURRAY ALTMANN, RICHARD G. DAVIS, Secretary Associate Economist NORMAND R.V. BERNARD, EDWARD C. ETTIN, Assistant Secretary Associate Economist NANCY M. STEELE, DONALD J. MULLINEAUX, Deputy Assistant Secretary Associate Economist MICHAEL BRADFIELD, MICHAEL J. PRELL, General Counsel Associate Economist JAMES H. OLTMAN, KARL L. SCHELD, Deputy General Counsel Associate Economist ROBERT E. MANNION, EDWIN M. TRUMAN, Assistant General Counsel Associate Economist JAMES L. KICHLINE, JOSEPH S. ZEISEL, Economist Associate Economist PETER D. STERNLIGHT, Manager for Domestic Operations, System Open Market Account SAM Y. CROSS, Manager for Foreign Operations, System Open Market Account During 1981, the Federal Open Mar- eral Open Market Committee" in this ket Committee held ten meetings. (See REPORT.) "Record of Policy Actions of the Fed- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 263 Federal Advisory i V>/'/?aV December 31,1981 Members District No. 1—WILLIAM S. EDGERLY, Chairman of the Board and President, State Street Bank and Trust Company, Boston, Massachusetts District No. 2—DONALD C. PLATTEN, Chairman of the Board, Chemical Bank, New York, New York District No. 3—JOHN H. WALTHER, Chairman of the Board, New Jersey National Corporation and New Jersey National Bank, Trenton, New Jersey District No. A—MERLE E. GILLIAND, Chairman of the Board 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—RONALD TERRY, Chairman of the Board, First Tennessee Bank, N.A., Memphis, Tennessee 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—T.C. FROST, JR., Chairman of the Boards, Cullen/Frost Bankers, Inc., and the Frost National Bank of San Antonio, San Antonio, 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 MERLE E. GILLIAND, President CHAUNCEY E. SCHMIDT, Vice President HERBERT V. PROCHNOW, Secretary WILLIAM J. KORSVIK, Associate Secretary Directors J. OWEN COLE CLARENCE G. FRAME ROBERT M. SURDAM Meetings of the Federal Advisory banking industry, one from each Fed- Council were held on February 5-6, eral Reserve District, is required by law April 30-May 1, September 10-11, and to meet in Washington at least four November 5-6, 1981. The Board of times a year, and is authorized by the Governors met with the council on Feb- Federal Reserve Act to consult and ruary 6, May 1, September 11, and advise the Board on all matters within November 6, 1981. The council, which the jurisdiction of the Board, is composed of 12 representatives of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 Directories and Meetings Consumer Advisory Council December 31,1981 RALPH J. ROHNER, Washington, D.C, Chairman CHARLOTTE H. SCOTT, Charlottesville, Virginia, Vice Chairman ARTHUR F. BOUTON, F. THOMAS JUSTER, Little Rock, Arkansas Ann Arbor, Michigan JULIA H. BOYD, RICHARD F. KERR, Alexandria, Virginia Palm City, Florida ELLEN BROADMAN, HARVEY M. KUHNLEY, Washington, D.C. Minneapolis, Minnesota JAMES L. BROWN, THE REV. ROBERT J. MCEWEN, S.J., Milwaukee, Wisconsin Chestnut Hill, Massachusetts MARK E. BUDNITZ, STAN L. MULARZ, Atlanta, Georgia Chicago, Illinois JOSEPH N. CUGINI, WILLIAM J. O'CONNOR, JR., Westerly, Rhode Island Buffalo, New York RICHARD S. D'AGOSTINO, MARGARET REILLY-PETRONE, Philadelphia, Pennsylvania Upper Montclair, New Jersey SUSAN PIERSON DE WITT, RENE REIXACH, Springfield, Illinois Rochester, New York JOANNE S. FAULKNER, FLORENCE M. RICE, New Haven, Connecticut New York, New York LUTHER GATLING, HENRY B. SCHECHTER, New York, New York Washington, D.C. VERNARD W. HENLEY, PETER D. SCHELLIE, Richmond, Virginia Washington, D.C. JUAN JESUS HINOJOSA, NANCY Z. SPILLMAN, McAllen, Texas Los Angeles, California SHIRLEY T. HOSOI, RICHARD A. VAN WINKLE, Los Angeles, California Salt Lake City, Utah GEORGE S. IRVIN, MARY W. WALKER, DMeenevtienrg, sC boelotwraedeno the Consumer Ad- whMicho nriso e,c oGmeporogseiad of creditors, convisory Council and members of the sumers, and others, was established Board of Governors were held on Jan- pursuant to the Equal Credit Opportuuary 14-15, April 15-16, July 29-30, nity Act to advise the Board on conand October 28-29, 1981. The council, sumer-related matters. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 265 Federal Reserve Banks and Brandies December 31,1981 Chairmen and Deputy iJhairmen of Boards of Directors Chairman and Federal Reserve Bank Deputy Chairman Federal Reserve Agent Boston Robert P. Henderson Thomas I. Atkins New York Robert H. Knight, Esq. Boris Yavitz Philadelphia John W. Eckman Jean A. Crockett Cleveland J.L. Jackson William A. Knoell 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 Paul H. Henson Doris M. Drury Dallas Gerald D. Hines John V. James San Francisco Cornell C. Maier Caroline L. Ahmanson Conference of Chairmen tem. One term in each class of directors expires each year. Directors are chosen The chairmen of the Federal Reserve Banks are organized into a Conference without discrimination as to race, creed, of Chairmen that meets to consider color, sex, or national origin. matters of common interest and to The Class A directors are chosen as consult with and advise the Board of representatives of member banks and, Governors. Such meetings, attended as a matter of practice, are active ofalso by the deputy chairmen, were held ficers of member banks. Class B and in Washington on June 7-8 and Decem- Class C directors represent the public ber 3-4, 1981. and are selected with due, but not The Executive Committee of the exclusive, consideration to the interests Conference of Chairmen during 1981 of agriculture, commerce, industry, comprised Stephen F. Keating, Chair- services, labor, and consumers. Class B man, Cornell C. Maier, Vice Chairman, and Class C directors may not be ofand John Sagan, member. ficers, directors, or employees of any On December 4, 1981, John Sagan bank, nor may Class C directors be was elected chairman of the conference stockholders of any bank. Annually, and of its Executive Committee to serve the Board of Governors designates one for the succeeding year; William A. Class C director of each Reserve Bank Fickling, Jr. was elected vice chairman to serve as chairman of the Bank and of the conference and a member of the one to serve as deputy chairman. Executive Committee; and Paul H. Branches of Federal Reserve Banks Henson was elected as the other mem- have either five or seven directors, of ber of the Executive Committee. whom a majority are appointed by the board of directors of the parent Federal Directors Reserve Bank. The others are ap- Class A and Class B directors are pointed by the Board of Governors of elected by the member banks of a the Federal Reserve System. The chair- Federal Reserve District. Class C di- men of branch boards are selected rectors are appointed by the Board of from among directors appointed by the Digitized for FRASER Governors of the Federal Reserve Sys- Board of Governors. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 Directories and Meetings Term expires District 1—BOSTON Dec. 31 Class A Fred A. White President, Dartmouth National Bank of Hanover, Hanover, New Hampshire ... 1981 H. Alan Timm President, Bank of Maine, N.A., Augusta, Maine 1982 Henry S. Woodbridge, Jr. .Chairman of the Board and Chief Executive Officer, Rhode Island Hospital Trust National Bank, Providence, Rhode Island .. 1983 Class B Robert D. Kilpatrick .... President and Chief Executive Officer, Connecticut General Insurance Corporation, Hartford, Connecticut 1981 Carol R. Goldberg Senior Vice President, The Stop & Shop Companies, Inc., Boston, Massachusetts 1982 Joseph A. Baute Chairman and Chief Executive Officer, Markem Corporation, Keene, New Hampshire 1983 Class C Robert P. Henderson ... .Chairman and Chief Executive Officer, Itek Corporation, Lexington, Massachusetts .. 1981 Thomas I. Atkins General Counsel, National Association for the Advancement of Colored People, New York, New York 1982 Michael J. Harrington . . .Chairman of the Board, Harrington, Keefe, and Schork, Inc., Lynnfield, Massachusetts 1983 District 2—NEW YORK Class A 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 Peter D. Kiernan Chairman and President, United Bank Corporation of New York, Albany, New York 1983 Class B Edward L. Hennessy, Jr. .Chairman of the Board, Allied Corporation, Morristown, New Jersey 1981 William S. Cook President, Union Pacific Corporation, New York, New York 1982 John R. Opel President and Chief Executive Officer, International Business Machines Corporation, Armonk, New York 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 267 Term expires Class C Dec. 31 Gertrude G. Michelson .. Senior Vice President, R.H. Macy & Company, Inc., New York, New York 1981 Boris Yavitz Dean, Graduate School of Business, Columbia University, New York, New York .. 1982 Robert H. Knight, Esq. . .Partner, Shearman and Sterling, Attorneys, New York, New York 1983 BUFFALO BRANCH Appointed by Federal Reserve Bank 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 Carl F. Ulmer President, The Evans National Bank of Angola, Angola, New York 1983 Appointed by Board of Governors 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 John R. Burwell President, Rollins Container Corporation, Rochester, New York 1983 District 3—PHILADELPHIA Class A 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 Roger S. Hillas Chairman and President, Provident National Bank, Philadelphia, Pennsylvania 1983 Class B Richard P. Hauser Chairman and Chief Executive Officer, John Wanamaker, Philadelphia, Pennsylvania . 1981 Eberhard Faber IV Chairman of the Board and Chief Executive Officer, Eberhard Faber, Inc., Wilkes- Barre, Pennsylvania 1982 Harry A. Jensen President and Chief Executive Officer, Armstrong World Industries, Inc., Lancaster, Pennsylvania 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 Directories and Meetings Term expires Class C Dec. 31 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 Robert M. Landis, Esq. . .Partner, Dechert Price & Rhoads, Philadelphia, Pennsylvania 1983 District 4—CLEVELAND Class A 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 J. David Barnes Chairman of the Board, Mellon Bank, N.A., Pittsburgh, Pennsylvania 1983 Class B Jeffery A. Robb Managing Partner, Audit Division, Proctor, Robb and Company, Granville, Ohio ... 1981 John W. Kessler President, John W. Kessler Company, Columbus, Ohio 1982 E. Mandell de Windt .... Chairman of the Board, Eaton Corporation, Cleveland, Ohio 1983 Class C J.L. Jackson Executive Vice President and President— Coal Unit, Diamond Shamrock Corporation, Lexington, Kentucky 1981 John D. Anderson Senior Partner, The Andersons, Maumee, Ohio 1982 William H. Knoell President and Chief Executive Officer, Cyclops Corporation, Pittsburgh, Pennsylvania 1983 CINCINNATI BRANCH Appointed by Federal Reserve Bank Lawrence C. Hawkins . . .Senior Vice President, University of Cincinnati, Cincinnati, Ohio 1981 Elden Houts Chairman of the Board and 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, Digitized for FRASER N.A., Cincinnati, Ohio 1982 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 269 Term expires O.T. Dorton President, Citizens National Bank, Paints- Dec. 31 ville, Kentucky 1983 Appointed by Board of Governors Martin B. Friedman Director, Formica Corporation, Cincinnati, Ohio 1981 Sister Grace Marie Hiltz President, Sisters of Charity Health Care, Systems, Inc., Cincinnati, Ohio 1982 Clifford R. Meyer Executive Vice President, Cincinnati Milacron Inc., Cincinnati, Ohio 1983 PITTSBURGH BRANCH Appointed by Federal Reserve Bank Thomas V. Manseli President and Chief Executive Officer, First National Bank of Western Pennsylvania, New Castle, Pennsylvania 1981 R. Burt Gookin Director, HJ. Heinz Co., Pittsburgh, Pennsylvania 1981 William D. McKain President, Wheeling National Bank, Wheeling, West Virginia 1982 Ernest L. Lake President, The National Bank of North East, North East, Pennsylvania 1983 Appointed by Board of Governors Quentin C. McKenna . . .President and Chief Executive Officer, Kennametal Inc., Latrobe, Pennsylvania ... 1981 Robert S. Kaplan Dean, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania 1982 Milton G. Hulme, Jr. . . .President and Chief Executive Officer, Mine Safety Appliances Company, Pittsburgh, Pennsylvania 1983 District 5—RICHMOND Class A Vincent C. Burke, Jr. . . .Chairman of the Board and Chief Executive Officer, The Riggs National Bank, Washington, D.C 1981 William M. Dickson President and Senior Trust Officer, First National Bank in Ronceverte, Ronceverte, West Virginia 1982 J. Banks Scarborough .. .Chairman and President, Pee Dee State Bank, Timmonsville, South Carolina .... 1983 Class B 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 Caro- Digitized for FRASER lina 1982 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 Directories and Meetings Term expires Leon A. Dunn, Jr Chairman, President, and Chief Executive Dec. 31 Officer, Guardian Corporation and Subsidiaries, Rocky Mount, North Carolina . 1983 Class C 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 Steven Muller President, The Johns Hopkins University, Baltimore, Maryland , 1983 BALTIMORE BRANCH Appointed by Federal Reserve Bank 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 Joseph M. Gough, Jr. . . .President, The First National Bank of St. Mary's, Leonardtown, Maryland 1983 Appointed by Board of Governors Vacant 1981 Edward H. Covell Vice President for Governmental and Industry Affairs, Country Pride Foods Limited, Easton, Maryland 1982 Robert L. Tate Chairman, Tate Industries, Baltimore, Maryland 1983 CHARLOTTE BRANCH Appointed by Federal Reserve Bank Hugh M. Chapman Chairman of the Board, The Citizens & Southern National Bank of South Carolina, Columbia, South Carolina 1981 J.B. Aiken, Jr Chairman of the Board, Guaranty Bank and Trust Company, Florence, South Carolina 1982 W.B. Apple, Jr President, First National Bank of Reidsville, Reidsville, North Carolina 1982 Nicholas W. Mitchell . .. .Chairman of the Board, Piedmont Federal Savings and Loan Association, Winston- Digitized for FRASER Salem, North Carolina 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 271 Term expires Appointed by Board of Governors Dec. 31 Henry Ponder 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 William S. Lee III President and Chief Operating Officer, Duke Power Company, Charlotte, North Carolina 1983 District 6—ATLANTA Class A Guy W. Botts Chairman of the Board, Barnett Banks of Florida, Inc., Jacksonville, Florida .... 1981 Dan B. Andrews President, First National Bank, Dickson, Tennessee 1982 Hugh M. Willson President, Citizens National Bank, Athens, Tennessee 1983 Class B Floyd W. Lewis Chairman of the Board and Chief Executive Officer, Middle South Utilities, Inc., New Orleans, Louisiana 1981 Jean Me Arthur Davis . . .President, Me Arthur Dairy, Inc., Miami, Florida 1982 Harold B. Blach, Jr President, Blach's Inc., Birmingham, Alabama 1983 Class C Fred Adams, Jr President, Cal-Maine Foods, Inc., Jackson, Mississsippi 1981 John H. Weitnauer, Jr. . . Chairman and Chief Executive Officer, Richway, Atlanta, Georgia 1982 William A. Fickling, Jr. . .Chairman and Chief Executive, Charter Medical Corporation, Macon, Georgia . . 1983 BIRMINGHAM BRANCH Appointed by Federal Reserve Bank 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 Henry A. Leslie President and Chief Executive Officer, Union Bank and Trust Company, Montgomery, Digitized for FRASER Alabama 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 Directories and Meetings Term expires Appointed by Board of Governors Dec. 31 Louis J. Willie Executive Vice President, Booker T. Washington Insurance Company, Birmingham, Alabama 1981 William H. Martin III . . .President and Chief Executive Officer, Martin Industries, Inc., Florence, Alabama 1982 Samuel R. Hill, Jr President, University of Alabama in Birmingham, Birmingham, Alabama 1983 JACKSONVILLE BRANCH Appointed by Federal Reserve Bank Vacant 1981 Whitfield M. Palmer, Jr. .Chairman, Mid-Florida Mining Company, Ocala, Florida 1982 Billy J. Walker President, Atlantic Bancorporation, Jacksonville, Florida 1982 Gordon W. Campbell . . .President and Chief Executive Officer, Exchange Bancorporation, Inc., Tampa, Florida 1983 Appointed by Board of Governors Jerome P. Keuper President, Florida Institute of Technology, Melbourne, Florida 1981 Copeland D. Newbern . . .Chairman of the Board, Newbern Groves, Inc., Tampa, Florida 1982 Joan W. Stein Partner, Regency Square Shopping Center, Jacksonville, Florida 1983 MIAMI BRANCH Appointed by Federal Reserve Bank Jane C. Cousins Realtor, 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 Daniel S. Goodrum President and Chief Executive Officer, Century Banks, Inc., Ft. Lauderdale, Florida 1983 Appointed by Board of Governors Roy Vandegrift, Jr President, Vandergrift-Williams' Farms, Inc., Pahokee, Florida 1981 David H. Rush President, ACR Electronics, Inc., Hollywood, Florida 1982 Eugene E. Cohen Chief Financial Officer and Treasurer, Howard Hughes Medical Institute, Coco- Digitized for FRASER nut Grove, Florida 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 273 Term expires NASHVILLE BRANCH Dec. 31 Appointed by Federal Reserve Bank 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 John R. King President, The Mason and Dixon Lines, Inc., Kingsport, Tennessee 1982 James F. Smith, Jr Chairman and Chief Executive Officer, Park National Bank, Knoxville, Tennessee . . . 1983 Appointed by Board of Governors John C. Bolinger, Jr Management Consultant, Hamilton House No. 130, Knoxville, Tennessee 1981 Cecelia Adkins Executive Director, Sunday School Publishing Board, Nashville, Tennessee 1982 Robert C.H. Mathews, Jr. .Managing General Partner, R.C. Mathews, Contractor, Nashville, Tennessee 1983 NEW ORLEANS BRANCH Appointed by Federal Reserve Bank Robert H. Bolton President, Rapides Bank and Trust Company, Alexandria, Louisiana 1981 Patrick A. Delaney Chairman of the Board and President, Whitney National Bank of New Orleans, New Orleans, Louisiana 1982 Ben M. Radcliff President, Ben M. Radcliff Contractor, Inc., Mobile, Alabama 1982 Paul W. McMullan Chairman and Chief Executive Officer, First Mississippi National Bank, Hattiesburg, Mississippi 1983 Appointed by Board of Governors Horatio C. Thompson . . .President, Horatio Thompson Investment, Inc., Baton Rouge, Louisiana 1981 Levere C. Montgomery . .Chairman, Time Saver Stores, Inc., New Orleans, Louisiana 1982 Leslie B. Lampton President, Ergon, Inc., Jackson, Mississippi 1983 District 7—CHICAGO Class A Roger E. Anderson Chairman of the Board, Continental Illinois National Bank and Trust Company of Chicago, Chicago, Illinois 1981 Patrick E. McNarny . .. .President, First National Bank of Logansport, Logansport, Indiana 1982 Ollie Jay Tomson President, The Citizens National Bank of Digitized for FRASER Charles City, Charles City, Iowa 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 Directories and Meetings Term expires Class B Dec. 31 Dennis W. Hunt President, Hunt Truck Lines, Inc., Rockwell City, Iowa 1981 Mary Garst Manager of Cattle Division, Garst Company, Coon Rapids, Iowa 1982 Leon T. Kendall President, Mortgage Guaranty Insurance Corporation, Milwaukee, Wisconsin . .. 1983 Class C 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 John Sagan Vice President-Treasurer, Ford Motor Company, Dearborn, Michigan 1983 DETROIT BRANCH Appointed by Federal Reserve Bank Thomas R. Ricketts ... .Chairman and President, Standard Federal Savings and Loan Association, Troy, 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 Lawrence A. Johns President, Isabella Bank and Trust, Mount Pleasant, Michigan 1983 Appointed by Board of Governors 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 Karl D. Gregory Professor of Economics and Management, School of Economics and Management, Oakland University, Rochester, Michigan 1983 District 8—ST. LOUIS Class A George M. Ryrie President, First National Bank & Trust Co., Alton, Illinois 1981 Donald L. Hunt President, First National Bank of Marissa, Marissa, Illinois 1982 Clarence C. Barksdale . .Chairman and Chief Executive Officer, First National Bank in St. Louis, St. Louis, Digitized for FRASER Missouri 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 275 Term expires Class B Dec. 31 Tom K. Smith, Jr St. Louis, Missouri 1981 Mary P. Holt President, Clothes Horse, Little Rock, Arkansas 1982 Frank A. Jones, Jr President, Dietz Forge Company, Memphis, Tennessee 1983 Class C 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 William H. Stroube Associate Dean, Department of Agriculture, Western Kentucky University, Bowling Green, Kentucky 1983 LITTLE ROCK BRANCH Appointed by Federal Reserve Bank Gordon E. Parker Chairman of the Board and President, The First National Bank of El Dorado, El Dorado, Arkansas 1981 Shirley J. Pine Professor, Program in Communicative Disorders, University of Arkansas at Little Rock, Little Rock, Arkansas 1981 William H. Bowen Chairman and Chief Executive Officer, The Commercial National Bank of Little Rock, Little Rock, Arkansas 1982 William H. Kennedy, Jr. .Chairman of the Board, National Bank of Commerce of Pine Bluff, Pine Bluff, Arkansas 1983 Appointed by Board of Governors G. Larry Kelley President, Pickens-Bond Construction Company, 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 Richard V. Warner Group Vice President, Wood Products Group, Potlatch Corporation, Warren, Arkansas 1983 LOUISVILLE BRANCH Appointed by Federal Reserve Bank Fred B. Oney President, The First National Bank of Carrollton, Carrollton, Kentucky 1981 William C. Ballard, Jr. . .Executive Vice President-Finance and Administration, Humana, Inc., Louisville, Digitized for FRASER Kentucky 1981 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 Directories and Meetings Term expires Howard Brenner Vice Chairman of the Board, Tell City Na- Dec. 31 tional Bank, Tell City, Indiana 1982 Frank B. Hower, Jr Chairman and Chief Executive Officer, Liberty National Bank and Trust Company, Louisville, Kentucky 1983 Appointed by Board of Governors Sister Eileen M. Egan . . .President, Spaulding College, Louisville, Kentucky 1981 James F. Thompson ... .Professor of Economics, Murray State University, Murray, Kentucky 1982 Richard O. Donegan . .. .Senior Vice President and Group Executive, General Electric Company, Louisville, Kentucky 1983 MEMPHIS BRANCH Appointed by Federal Reserve Bank 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 Company, Blytheville, Arkansas 1982 Wayne W. Pyeatt President, Memphis Fire Insurance Company, Memphis, Tennessee 1983 Appointed by Board of Governors Benjamin P. Pierce President, Tyrone Hydraulics, Inc., Corinth, Mississippi 1981 Patricia W. Shaw Executive Vice President, Universal Life Insurance Company, Memphis, Tennessee 1982 Donald B. Weis President, Tamak Transportation Corporation, West Memphis, Arkansas 1983 District 9—MINNEAPOLIS Class A 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 Vern A. Marquardt ....President, Commercial National Bank of L'Anse, L'Anse, Michigan 1983 Class B Russell G. Cleary Chairman and President, G. Heileman Brewing Company, LaCrosse, Wisconsin 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 277 Term expires Joe F. Kirby Chairman, Western Surety Company, Sioux Dec. 31 Falls, South Dakota 1982 Harold F. Zigmund President and Chief Executive Officer, Blandin Paper Company, Grand Rapids, Minnesota 1983 Class C William G. Phillips Chairman and Chief Executive Officer, International Multifoods, Minneapolis, Minnesota 1981 Sister Generose Gervais .Administrator, St. Mary's Hospital, Rochester, Minnesota 1982 Stephen F. Keating Midwest Plaza Building, Minneapolis, Minnesota 1983 HELENA BRANCH Appointed by Federal Reserve Bank Lynn D. Grobel President, First National Bank of Glasgow, Glasgow, Montana 1981 Jase O. Norsworthy President, The N.R.G. Company, Billings, Montana 1982 Harry W. Newlon President, First National Bank, Bozeman, Montana 1982 Appointed by Board of Governors Norris E. Hanford Fort Benton, Montana 1981 Ernest B. Corrick Vice President and General Manager, Timberlands-Rocky Mountain Operation, Champion International Corporation, Missoula, Montana 1982 District 10—KANSAS CITY Class A John D. Woods Chairman and Chief Executive Officer, The Omaha National Bank, Omaha, Nebraska 1981 Howard K. Loomis President, The Peoples Bank, Pratt, Kansas 1982 Wayne D. Angell President, Council Grove National Bank, Ottawa, Kansas 1983 Class B Alan R. Sleeper Alden, Kansas 1981 Charles C. Gates Chairman of the Board and President, Gates Rubber Company, Denver, Colorado .. . 1982 James G. Harlow, Jr. . . .President and Chief Executive Officer, Oklahoma Gas and Electric Company, Oklahoma City, Oklahoma 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 Directories and Meetings Term expires Class C Dec. 31 Doris M. Drury Professor of Economics and Director of Public Affairs Program, University of Denver, Englewood, Colorado 1981 Paul H. Henson Chairman, United Telecommunications, Inc., Kansas City, Missouri 1982 John F. Anderson President and Chief Executive Officer, Farmland Industries, Inc., Kansas City, Missouri 1983 DENVER BRANCH Appointed by Federal Reserve Bank Kenneth C. Naramore . . .President, Stockmen's Bank & Trust Company, Gillette, Wyoming 1981 Delano E. Scott Chairman of the Board and President, The Routt County National Bank of Steamboat Springs, Steamboat Springs, Colorado 1982 George S. Jenks Chairman and Chief Executive Officer, Albuquerque National Bank, Albuquerque, New Mexico 1982 Appointed by Board of Governors Caleb B. Hurtt President and Corporate Vice President, Denver Division, Martin Marietta Aerospace Corporation, Denver, Colorado . . 1981 Alvin F. Grospiron Denver, Colorado 1982 OKLAHOMA CITY BRANCH Appointed by Federal Reserve Bank J.A. Maurer Chairman, Security National Bank and Trust Company, Duncan, Oklahoma 1981 Marcus R. Tower Vice Chairman of the Board and Chairman of the Credit Policy Committee, Bank of Oklahoma, Tulsa, Oklahoma 1982 W.L. Stephenson, Jr Chairman and Chief Executive Officer, Central National Bank and Trust Company, Enid, Oklahoma 1982 Appointed by Board of Governors Christine H. Anthony . . .Oklahoma City, Oklahoma 1981 Samuel R. Noble Chairman of the Board, Noble Affiliates, Inc., Ardmore, Oklahoma 1982 OMAHA BRANCH Appointed by Federal Reserve Bank W.W. Cook, Jr President, Beatrice National Bank and Trust Company, Beatrice, Nebraska 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 279 Term expires Joe J. Huckfeldt President, Gering National Bank and Trust Dec. 31 Company, Gering, Nebraska 1981 Donald J. Murphy Chairman and Chief Executive Officer, United States National Bank of Omaha, Omaha, Nebraska 1982 Appointed by Board of Governors Gretchen S. Pullen Chairman of the Board, Swanson Enterprises, Inc., Omaha, Nebraska 1981 Robert G. Lueder President, Lueder Construction Company, Omaha, Nebraska 1982 District 11— DALLAS Class A 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 Miles D. Wilson Chairman of the Board and President, The First National Bank of Bellville, Bellville, Texas 1983 Class B J. Wayland Bennett Associate Dean for Industry Relations, Texas Tech University, Lubbock, Texas . 1981 Robert D. Rogers President, Texas Industries, Inc., Dallas, Texas 1982 Kent Gilbreath Associate Dean, Hankamer School of Business, Baylor University, Waco, Texas . .. 1983 Class C 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 John V. James Chairman of the Board, Dresser Industries, Inc., Dallas, Texas 1983 EL PASO BRANCH Appointed by Federal Reserve Bank Arnold B. Peinado, Jr. . .Executive Vice President, AVC Development Corporation, El Paso, Texas 1981 Ernest M. Schur Chairman of the Executive Committee, The First National Bank of Odessa, Odessa, Texas 1981 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 Directories and Meetings Term expires Stanley J. Jarmiolowski . .Chairman of the Board and President, First Dec. 31 International Bank in El Paso, El Paso, Texas 1982 Claude E. Leyendecker . .President, Mimbres Valley Bank, Deming, New Mexico 1983 Appointed by Board of Governors Josefina A. Salas-Porras . .Executive Director, BI Language Services, El Paso, Texas 1981 A.J. Losee Shareholder, Losee, Carson, & Dickerson Professional Association, Artesia, New Mexico 1982 Chester J. Kesey CJ. Kesey Enterprises, Pecos, Texas 1983 HOUSTON BRANCH Appointed by Federal Reserve Bank John T. 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 Chairman of the Board and Chief Executive Officer, First Security Bank of Beaumont, N.A., Beaumont, Texas 1982 Raymond L. Britton .... Labor Arbitrator, and Professor of Law, University of Houston, Houston, Texas . 1983 Appointed by Board of Governors 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 Paul N. Ho well Chairman of the Board and President, Howell Corporation, Houston, Texas ... 1983 SAN ANTONIO BRANCH Appointed by Federal Reserve Bank 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 John H. Garner President and Chief Executive Officer, Corpus Christi National Bank, Corpus Christi, Texas 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 281 Term expires Appointed by Board of Governors Dec. 31 Carlos A. Zuniga Partner, Zuniga Storage and Forwarding Company, Laredo, Texas 1981 Pat Legan Owner, Legan Properties, San Antonio, Texas 1982 Lawrence L. Crum Professor of Banking and Finance, The University of Texas at Austin, Austin, Texas 1983 District 12—SAN FRANCISCO Class A 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 Ole R. Mettler Chairman and President, Farmers & Merchants Bank of Central California, Lodi, California 1983 Class B Malcolm T. Stamper .... President, The Boeing Company, Seattle, Washington 1981 Clair L. Peck, Jr Chairman of the Board, C.L. Peck Contractor, Los Angeles, California 1982 J.R. Vaughan Senior Member, Richards, Watson, Dreyfuss & Gershon, Los Angeles, California ... 1983 Class C 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 Cornell C. Maier Chairman, President, and Chief Executive Officer, Kaiser Aluminum and Chemical Corp., Oakland, California 1983 LOS ANGELES BRANCH Appointed by Federal Reserve Bank Harvey J. Mitchell Executive Vice President and Division Manager, The Mitsubishi Bank of California, 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 James D. McMahon . .. .President, Santa Clarita National Bank, Valencia, California 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 Directories and Meetings Term expires Appointed by Board of Governors Dec. 31 Harvey A. Proctor Chairman of the Board, Southern California Gas Company, Los Angeles, California . 1981 Togo W. Tanaka President, Gramercy Enterprises, Los Angeles, California 1982 Lola M. McAlpin-Grant .Assistant Dean, Loyola Law School, Los Angeles, California 1983 PORTLAND BRANCH Appointed by Federal Reserve Bank Jack W. Gustavel President and Chief Executive Officer, The First National Bank of North Idaho, Coeur d'Alene, Idaho 1981 Robert F. Wallace Chairman of the Board and President, First Interstate Bank of Oregon, N.A., Portland, Oregon 1981 Herman C. Bradley, Jr. .. President and Chief Executive Officer, Tri- County Banking Company, Junction City, Oregon 1982 William S. Naito Vice President, Norcrest China Company, Portland, Oregon 1983 Appointed by Board of Governors Jean Mater Vice President, Mater Engineering, Ltd., Corvallis, Oregon 1981 Phillip W. Schneider .... Former Northwest Regional Executive, National Wildlife Federation, Portland, Oregon 1982 John C. Hampton Chairman and President, Willamina Lumber Company, Portland, Oregon 1983 SALT LAKE CITY BRANCH Appointed by Federal Reserve Bank 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 Albert C. Gianoli Chairman of the Board and President, First National Bank of Ely, Ely, Nevada 1983 Appointed by Board of Governors Wendell J. Ashton Publisher, Deseret News, Salt Lake City, Utah 1981 Robert A. Erkins Geothermal Agri/Aquaculturist, White Arrow Ranch, Bliss, Idaho 1982 J.L. Terteling President, The Terteling Company, Inc., Digitized for FRASER Boise, Idaho 1983 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 283 Term expires SEATTLE BRANCH Dec. 31 Appointed by Federal Reserve Bank Douglas S. Gamble President and Chief Executive Officer, Pacific Gamble Robinson Company, Seattle, Washington 1981 CM. Berry President, Seattle-First National Bank, Seattle, Washington 1981 Donald L. Mellish Chairman of the Board, National Bank of Alaska, Anchorage, Alaska 1982 Lonnie G. Bailey Executive Vice President, Farmers & Merchants Bank of Rockford, Spokane, Washington 1983 Appointed by Board of Governors George H. Weyerhaeuser .President and Chief Executive Officer, Weyerhaeuser Company, Tacoma, Washington 1981 Merle D. Adlum President, Maritime Trades Department, AFL-CIO, Puget Sound District Council, Seattle, Washington 1982 Virginia L. Parks Vice President for Finance and Treasurer, Seattle University, Seattle, Washington . . 1983 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 Directories and Meetings Presidents and Vice Presidents December 31,1981 Federal Reserve President Vice Presidents Bank First Vice President or Branch Boston .. Frank E. Morris Daniel Aquilinox R.W. Eisenmengerx James A. Mclntosh T.F.HunUr.1 Niels O. Larsenx Richard A. Walker1 T.E. Cimeno, Jr. F.K. Cummings Norman S. Fieleke James W. Grieb Joan L. Gulley Luther M. Hoyle, Jr. Kenneth H. Kulesza Robert J. Listfield W.N. McDonough Stephen K. McNees Alicia H. Munnell D.A. Pelletier Richard E. Randall Laurence H. Stone Walter T. Sullivan Richard F. Syron Roy H. Turnquist Thomas Vangell Herbert F. Wass New York Anthony M. Solomon Sam Y. Cross1 Peter Fousekx T.M. Timlen, Jr. Ronald B. GrayJ P.B. Henderson, Jr. * Thomas C. Sloanex Peter D.Sternlight1 James O. Aston Peter Bakstansky Ralph A. Cann III Suzanne Cutler Chester B. Feldberg Henry S. Fujarski Roberta J. Green Margaret Greene Whitney R. Irwin Roger M. Kubarych Edwin R. Powers A.M. Puckett Geri M. Riegger Irwin D. Sandberg F.C. Schadrack, Jr. Israel Sendrovic Neal M. Soss Robert C. Thoman Richard Vollkommer H.W. Whiteman, Jr. H. David Willey Buffalo John T. Keane Philadelphia Edward G. Boehne K.G.Adack1 John D. Johnsonx Richard L. Smoot Thomas K. Desch Peter M. DiPlacido Guy H. Edwards Ronald G. Foley James F. Gaylord Hiliary H. Holloway 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.x W.H.Hendricks1 W.H. MacDonald Lee S. Adams George E. Booth, Jr. Randolph G. Coleman Harry W. Huning John W. Kopnick T.E. Orminston, Jr. Lester M. Selby Donald G. Vincel Robert F. Ware Cincinnati Robert E. Showalter * Charles A. Cerino Pittsburgh Donald C. Benjamin Richmond Robert P. Black WelfordS. Farmer1 James Parthemosx Jimmie R. Monhollon John F. Rand1 Joseph F. Viverettex 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 Digitized for FRASER http://frasFeor.rs tnloouteiss fseede. olargst/ page of listing. Federal Reserve Bank of St. Louis

Directories and Meetings 285 Presidents and Vice Presidents—Continued Federal Reserve President Vice Presidents Bank First Vice President or Branch Richmond— William D. Martin III A.V. Myers, Jr. Cont. CD. Porter, Jr. Joseph C. Ramage Aubrey N. Snellings Andrew L. Tilton James F. Tucker Baltimore .. R.D. McTeer, Jr.x William E. Pascoe III Gerald L. Wilson Charlotte .. Stuart P. Fishburnex Boyd Z. Eubanks Culpeper2 . . John G. Stoides A.D. Tinkelenberg Atlanta William F. Ford Harry Brandt* George C. Guynn1 Robert P. Forrestal Billy H.Hargett1 Arthur H. Kantner1 Donald L.Koch1 Brown R. Rawlingsx 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 . . . Silas Keehn Brian Carey1 Charles W. Furbee1 Daniel M. Doyle Robert M. Fitzgerald* James R. Morrisonx KarlA.Scheld1 Harry S.Schultz1 Ruby L. Sloan1 Carl E. Vander Wilt1 Richard P. Anstee Wayne R. Baxter Gary L. Benjamin Paul J. Bettini Harris C. Buell, Jr. George W. Cloos George E. Coe Franklin D. Dreyer William H. Gram Oliver I. Ireland Daniel P. Kinsella Joseph G. Kvasnicka Robert A. Ludwig Larry R. Mote William T. Newport Dorothy M. Nichols Louis J. Purol William Rooney Harvey Rosenblum R.M. Scheider David R. Starin Adolph J. Stojetz Ruth F. Vilona Eugene J. Wagner Laurence Washtien Patricia W. Wishart Robert W. Wellhausen Allen G. Wolkey Detroit .. William C.Conrad1 Frederick S. Dominick St. Louis . Lawrence K. Roos AnatolB. Balbach1 Joseph P. Garbarini1 Donald W. Bradley G. Glass1 F. G. Russell, Jr.1 Moriarty, Jr. Harold E.Uthoff1 Ruth A. Bryant Albert E. Burger, Jr. Charles R. Halbrook James R. Kennedy Martha L. Perine William J. Sneed Warren G. Snover Robert W. Thomas Delmer Weisz Little Rock . John F. Breen Digitized for FRASER For notes see last page of listing. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 Directories and Meetings Presidents and Vice Presidents—Continued Federal Reserve President VicePresidents Bank First Vice President or Branch Louisville Donald L. Henry * Memphis Robert E. Matthews Minneapolis E. Gerald Corrigan Melvin L. Bursteinx John P. Danforthx Thomas E. Gainor L.W. Fernelius1 Gary P. Hansonx Sheldon L. Azine Lester G. Gable Phil C. Gerber Bruce J. Hedblom Douglas R. Hellweg Ronald E. Kaatz 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. Bell1 W.T.Billington1 Henry R. Czerwinski James R. Bowenx Thomas E. Davisx James A. Cacy Cecil B. Foley Carl M. Gambs Thomas M. Hoenig G.H. Miller, Jr. M. L. Mothersead Richard K. Rasdall Barry K. Robinson Philip E. Schmidt Robert E. Scott Jerry D. Shreeves Donald A. Slover DickH. Woods, Jr. Denver .... Wayne W. Martinx James F. O'Meara Oklahoma Citv William G. Evans Omaha .... Robert D- Hamilton x Dallas Robert H. Boykin Joseph E. Burns1 G.C. Cochranlll1 William H. Wallace Jay K. Mast1 Harry E. Robinsonx Neil B.Ryan1 Tony J. Salvaggiox Jack A. Clymer Anthony J. Montelaro C.J. Pickering Larry J. Reck Sammy T. Schulze Robert Smith III M.E. Sweatt, Jr. E.W. Vorlop, Jr. El Paso Joel L.Knnnce Jr. Houston J.Z- Rowe San Antonio ThomasH. Robertson San Francisco . . John J. Balles John J. Carsonx Kenneth A. Grant1 John B. Williams R.T.Griffith1 Michael W.Keran1 Donald V. Masten1 Robert M.McGill1 Kent O.Sims1 Eugene A. Thomas1 Joseph R. Bisignano William M. Burke Oren L. Christenson David Christerson Robert C. Dietz H. Peter Franzel George P. Galloway John W. Gleason Harry W. Green Warren H. Hutchins Henry B. Jamison Rix Maurer, Jr. Michael J. Murray Louis E. Reilly W. Gordon Smith Wilhelmine Von Turk Digitized for FRASER Thomas Warren http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 287 Presidents and Vice Presidents-—Continued Federal Reserve President Vice Presidents Bank First Vice President or Branch Los Angeles. Richard C. Dunnx Hector M. Martin Richard L. Rasmussen Portland , Angelo S. Carella Salt Lake City . A. Grant Holman Seattle .. Gerald G.Kelly1 1. Indicates Senior Vice Presidents. 2. Culpeper Center is not considered a branch. Conference of f residents Conference of First Vice Presidents The presidents of the Federal Reserve Banks are organized into a Conference The Conference of First Vice Presidents of Presidents that meets periodically to of the Federal Reserve Banks was consider matters of common interest and organized in 1969 to meet periodically to consult and advise the Board of Gov- for the consideration of operational and ernors. At a meeting held Septem- other matters. On September 24, 1980, ber 16, 1980, J. Roger Guffey, President Henry R. Czerwinski, First Vice Presiof the Federal Reserve Bank of Kansas dent of the Federal Reserve Bank of City, was elected Chairman, and Law- Kansas City, was elected Chairman, and rence K. Roos, President of the Federal Donald W. Moriarty, Jr., First Vice Reserve Bank of St. Louis, was elected President of the Federal Reserve Bank Vice Chairman for 1981. Richard K. of St. Louis, was elected Vice Chairman Rasdall, Jr., of the Federal Reserve of the conference for 1981. Richard K. Bank of Kansas City was appointed Rasdall, Jr., and Lynn A. David were Secretary, and Lynn A. David of the appointed Secretary and Assistant Sec- Federal Reserve Bank of St. Louis was retary respectively. 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

291 Index Acceptances, bankers {See Bankers Banking supervision and regulation— acceptances) Continued Assets and liabilities Policy statements and other actions, Banks, by class, 241 68,69,74-76,182-84,190, Board of Governors, 206 192-93 Federal Reserve Banks, 212-17 Regulations {See Regulations) Regulatory improvement project, 192, Balance of payments, review of 1981, 193, 194-98 23-27 Board of Governors {See also Federal Bank holding companies Reserve System) Board policy statements and other Annual Reports to Congress, 148-60 actions, 68, 69, 74-76, 182-84, Consumer Advisory Council, 151, 190, 192-93 155, 264 Control of, changes, 186-87 Delegated authority, 185, 189, 191 Examination, inspection, and Educational activities, 148 regulation, 180-86 Financial statements, 205-10 International banking operations, Interpretations, 67, 70, 72, 73, 195 70, 187 Legislation recommended, 161-64 Legislation recommended, 161-62, Litigation, 165-74 163 Members and officers, 260 Litigation, 165-68 Policy actions and statements, 65-83, Number and assets, 180 182-84, 190, 192-93 Regulation Y, 73-74, 197 Publications {See Publications) Stock repurchases, 191 Regulations {See Regulations) Supervision manual, 183 Regulatory improvement project, Bank Holding Company Act, 162, 164, 192, 193, 194-98 184, 185, 188 Salaries, 207 Bank mergers and consolidations, 186, Training {See Training) 189, 248-66 Branch banks Bank Secrecy Act, 190 Changes in number, 247 Bankers acceptances Federal Reserve Authority to purchase and enter into Bank premises, 203, 232 repurchase agreements, 84-85 Directors, 265-83 Federal Reserve Banks Vice presidents in charge, 284-86 Earnings, 203, 224 Foreign, of U.S. banking organiza- Holdings, 203,212, 214, 216 tions, 67-68, 70, 178, 181, 187 Ineligible, amendment of Foreign banks, 68, 181 Regulation K, 70 Open market transactions, 222 Repurchase agreements, 212, 214, Capital accounts 216, 222 Banks, by class, 241 Banking offices, changes in number, 246 Federal Reserve Banks, 213, 215, 217 Banking supervision and regulation by Capital adequacy guidelines, 76, 182, Federal Reserve System 183, 190 In 1981, 180-93 Capital and surplus, 71 Legislation recommended, 161-64 Cash Discount Act, 175 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 Index Clearing and collection (See Transfers Discount rates at Federal Reserve Banks of funds) (See Interest rates) Commercial banks Discounts and advances (See Federal Assets and liabilities, 241 Reserve Banks) Banking offices, changes in number, Dividends, Federal Reserve Banks, 202 246 226,229,231 Number, by class, 241 Supervision and regulation by Federal Reserve System, 180-93 Earnings of Federal Reserve Banks (See Transfers of funds (See Transfers of Income of Federal Reserve Banks) funds) Economic Recovery Tax Act of 1981, Condition statement of Federal Reserve 176 Banks, 212-17 Economy in 1981,4-11 Consurner Advisory Council, 151,155, Educational activities, 148, 149, 185 264 Electronic fund transfers (See Transfers Consumer and community affairs of funds) Annual Reports to Congress, 147-60 Equal Credit Opportunity Board actions, review, 148-60 Annual Report to Congress, 153-56 Consumer Advisory Council, 151, Enforcement, 75 155, 264 Examinations and inspections Educational activities, 148 Bank holding companies, 180-85 Consumer leasing, 71, 196 Federal Reserve Banks, 201 Credit (See also Loans) Foreign operations of U.S. banking Equal Credit Opportunity (See organizations, 181 Equal Credit Opportunity) Improvements, 182 Farm, legislation, 177 Schools, 185 Stocks, 73, 191-93, 197 Specialized, 181 Truth in Lending (See Truth in State member banks, 180-85 Lending) Expenses Board of Governors, 205-10 Debt ceiling, legislation, 175 Federal Reserve Banks, 202, 224, Defense production loans, 177, 203 228, 230 Depository institutions Interest on deposits, 67 Legislation recommended, 161 Fair Housing Act, enforcement, 75 Reserve requirements, 65-68, 194, Farm credit, legislation, 177 235 Federal Advisory Council, 263 Depository Institutions Deregulation Federal agency securities and Monetary Control Act of 1980, Authority to purchase and enter 66, 67, 70, 72, 183 into repurchase agreements, Depository Institutions Deregulation 84-86, 121, 139 Committee, 72 Federal Reserve Bank holdings and Deposits earnings, 203, 212, 214, 216, Banks, by class, 241 220 Federal Reserve Banks, 213, 215, Federal Reserve open market 217, 243, 245 transactions, 222 Interest rates (See Interest on Repurchase agreements, 212, 214, deposits) 216,220,222,242,244 Reserve requirements (See Reserve Federal Deposit Insurance Act, 162 requirements) Federal Financial Institutions Examina- Directors, Federal Reserve Banks and tion Council, 75, 182, 183, 185, branches, 163, 265-83 193 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 293 Federal Open Market Committee Federal Reserve System (See also Board Audit of System Open Market of Governors) Account, 201 Banking supervision and regulation Continuing authorizations, review, by, 180-93 105 Consumer affairs (See Consumer and Meetings, 84, 262 community affairs) Members and officers, 262 Foreign currency operations (See Policy actions, 84-146 Foreign currencies) Federal Reserve Act, 162, 163, 184, 191 Map of Federal Reserve Districts, 257 Federal Reserve Agents, 265 Membership, 193 Federal Reserve Banks Payments mechanism, development Assessments for expenses of Board of (See Transfers of funds) Governors, 207, 226, 228, 230 Pricing of services, 199-201 Bank premises, 203, 212, 214, 216, Training (See Training) 232 Federal Trade Commission Act, 157-60 Branches (See Branch banks) Financial Institutions Regulatory and Capital accounts, 213, 215, 217 Interest Rate Control Act of 1978, Chairmen and deputy chairmen, 265 162, 193 Condition statement, 212-17 Financial Institutions Supervisory Act, Delegated authority, 185, 189, 191 184 Directors, 163, 265-83 Financial markets and monetary policy, Discount rates (See Interest rates) 12-22 Discounts and advances, 212, 214, Foreign banks, 67, 68, 163, 180, 187, 216,224,242,244 188 Dividends, 202, 226, 229, 231 Foreign currencies Educational activities, 148 Authorization and directive for Examination or audit, 201 operations, 84, 87-89, 106, 107 Income and expenses, 202, 224, 228, Federal Reserve earnings, 224 230 Review, 105 Interest rates, 235 Officers and employees, number and Gold certificate accounts of Reserve salaries, 234 Banks and gold stock, 212, 214, Operations, volume and cost, 233, 215,216,217,242,244 234 Gold Commission, 177 Payments mechanism, development (See Transfers of funds) Presidents and vice presidents, Home mortgage disclosure, 65, 156, 284-87 195 Pricing of services, 199-201 Profit and loss, 226 Income of Federal Reserve Banks, 202, Securities and loans, holdings and 224, 228, 230 earnings, 203 Individual retirement accounts (See U.S. government securities (See U.S. Retirement accounts) government securities) Insured commercial banks Federal Reserve notes Assets and liabilities, 241 Condition statement data, 212-17 Banking offices, changes in number, Cost of printing, issue, and 246 redemption, 207 Interest on deposits (See also Interest Interest paid to U.S. Treasury, 202, rates) 226,229,231 Maximum rates payable on time and Federal Reserve Reform Act of 1977, savings deposits, table, 238 163 Regulation Q, 67-68, 72, 195 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 Index Interest rates (See also Interest on Margin requirements deposits) Securities credit, 73, 192 Federal Reserve Banks Table, 240 Changes, 76-83 Member banks (See also National Table on rates, 235 banks) Interlocking relationships, 178, 198 Affiliates, legislation recommended, International banking facilities, 67, 163 68, 178, 187 Assets, liabilities, and capital International banking operations, 70, accounts, 241 187 Banking offices, changes in number, International Banking Act, 163, 188 246 International developments, review, Branches (See Branch banks) 23-27 Borrowings from Federal Reserve International Investment Survey Act of Banks (See Loans) 1976, 175 International banking operations, 70 Interpretations, 67, 70, 72, 73, 195 Number, 241 Investments Reserve requirements (See Reserve Banks, by class, 241 requirements) Federal Reserve Banks, 212, 214, 216 Reserves and related items, 242-45 Foreign, by U.S. banking State member banks (See State organizations, 177, 188 member banks) Transfers of funds (See Transfers of funds) Keogh plans (See Retirement plans) Mergers and consolidations, 185, 186, 189-90,248-56 Monetary Control Act (See Depository Institutions Deregulation and Labor market developments, 9 Leasing, consumer, 71, 196 Monetary Control Act of 1980) Legislation Monetary policy Enacted, 175-79 Financial markets relative to, 12-22 Recommended, 161-64 Reports to Congress, 28-61 Litigation Review of 1981, 3-11 Bank holding companies, 165-68 Money market mutual funds, 161 Board procedures and regulations, Mortgage loans, 65, 156, 195 challenges, 168-74 Mutual savings banks, 246 Loans (See also Credit) Affiliates of member banks, legislation recommended, 163 National banks (See also Member Banks, by class, 241 banks) Defense production, 177, 203 Assets and liabilities, 241 Executive officers of member banks Banking offices, changes in number, and other insiders, 162, 191 246 Federal Reserve Banks Capital adequacy guidelines, 76, 182, Discounts and advances, 212, 214, 183, 190 216, 224, 242, 244 Legislation, 175 Holdings and earnings, 203, 224 Number, 241 Interest rates, 235 Negotiable order of withdrawal (NOW) Volume, 212, 214, 216, 233, accounts, 72, 195 242, 244 Nonmember depository institutions Mortgages, legislation, 65, 156, 195 Assets and liabilities, 241 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 295 Nonmember depository institutions— Regulations—Continued Continued D, Reserve Requirements of Banking offices, changes in number, Depository Institutions, 65-68, 246 183, 194 Number, 241 E, Electronic Fund Transfers, 69, Reserve requirements, 66, 194 197, 198 Transfers of funds, 69 F, Securities of Member State Banks, 69, 190 Options, amendment of Regulation T, J, Collection of Checks and Other 73, 193 Items and Wire Transfers of Funds, 69 Payments mechanism, development (See K, International Banking Operations, Transfers of funds) 70-71 Policy actions L, Management Official Interlocks, Board of Governors 198 Discount rates at Federal Reserve M, Consumer Leasing, 71, 196 Banks, 76-83 P, Minimum Security Devices and Regulations (See Regulations) Procedure for Federal Reserve Statements and other actions, Banks and State Member Banks, 74-76, 182-84, 190, 192-93 193, 198 Federal Open Market Committee Q, Interest on Deposits, 67-68, 72, Authority to effect transactions in 195 System Open Market Account Securities credit transactions Domestic operations, 84-87, 90, (Regulations G, T, U, X), 98, 108, 113, 121, 128, 73, 191-93, 197 134, 139, 140, 146 Y, Bank Holding Companies and Foreign currency operations, 84, Change in Bank Control, 87-89, 106, 107 73-74, 197 Review, 105 Z, Truth in Lending, 71, 196, Presidents and vice presidents of 198 Federal Reserve Banks Regulatory improvement project, 192, Conferences of Presidents and of 193,194-98 First Vice Presidents, 287 Repurchase agreements List, 284-86 Authority to purchase and to enter Salaries of presidents, 234 into, 84-86 Prices, 10 Bankers acceptances, 84-85, 212, Pricing of System services, 199-201 214,216,222 Profit and loss, Federal Reserve Banks, Federal agency securities, 84-86, 226 212,214,216,220,222 Publications U.S. government securities, 84-86, Bank Holding Company Supervision 212,214,216,220,222,242, Manual, 183 244 Federal Reserve Regulatory Service, Reserve requirements 198 Depository institutions, 65-68, 194, 235 Real estate, 65, 156, 195 Foreign banks, 67, 68, 164, 187 Regulations (See also Regulatory Legislation recommended, 161, 164 improvement project) Member banks B, Equal Credit Opportunity, 198 Changes, 65-68 C, Home Mortgage Disclosure, 65,195 Table, 235 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 Index Reserves, member banks Tax incentives, 176 Reserve requirements (See Reserve Thrift institutions, 161-62, 238 requirements) Training, 148, 149, 185 Reserves and related items, 242-45 Transfers of funds Retirement accounts, 65-66, 72, 176 Check collection, 69 Electronic fund transfers, 69, 197, Salaries 198 Board of Governors, 207 Federal Reserve operations, volume Federal Reserve Banks, 234 and cost, 233, 234 Schools (See Training) Negotiable order of withdrawal Securities (See also specific types) (NOW) accounts, 72, 195 Credit transactions, 73, 191-93, 197 Payments mechanism, development, State member banks, 69, 182, 190 201 Social security legislation, 178 Truth in Lending Special drawing rights, 212, 214, 216, Act 242, 244 Annual Report to Congress, State member banks (See also Member 148-53 banks) Legislation, 175 Applications by, 191 Regulation Z, 71, 196,198 Assets and liabilities, 241 Banking offices, changes in number, U.S. balance of payments, review, 246 23-27 Board policy statements and other U.S. government securities actions, 68, 69, 74-76, 182-84, Authority to buy, to enter into 190, 192-93 repurchase agreements, and to Control of, changes, 186-87 lend, 84-86, 121, 139 Examination, 180-85 Bank holdings, by class of bank, 241 Executive officers and other insiders, Federal Reserve Banks loans to, 162, 191 Authority to buy directly from U.S. Financial disclosures, 190 Treasury, 85 Foreign activities, 219, 220, 225 Earnings, 202, 203, 224 Mergers and consolidations, 185, 186, Holdings, 203, 212, 214, 216, 218, 189-90, 248-56 242, 244 Number, 180,241 Open market transactions, 222 Securities, 69, 182, 190 Repurchase agreements, 212, 214, Stock market credit, 73, 191-93, 197 216, 220, 222, 242, 244 Supervision and regulation (See Banking Special certificates purchased directly supervision and regulation by from U.S. Treasury, 221 Federal Reserve System) System Open Market Account V loans, 177, 203 Audit, 201 Authority to effect transactions Domestic operations, 84-87, 90, 98, 108, 113, 121, 128, 134, 139, 140, 146 Foreign currency operations, 84, 87-89, 106, 107 Review, 105 FRB 1-12,000-0482 C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis