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Annual
Tieport
NO

1979

Board of Governors of the Federal Reserve System



Letter of Transmittal

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 25, 1980

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-Sixth Annual Report of the Board of
Governors of the Federal Reserve System.
This report covers operations of the Board during calendar year 1979.

Sincerely,
Paul A. Volcker, Chairman




Contents
Part 1 Monetary Policy and the
U.S. Economy in 1979
3
5
7
8
9
10
11

INTRODUCTION
THE ECONOMY IN 1979
Household sector
Business sector
Government sector
Labor market developments
Prices

14 MONETARY POLICY AND FINANCIAL MARKETS
15 Monetary aggregates and interest rates
20 Aggregate flows of funds
26 INTERNATIONAL DEVELOPMENTS
27 Current-account balance
30 Operations in foreign currencies
33 MONETARY POLICY REPORTS TO CONGRESS
33 Report on February 20, 1979
59 Report on July 17, 1979




Part 2 Records, Operations,
and Organization
81
116

RECORD OF POLIO' ACTIONS —BOARD OF GOVERNORS
RHCORD OF POLICY ACTIONS —FEDERAL OPEN
MARKHT COMMITTEE

216 CONSUMER AFFAIRS
216 Introduction
221 Truth in Lending
230 Equal Credit Opportunity
242 Federal Trade Commission Act
248 Home Mortgage Disclosure
249 Community Reinvestment Act information statement
252

SECURITIES ACTS AMENDMENTS OF IS>7S

253
253
254
255
256
256
257

LEGISLATIVE RECOMMENDATIONS
Reserve requirements
Financial transactions with affiliates
Lending authority of Federal Reserve Banks
Expansion of Class C directors
Term of Chairman of the Board of Governors
Authority for bank holding companies to acquire banks
across state lines in emergency and failing-bank situations
Simplification of Truth in Lending Act
Uniform rules for credit and EFT transactions

257
258
259
259
267

LITIGATION
Bank holding companies—Antitrust action
—Review of Board actions
Other litigation involving challenges to Board procedures and
regulations




272
272
272
273
273
273
273
274
274
274
276

LEGISLATION ENACTED
Increase in debt ceiling
Amendments to Council on Wage and Price Stability Act
Direct purchase authority of Federal Reserve Banks
Exemption of savings and loan associations from
Federal Trade Commission Act
Federal deposit insurance of branches of foreign banks
Congressional budget resolutions
Housing and Community Development Amendments of 1979
Consumer services and usury
Chrysler Corporation Loan Guarantee Act

276
284
287

BANK AND BANK HOLDING COMPANY SUPERVISION
AND REGULATION BY THE FEDERAL RESERVE SYSTEM
Domestic activities and applications
International activities and applications
Banking schools

289
290
293

CONDITION OF THE BANKING SYSTEM
Indexes of bank soundness
Supervisory and regulatory improvements

295

REGULATORY IMPROVEMENT PROJECT

296
296

FEDERAL RESERVE BANKS
Developments in payments mechanism

297

Examination

297
298
299
299
300

Earnings and expenses
Federal Reserve Bank premises
Holdings of loans and securities
Loan guarantees for defense production
Volume and cost of operations

301

BOARD OF GOVERNORS
Financial statements

308
310

STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks combined,
December 31, 1979
2. Statement of condition of each Federal Reserve Bank, December 31,
1979 and 1978




314
316

317
318
320
322
323
324
325

325
326
328
330
331
332
336
337
339
356

STATISTICAL TABLES—Continued
3. Federal Reserve Bank holdings of U.S. government and federal agency
securities, December 31, 1977-79
4. Federal Reserve Bank holdings of special short-term Treasury certificates purchased directly from the United States, 1971-79
5 Open market transactions of the Federal Reserve System, 1979
6 Earnings and expenses of Federal Reserve Banks during 1979
7 Earnings and expenses of Federal Reserve Banks, 1914-79
8 Bank premises of Federal Reserve Banks and branches, December 31,
1979
9. Volume of operations in principal departments of Federal Reserve
Banks, 1976-79
10. Principal operations of Federal Reserve Banks—Expense, ratio of expense for each operation to total expenses, and average number of
employees, 1976-79
11. Number and salaries of officers and employees of Federal Reserve
Banks, December 31, 1979
12 Federal Reserve Bank interest rates, December 31, 1979
13 Member bank reserve requirements
14 Maximum interest rates payable on time and savings deposits
1 Margin requirements
5
16 Principal assets and liabilities, and number of insured commercial
banks, by class of bank, September 30, 1979 and 1978
17 Member bank reserves. Federal Reserve Bank credit, and related items:
Year-end, 1918-79, and month-end, 1979
18 Changes in number of banking offices in the United States during 1979
19 Number of par and nonpar banking offices, December 31, 1979
20 Mergers, consolidations, acquisitions of assets or assumptions of liabilities approved by the Board of Governors during 1979
MAP OF FEDERAL RESERVE SYSTEM —DISTRICTS

FEDERAL RESERVE DIRECTORIES AND MEETINGS
358 Board of Governors of the Federal Reserve System
360 Federal Open Market Committee
361 Federal Advisory Council
362 Consumer Advisory Council
363 Federal Reserve Banks and branches
389

INDEX




Part 1
Monetary Policy and
the U.S. Economy in 1979




The U.S. economy expanded little in 1979, in a worsening inflationary
environment. In real terms the gross national product increased only about
1 percent over the year, compared with nearly 5 percent during 1978; all
major domestic sectors of the economy showed reduced rates of growth.
Employment also increased less than in 1978, but growth in the labor force
moderated, and the unemployment rate fluctuated within a narrow range
throughout the year.
Acceleration of prices during 1979 reflected to a considerable extent the
sharp increase in the prices of oil and other energy-related items. Food
prices also rose substantially in the early part of the year. Even excluding
energy and food, however, prices increased more rapidly last year than in
1978, as a decline in productivity resulted in a marked rise in unit labor
costs.
The primary goals of monetary policy in 1979 were to curb inflationary
expectations at home and to maintain the value of the dollar abroad without
exacerbating recessionary tendencies. The policy of progressive restraint
pursued by the Federal Reserve beginning in the spring contributed to
slower growth in real economic activity, but inflationary pressures remained intense. Over the second and third quarters of the year, the monetary aggregates expanded at rates well above those specified by the Federal
Open Market Committee and faster than was appropriate to the containment of inflation. Moreover, highly speculative activities emerged in commodities markets and the dollar came under increased pressure in foreign
exchange markets. To counter these developments, the Federal Reserve on
October 6 announced a set of actions, including new operating procedures,
designed to provide greater assurance of control of the aggregates.
These measures, together with the relatively sluggish pace of economic
expansion, brought a marked reduction in the fourth-quarter growth of both
the monetary aggregates and the volume of credit made available to the
economy as a whole. Most market rates of interest increased sharply immediately after October 6, and although some had receded from their highs by
the end of the year with the moderation in money and credit demands, rates
generally remained at near-record levels. On the other hand, the favorable
initial effect of the policy actions on the exchange value of the dollar was
later eroded as foreign interest rates increased further and as financial




Introduction

markets reacted to the uncertainties associated with developments in the
Middle East.
At year-end, the short-term outlook for inflation remained bleak. Inflationary pressures seem likely to continue intense, not only because of the
further boost in oil prices but also because past increases in costs and prices
will still be working their way through the economy. In these circumstances, the urgent task of policy is to make sure that inflation is not
exacerbated by the development of excessive demands on the economy or
by unrealistic expectations as to the future strength of markets.




The Economy in 1979
The pace of real economic activity slowed considerably during 1979—the
fifth year of the current expansion—while inflation intensified. Over the
four quarters of the year, GNP rose about 1 percent in real terms after an
increase of nearly 5 percent during the previous year; industrial production
also rose only about 1 percent after advancing IVi percent during 1978.l
The slowdown in activity was largely in response to the 75 percent increase
in the price of imported oil during 1979 as well as to the relatively restrictive fiscal and monetary policies instituted to damp inflationary pressures.
In addition, severe winter weather, major strikes, and fuel shortages disrupted activity in the first half of the year.
The sluggishness of economic activity during 1979 was evident in all
major domestic sectors of the economy. Real consumer expenditures increased only moderately over the year, housing starts fell sharply—
especially toward year-end—as a consequence of tightened financial conditions, and the rise in business fixed investment slowed. Growth in total
government purchases of goods and services also moderated as a pickup of
federal purchases was largely offset by a reduction in outlays by state and
local governments, reflecting in part public sentiment to contain taxes and
spending.
The acceleration in overall inflation in 1979 was due in large part to the
dramatic rise in the prices of imported crude oil and other energy items. In
addition, while wage gains in the private nonfarm sector during 1979
moderated somewhat from those of the previous year, productivity declined and the rise in unit labor costs accelerated, putting further upward
pressure on prices. The gross domestic business product fixed-weight price
index, a broad measure of inflation, rose about 10 percent, 1 lA percentage
points more than the rate during 1978; the consumer price index (CPI)
increased about 13 percent over the four quarters of 1979 compared
with 9 percent in the previous year. A sharp advance in homeownership
costs contributed significantly to the rapid rise in the CPI. Inflationary
pressures are likely to remain intense during 1980 as wages move up
rapidly in response to recent increases in the cost of living, and prices
continue adjusting to higher unit labor costs and to additional increases in
the price of oil, both imported and domestically produced.
1. Unless otherwise indicated, annual figures represent changes from the fourth quarter of
1978 to the fourth quarter of 1979.




The Economy in 1979

Indicators of Economic Performance
Percentage change, Q4 to Q4

Ratio

Millions of units
Index, 1967 = 100

Housing starts

Industrial production,
manufacturing

1.0
Percent

Percentage change

Unemployment rate
Fixed-weight p
<
12

Index, 1973 Ql=100

Percentage change from year earlier

^ 12°

15

X

Real consumption —-*
expenditures/-^

/

\ Unit labor costs

i'

100

/
5

80
1973

1975

1977

1979

1973

1975

1977

1979

All data are seasonally adjusted at annual rates.
The industrial production index (monthly data) is Federal Reserve data; the unemployment rate (monthly
data) and the change in nonfarm unit labor costs are U.S. Department of Labor data. All other data are from
the U.S. Department of Commerce.
Real GNP and real final sales are in terms of 1972 dollars.
The fixed-weight price index (1972 weights) is for gross domestic business product. The annual rate of
change is calculated from the previous quarter.
The inventory-sales ratio is based on real (1972 dollars) manufacturing and total trade sales and
inventories.




The Economy in 1979

HOUSEHOLD SECTOR
Much of the slower growth of real GNP over 1979 was due to the reduced
pace of household spending. Consumer outlays in real terms increased l3/4
percent during 1979, following a 4!/2 percent rise the previous year. All of
the 1979 gain was recorded in the second half when the saving rate fell
sharply—from 5VA percent in the first half to 3!/2 percent by the fourth
quarter, the first time since the Korean War that the rate was below 4
percent. The reduced growth of real consumer outlays over the year reflected in large measure the leveling off in real disposable income as
growth of nominal personal income slowed and inflation accelerated.
Moreover, tax burdens on households were boosted last year as an income
tax cut at the start of the year was more than offset by inflation-induced
increases in income tax payments and legislated increases in personal
contributions for social insurance.
Consumer spending was unusually depressed in the second quarter,
when gasoline shortages resulted in a sharp falloff in new-car purchases.
During the summer, however, outlays for automobiles rebounded as consumers responded to company-sponsored sales incentive programs and to
the increased availability of gasoline. Nevertheless, some of these purchases apparently represented a borrowing from future periods, and auto
sales weakened in the fourth quarter to an annual rate of 9.8 million units,
down 1.3 million from the year-earlier pace. The drop in sales was centered in domestic larger-size cars; sales of foreign cars, which are generally
small and therefore more fuel efficient, rose 500,000 units over the year to
an annual rate of 2.4 million units.
Real residential construction expenditures declined about 7 percent during 1979 after having remained nearly flat in the previous year. Total
private housing starts averaged 1.8 million units at an annual rate during
the first three quarters of 1979, following a pace of 2.1 million units in the
final quarter of 1978. The decline reflected primarily the tightening in
financial markets, which slowed the growth of deposits at thrift institutions
and raised mortgage interest rates and monthly carrying costs. After the
Federal Reserve's policy actions on October 6, starts fell again, averaging
1.5 million units in the last two months of the year. The renewed decline
reflected a further sharp rise in mortgage rates and reduced availability of
new financing, most notably in states with usury ceilings that were below
market rates.
The moderation in housing activity over the course of 1979 was most
pronounced in the single-family sector, in which starts fell more than 25




8

The Economy in 1979

Income, Consumption, and Saving
Percentage change, Q4 to Q4
Real consumption

m

J_ ! '

Real disposable income
4
Percent

1973

1975

1977

1979

Based on U.S. Department of Commerce data, seasonally adjusted at annual rates. Real consumption
and real disposable income are in terms of 1972 dollars.

percent. Starts of multifamily units were reduced 9 percent during 1979.
Rental units built under the section 8 subsidy program administered by the
Department of Housing and Urban Development made up almost onefourth of all multifamily starts, about the same proportion as in 1978.
BUSINESS SECTOR
Business fixed investment rose 3 percent in real terms during 1979, considerably less than during the previous two years, as fundamental determinants of capital spending weakened. Growth of final sales slowed considerably, and the capacity utilization rate in manufacturing moved downward
after the first quarter. In addition, nominal financing costs rose throughout
most of the year, growth of corporate economic profits was generally
weak, and the business sector came under increasing financial pressures.
For the second consecutive year, growth in real outlays for nonresidential structures, which generally have long lead times, exceeded those for
producers' durable equipment—a typical occurrence late in an economic
expansion. Investment in equipment was little changed during 1979 after
an 8 percent advance in the preceding year. Outlays for nonresidential
structures were up 8 percent, compared with 16 percent during 1978; most
of the growth was in spending for commercial and industrial buildings.
The increase in plant and equipment spending was concentrated in durable goods manufacturing, notably producers of machinery and aircraft. In
the nondurable goods sector, producers of paper and chemicals showed the
largest spending gains. Growth of outlays by materials manufacturers as a




The Economy in 1979

group was moderate despite the brisk pace of spending by the primary
metals industry. Outside of the manufacturing sector, slower growth of
investment spending by communications firms and public utilities was
offset by gains in transportation industries.
Advance indicators of capital spending suggest that growth of real business fixed investment may be relatively well maintained into the first part
of 1980 but may slacken thereafter. New orders for nondefense capital
goods, which recovered in the fourth quarter of 1979 after having shown
signs of weakness earlier in the year, imply some growth of outlays in
the months ahead. However, surveys of business investment intentions
indicate little, if any, real growth of capital spending in 1980.
In general, inventories were held under tight control in 1979. Total
business inventory investment in constant dollars rose rapidly in the second
quarter; but this increase, the largest since the end of 1973, was due mainly
to energy-related disruptions in final sales. Thereafter, inventory investment slowed markedly as excessive stocks at auto dealers were drawn
down, overall final sales picked up, and industrial production remained
virtually unchanged. Thus the real inventory-to-sales ratio for all manufacturing and trade industries rose during the first half of the year, and then
remained about unchanged during the second half.
Increases in manufacturing inventories, which were at a fairly substantial rate throughout the year, were concentrated among producers of machinery, transportation equipment, and primary metals. Inventory investment in the trade sector was dominated by sizable swings in dealers'
automobile stocks. Throughout the spring, dealers' supplies of automobiles, especially of large cars, increased as consumers reacted adversely to
gasoline shortages and price increases, while production was maintained at
a relatively high rate. Subsequent production adjustments, coupled with
sales rebates and other promotional campaigns that temporarily boosted
sales, resulted in a substantial reduction in dealers' stocks for most lines of
cars. In the fourth quarter, qualitative reports suggested that because of
increased carrying costs many businesses were redoubling efforts to maintain a cautious inventory posture.
GOVERNMENT SECTOR
Real purchases of goods and services by governments rose fractionally in
1979 after having increased more than 1 Vi percent during the previous
year. Real federal purchases of goods and services advanced about 1 Vi
percent while purchases by states and localities declined slightly.




10

The Economy in 1979

For the calendar year 1979, the federal government budget deficit on a
national income accounts basis fell to around $11 billion, after a $28
billion deficit the previous year. Revenues were bolstered by a sharp
increase in personal income tax receipts as inflation pushed up nominal
incomes and by a sizable increase in social security taxes. The increase in
real federal government purchases was mostly in the defense area. Growth
of grants to state and local governments slowed during 1979 with the
expiration of countercyclical revenue sharing in late 1978 and the phasing
out of local public works and employment programs. In contrast, federal
transfer payments registered a considerable increase owing in part to a
large midyear cost-of-living increase for social security recipients. Interest
payments also rose sharply over the year.
At the state and local level, governmental units showed an operational
deficit (total deficit net of social insurance contributions) following three
years of surplus. Growth of both outlays and revenues slowed, reflecting in
part public sentiment to limit spending at both the national and the local
level. Real purchases of goods and services decreased lA percent during
1979; the reduction was accomplished primarily through reduced construction outlays. State and local payroll employment increased about 200,000,
or V/z percent, over the 12 months of 1979, about the same as in the
previous year. The growth of total revenues was curtailed because of the
slower growth of federal grants, which make up about a quarter of total
receipts. On balance, all other receipts increased last year at about the
same rate as in 1978.
LABOR MARKET DEVELOPMENTS
The slowing of economic activity in 1979 was accompanied by a moderation in the demand for labor. Over the year, total employment rose 2
percent, just one-half the gain during 1978. The slowdown in employment
growth mainly reflected a weakness in manufacturing employment, especially in the motor vehicle and steel industries. At year-end, about 130,000
auto workers were on indefinite layoff. Despite the slowing in housing
activity, the number of jobs in contract construction expanded considerably
during the year as strength in nonresidential construction more than offset
reduced hiring in homebuilding. In the private service-producing sector,
employment gains were well maintained in 1979.
The easing of labor demand was accompanied by a reduction in the
growth of the labor force in 1979. As a result, the overall unemployment
rate remained remarkably stable, fluctuating in the narrow range of 5.7 to




The Economy in 1979

11

5.9 percent; jobless rates for most demographic groups were little changed
over the year. In the second half of 1979, unemployment rates for bluecollar workers increased somewhat, probably reflecting layoffs by automobile producers, while unemployment rates in other occupational groups
edged down.
As often occurs during a period of sluggish economic activity, the
moderation in employment growth last year was not as great as the deceleration in output, and productivity deteriorated. During 1979, output per
hour in the nonfarm business sector declined 2 percent, after increasing 1
percent the previous year. The cyclical decline in productivity in 1979
reinforced a longer-term slowdown in the trend rate of growth of productivity that had been in evidence throughout the decade.
The rate of increase in wage rates moderated slightly during 1979. In the
private nonfarm sector, wage rates rose 8 percent over the four quarters of
1979, compared with about 8!/2 percent in the preceding year. Increases
were above average in manufacturing, in which cost-of-living protection is
more widespread, and in transportation, in which a large labor contract
settlement was negotiated. Hourly compensation, which includes employer
contributions for social insurance and the cost of fringe benefits in addition
to wages, rose 9 percent during 1979, about the same as in the previous
year. This absence of an acceleration of compensation, despite rapidly
rising prices, may have reflected the slower growth of activity and employment as well as the influence of the administration's voluntary pay standard, which called for a 7 percent annual ceiling for wages and private
fringe benefits.
With the growth of hourly compensation nearly unchanged last year, the
decline in productivity resulted in an acceleration in the rise of unit labor
costs for the nonfarm business sector from a rate of 8 percent during 1978
to more than 11 percent during 1979. Prospects for significantly slower
growth of labor costs in 1980 remain poor because of the upward pressure
of past price increases on wages, the heavy collective bargaining calendar,
and further scheduled boosts in the federal minimum wage and in payroll
taxes.
PRICES
The fixed-weight price index for gross domestic business product rose 10
percent over the four quarters of 1979. Other inflation indicators increased
even faster; both the CPI and the producer price index (PP1) for finished
goods rose around 13 percent last year.




12

The Economy in 1979

During 1979 increases in energy prices far exceeded most other price
advances and were responsible for about two-thirds of the acceleration in
the CPI. At the end of 1978, the Organization of Petroleum Exporting
Countries (OPEC) announced the first in a series of price hikes that continued throughout the past year. In addition, as political unrest intensified in
Iran, spot market prices for crude oil increased sharply, and individual oilproducing nations frequently were able to charge prices well above the
OPEC base price. As a result, the price of imported petroleum in the
United States rose about 75 percent during the year. This surge in world oil
prices put considerable upward pressure on the prices of uncontrolled
domestic crude oil. Furthermore, on June 1, a phaseout of domestic crude
oil price controls began. As a consequence, by the end of 1979, the PP1 for
domestically produced crude was about 50 percent above its level in December 1978.
Price pressures in crude oil markets influenced markets for petroleum
products. Retail gasoline prices rose about 50 percent over the year, and
fuel oil prices increased nearly 60 percent. In addition, prices of a wide
variety of oil-based industrial materials and products rose markedly: prices
of industrial chemicals climbed more than 25 percent over the year, following near stability in 1977 and 1978, and large increases were posted for
plastics. The inflationary pressures generated by the 1979 rise in energy
prices are expected to extend into 1980 because of the passthrough of
higher costs of fuel and materials. Moreover, further large increases were
announced by oil-producing nations in December 1979 which, in conjunction with domestic decontrol, will boost energy prices in 1980.
In contrast to energy prices, food prices rose less rapidly during 1979
than in the previous year despite a surge early in the year. Consumer
food prices rose 10 percent during 1979, after an 11 '/> percent increase
in 1978. While beef remained in relatively short supply in 1979, greater
availability of other meats and poultry contributed to some easing of
food prices during the summer.
Even when food and energy items are excluded, prices increased more
rapidly in 1979 than in 1978. For example, the personal consumption
expenditure component of the gross business product price index, excluding food and energy, rose 73A percent, compared with 7 percent during the
previous year. The acceleration in the CPI excluding food and energy was
even greater than that for the comparable personal consumption expenditure measure, mainly because of conceptual differences in the treatment of




The Economy in 1979

13

homeownership costs. Moreover, prices for capital equipment and nonresidential structures also accelerated.
Price movements in commodity markets were quite volatile during much
of the year. Prices of copper and other nonferrous metals rose rapidly at the
beginning of the year and again in September. After subsiding somewhat
early in the fall, pressures on gold and silver reappeared, and by the end of
the year, prices of these metals had reached exceptionally high levels.




14

Monetary Policy and Financial Markets
Monetary policy in 1979 sought to curb inflationary pressures and to
maintain the stability of the dollar on international markets, against a
backdrop of widespread concern about possible recessionary tendencies in
the economy. Early in the year, when growth in the monetary aggregates
was very weak and incoming economic data provided some indications of
softening in economic activity, the Federal Reserve avoided measures that
would have led to a marked rise in interest rates or would have severely
reduced the availability of credit. But expenditures for goods and services
strengthened as the year progressed, in part because of heightened inflationary expectations. In the spring, moreover, accelerating growth in the
monetary aggregates threatened to intensify inflationary pressures, and in
early summer the dollar came under renewed pressures in foreign exchange
markets. Consequently, the System adopted a progressively less accommodative stance, allowing the federal funds rate to rise and increasing the
discount rate in several steps.
These actions were accompanied by increases of 1 VA percentage points
in short-term interest rates and Vi percentage point in long-term rates over
the third quarter, but even so money and credit continued to expand
briskly. Moreover, prospects of continued high inflation touched off a
surge of speculative activities in financial, foreign exchange, and commodity markets. Responding to these developments, the Federal Reserve on
October 6 announced further actions, including a change in day-to-day
procedures for conducting open market operations to place more emphasis
on controlling reserves. In the weeks immediately thereafter, interest rates
in all markets rose sharply, and despite some subsequent decline, they
remained at near-record levels as the year ended. Interest rates on shortterm instruments were 2Vi to 3 percentage points higher in December than
12 months earlier; long-term rates were up about 1 to 2 percentage
points.
As financial markets tightened in the fourth quarter, credit flows slowed.
Net funds raised by private domestic nonfinancial sectors dropped approximately 18 percent below the average pace in the first nine months of the
year, reflecting a sharp falloff in business borrowing at commercial banks
and reduced borrowing by households. Monetary expansion also slowed,
bringing all of the monetary aggregates either within or near the growth
ranges that the FOMC had established for the period from the fourth
quarter of 1978 to the fourth quarter of 1979.




Monetary Policy

15

Early in the year the Federal Reserve set ranges for growth in the monetary
aggregates that were thought to be consistent with its objectives of moderating economic growth and restraining inflation. Over the targeted
period, the last quarter of 1978 to the last quarter of 1979, growth in the
narrow and broadest aggregates, M-l and M-3, was within the established ranges, while M-2 was above the upper end of its range.

Interest Rates
Percent per annum
14
Short-term

State and local
government bonds
1973

1975

1977

1979

Monthly averages except for conventional mortgages, which are based on quotations for one day each
month. Yields: U.S. Treasury bills, market yields; prime commercial paper, dealer offering rates; conventional mortgages, rates on first mortgages in primary markets, unweighted and rounded to nearest 5 basis
points, from U.S. Department of Housing and Urban Development; Aaa utility bonds, weighted averages
of new publicly offered bonds rated Aaa, Aa, and A by Moody's Investors Service and adjusted to a Aaa
basis; U.S. government bonds, market yields adjusted to 20-year constant maturity by U.S. Treasury; state
and local government bonds (20 issues, mixed quality), Bond Buyer.




16

Monetary Policy

Changes in Selected Monetary Aggregates1
Annual rates of change based on seasonally adjusted data, percent
1978
Item

1977

1978

Q4
Member bank reserves2
Total
Nonborrowed

1979

1979
Ql

Q2

Q3

Q4

5.3
3.1

6.7
6.8

2.8

2.4
4.7

-3.0
-3.4

-5.0
-8.8

6.3
8.2

13.1
7.5

Concepts of money3
M-l
M-2
M-3

7.9
9.8
11.7

7.2
8.7
9.5

5.5
8.3
8.1

4.3
8.5
9.8

-1.3
2.8
5.3

8.1
8.8
8.0

9.7
11.9
10.5

5.0
8.9
7.8

Time and savings deposits at
commercial banks (excluding
large negotiable CDs)
Savings
Other time

11.2
11.1
11.4

9.7
1.8
16.7

10.4
-5.8
22.8

11.5
5.8
-1.2 -11.8
21.9
19.3

9.3
-3.5
18.4

Deposits at thrift institutions4

14.5

10.6

7.8

11.6

MEMO (change in billions of dollars,
seasonally adjusted)
Managed liabilities
27.4
18.8
Large time deposits
8.6
Nondeposit funds5

68.4
45.3
23.1

50.4
9.1
41.3

19.8
12.3
7.5

8.8

13.3
11.5
5.8 - 1 3 . 8
18.5
28.1

6.8

8.4

6.3

20.8
3.8
11.7 -13.8
9.1
17.6

13.0
-2.7
15.7

12.8
13.9
-1.1

1. Changes are calculated from the average amounts outstanding in each quarter; yearly rate calculations
are based on fourth-quarter data.
2. Annual rates of change in reserve measures have been adjusted for changes in reserve requirements.
3. M-l is currency plus private demand deposits adjusted. M-2 is M-l plus bank time and savings
deposits other than large negotiable CDs. M-3 is M-2 plus deposits at mutual savings banks and savings and
loan associations and credit union shares.
4. Savings and loan associations, mutual savings banks, and credit unions.
5. Includes borrowings by banks from other than commercial banks in the form of federal funds
purchased and securities sold under agreements to repurchase, plus other liabilities for borrowed money,
loans sold to affiliates, loan repurchase agreements, and net due to foreign related institutions.

The monetary aggregates exhibited considerable weakness in the first
quarter of 1979—indeed, M-l declined. M-l was depressed by shifts from
demand deposits into savings accounts accessed by automatic transfer
services (ATS) and into negotiable order of withdrawal (NOW) accounts in
New York State (both introduced on November 1, 1978). Such transfers
are estimated to have reduced growth in M-l in the first quarter by about
23/4 percentage points. The pronounced weakness in the public's demand
for M-l probably reflected other factors as well, including the slower pace
of economic growth and the previous runup of short-term interest rates to
cyclically high levels. These high rates apparently stimulated the unusually
intensive efforts, particularly by households and small businesses, to economize on non-interest-bearing deposits.
In addition to declines in demand deposits during the first quarter, there
were substantial outflows from savings deposits and small-denomination




Monetary Policy

17

time deposits subject to fixed interest rate ceilings. Net issuance of sixmonth money market certificates (MMCs) by commercial banks, on the
other hand, accelerated to high levels, and the interest-bearing component
of M-2 continued to grow, though at a slower pace than during the preceding quarter. Deposit growth at thrift institutions, which was accounted for
entirely by MMCs, also slowed in the first quarter but remained above that
at banks, and M-3 decelerated somewhat less than M-2. In addition to a
large increase in net issuance of MMCs, banks expanded their use of
managed liabilities, which include large-denomination time deposits not
subject to interest rate ceilings and various nondeposit funds.
The weakness of the monetary aggregates early in the year left their
growth below the long-run ranges set by the FOMC. However, because of
the strength of the economy at the end of 1978 and the persistence of
inflation, the Federal Reserve maintained a firm posture that left short-term
rates about unchanged over the first quarter. Long-term rates moved up
somewhat, perhaps in reflection of growing pessimism regarding prospects
for inflation.
Growth in M-l rebounded sharply during the second quarter, to an
annual rate of 8 percent, even as growth of nominal spending moderated.
This pickup marked a return to growth rates more consistent with the
historical relationship of money to nominal income and expenditures, evidently reflecting an abatement of the unusual economizing by the public as
well as a diminished pace of ATS and NOW transfers. As a result, by June
the level of M-l had risen well into the long-run growth range established
by the FOMC.
M-2 also moved into its growth range during the second quarter. The
interest-bearing component of M-2 expanded at an annual rate of 9lA
percent, as inflows of time deposits not subject to fixed interest rate ceilings accelerated and outflows of savings and other small time deposits
slowed. In part, the acceleration of the time deposit component of M-2 was
attributable to a regulatory change in the spring that eliminated (when
Treasury bill rates are above 9 percent) the ceiling rate advantage of lA
percentage point permitted to thrift institutions when issuing MMCs. (This
change, effective March 15, also prohibited compounding of MMC interest. These provisions were intended to reduce pressures on earnings of
thrift institutions by lowering the cost of MMCs and to moderate the
flow of funds to depositary institutions in efforts to restrain inflation.)
The correlative impact of this regulatory change was a weakening of
inflows at thrift institutions in the second quarter. As a result, M-3
accelerated less than M-2. As other deposit flows slowed, thrift institu-




18

Monetary Policy

tions increased their use of large certificates of deposit (CDs) and, to a
lesser extent, their issuance of commercial paper and mortgage-backed
bonds.
Confronted with the strengthening of the monetary aggregates and recognizing the underlying momentum of inflation, the System maintained
restraint in the provision of reserves to the banking system. The federal
funds rate rose somewhat over the second quarter, but other short-term
rates generally tended to fall, apparently reflecting expectations by market
participants that economic activity was weakening and that monetary policy might ease in the near future. Long-term rates also declined on balance,
after reaching cyclical peaks earlier in the second quarter. By the end of the
quarter, short-term rates had declined about 25 to 50 basis points and longterm rates about 10 basis points.
The monetary aggregates continued to accelerate in the third quarter.
M-l expanded at a record annual rate of 93/4 percent, reflecting in part a
pickup in economic activity. Growth in M-2 increased even more sharply,
as issuance of MMCs and other time deposits paying market rates remained
strong, and outflows from deposits subject to fixed interest rate ceilings
ceased. In part, this latter development may have reflected regulatory
changes effective on July 1 that raised ceiling rates on passbook savings
accounts [A percentage point, removed minimum denominations on consumer-type time deposits (except for MMCs), and established a new fouryear deposit with a floating rate ceiling based on the yield for four-year
government securities. The purpose of these changes was to aid small
savers in obtaining higher rates of return on their deposits. The four-year
certificate, however, attracted a relatively small volume of new deposits
Monetary Aggregates and Long-Run Growth Ranges
Billions of dollars
M-l

1978

1979

1978

1979

1978

1979

Long-run ranges are calculated from the fourth quarter of 1978 to the fourth quarter of 1979. The ranges
for M-l were raised from V/i to 4Vi percent as shifts from demand deposits into ATS and NOW accounts
over the year were about one-half as large as had been projected in February.




Monetary Policy

19

during the year, as its ceiling rate remained below yields on competitive
market instruments.
The more rapid growth in the aggregates in the third quarter brought M-1
near, and M-2 above, the upper end of its long-run growth range. The
Federal Reserve responded to this development and to continuing inflationary pressures and weakness in the dollar by allowing the federal funds rate
to increase about 1 VA percentage points from June to September. In addition, the discount rate was raised three times, for a cumulative increase of
W2 percentage points. Private short-term rates increased somewhat more
than the funds rate over the quarter. Long-term rates rose about Vi percentage point, and by the end of the quarter were at or above cyclical highs
reached in the second quarter.
As the third quarter ended, expansion of the monetary aggregates continued at a fast pace and the value of the dollar on foreign exchange markets
came under strong downward pressure. Moreover, a spreading speculative
boom in commodity markets seemed to be developing. It was against this
background that the Federal Reserve announced on October 6 a set of
actions designed to damp speculative developments in financial, foreign
exchange, and commodity markets and to moderate growth in the monetary aggregates. One element of the package was an increase of 1 percentage point in the discount rate, to 12 percent. In addition, it was indicated
that the System's day-to-day operating procedures would be altered in a
way expected to make the achievement of growth targets for the monetary
aggregates more certain. Specifically, policy would be conducted with
greater emphasis on supplying reserves to member banks at a rate believed
consistent with growth objectives for the monetary aggregates; and less
attention would be focused on short-term interest rates as a guide for open
market operations. Previously, open market operations had been directed
at maintenance of the federal funds rate in a relatively narrow range
thought to be consistent with achievement of monetary growth objectives.
It was felt that this procedure had become less reliable in an environment of
rapid and variable inflation.
The third element of the policy package announced on October 6 was the
imposition of a marginal reserve requirement of 8 percent at large banks on
net increases above a base-period level in certain liabilities: CDs issued in
denominations of $100,000 or more with maturities of less than one year,
Eurodollar borrowings, security repurchase agreements, and federal funds
borrowings from nonmember institutions. These requirements applied to
member banks that had $100 million or more in such liabilities and were
imposed as well on U.S. branches and agencies of foreign banks whose




20

Monetary Policy

foreign parents have worldwide banking assets in excess of $1 billion. As
in the previous year, a substantial part of the rapid expansion in bank credit
in 1979 had been financed with managed liabilities. Moreover, the increase
in managed liabilities in the first three quarters of 1979 had been, on
balance, entirely in the form of nondeposit funds, which had been exempt
from reserve requirements until October 6.
In the three weeks following the early October announcement, interest
rates rose very rapidly, exhibiting great day-to-day volatility as the markets
adjusted to the System's new operating procedures. The federal funds rate
climbed about 33A percentage points and other short-term rates somewhat
less. Medium- and longer-term rates rose between 1 and Wi percentage
points. By late October or early November, upward pressures on rates
began to ease, as credit demands were reduced significantly and expansion
of the monetary aggregates slowed. The prime lending rate charged by
commercial banks reached 153/4 percent in November, but was lowered to
15!/4 percent in December.
M-l expanded at a rate of 5 percent in the fourth quarter, while growth
in M-2 slowed more gradually, to a rate near 9 percent, as its interestbearing component continued to expand at just below the third-quarter
pace. Outflows from savings deposits, which had been evident in the first
half, recommenced and reached record rates in the fourth quarter. This
evidently reflected in part a shift into MMCs, which grew $27 billion
during the quarter.
During 1979 MMCs outstanding at banks rose $80 billion and at the end
of the year accounted for 23 percent of savings and small-denomination
time deposits, up from about 6 percent as the year began. At thrift institutions, net issuance was $110 billion and accounted for all deposit growth;
by year-end MMCs had reached 26 percent of all thrift deposits. Households at the same time acquired a large volume of other liquid assets
bearing market yields. Most notably, shares outstanding in money market
mutual funds grew $3416 billion in 1979, compared with $63/4 billion for
1978. Several billion dollars of short-term unit investment trusts also were
sold, and individuals acquired a sizable volume of Treasury securities
through noncompetitive tenders in bill and note auctions.
AGGREGATE FLOWS OF FUNDS
Net credit flows to nonfinancial sectors of the U.S. economy totaled approximately $395 billion in 1979, slightly below the pace of financing in
1978. In the first half of the year, slower credit flows were attributable




Monetary Policy

21

Net Funds Raised and Supplied in Credit and Equity Markets
Billions of dollars
Sector

1976

1977

1978

1979 '

1979p
HI

Q3

Q4P

NET FUNDS RAISED
296

393

482

482

472

548

434

U.S. government
State and local government...
Foreign

69
15
21

57
20
14

54
24
32

37
18
23

27
14
17

40
21
60

55
22
-2

Private domestic nonfinancial.
Business
Household

166
76
90

248
108
140

291
128
163

316
156
160

326
158
168

340
181
159

273
126
147

Domestic financial
Private intermediaries
Sponsored credit agencies..
Mortgage pool securities...

24
5
3
16

54
28

81
40
23
18

87
35
25
28

42
22
24

87
35
19
34

86
20
36
29

Total, all sectors .

6
20

NET FUNDS SUPPLIED
296

392

482

482

472

548

434

U.S. government
State and local government.
Foreign

9
8
18

12
14
42

20
15
40

23
15
-6

24
9
-27

22
15
37

21
27
-6

Private domestic nonfinancial.
Business
Household

29
9
20

26
-4
30

51

70
18
52

81
7
74

44
24
20

73
34
39

Domestic financial
Private intermediaries
Commercial banks
Thrift institutions
Insurance and pension funds.
Other 2

232
202
60
71
64
7

297
264
88
82
78
16

355
304
129

379
314
121
54
97
42

384
335
130
58
96
51

430
350
174
63
90
23

316
235
47
39
106
43

5
16
9

6
20
7

26
18
7

29
28

26
24
-1

26
34
20

40
29
12

Total, all sectors .

Sponsored credit agencies
Mortgage pool securities
Federal Reserve System

52

76

83
16

1. Seasonally adjusted annual rates.
2. Includes finance companies, money market funds, real estate investment trusts, open-end investment
companies, and security brokers and dealers.
p
Data for the fourth quarter of 1979 are preliminary estimates.

largely to reduced credit demands by federal and state and local governments and by foreign borrowers. Credit demands of private nonfinancial
sectors remained strong through the third quarter; but firmer conditions in
financial markets and somewhat slower growth in nominal expenditures
curtailed growth in such credit demands late in the year. Both households
and businesses sharply reduced their borrowing in the fourth quarter, with
a substantial falloff in funds flowing to these sectors in the period following the October 6 actions of the Federal Reserve.




22

Monetary Policy

The U.S. government greatly reduced the volume of funds it raised in
credit markets in 1979, owing primarily to a substantial decrease in the size
of the federal deficit from the previous year and, in the first half, to the
availability of large cash balances carried over from year-end 1978. For the
year net Treasury borrowing amounted to about $37 billion, compared with
$54 billion in 1978. Households acquired a substantial share of the increase
in government securities outstanding. In contrast, as the dollar
strengthened in international exchange markets in the first half, foreign
central banks redeemed an appreciable volume of Treasury securities, most
of which had been acquired in late 1978 with the proceeds of dollar-support
operations. Although foreign account managers did acquire Treasury securities in the third quarter—when the value of the dollar once again came
under pressure on foreign exchanges—these purchases were substantially
less than the redemptions of the first two quarters and were followed by
further net redemptions in the fourth quarter.
Almost all the Treasury's net financing needs in 1979 were met by sales
of marketable securities. The Treasury continued its practice of recent
years of concentrating its marketable borrowings in coupon issues in order
to lengthen the maturity structure of its debt. However, issuance of Treasury bills was increased considerably in the final three months of the year.
Net funds raised by state and local governments fell to around $18
billion in 1979, only two-thirds of the 1978 volume. Most of the decline
reflected the diminution of advance-refunding issues after September 1,
1978, the effective date of Internal Revenue Service regulations that reduced the attractiveness of these operations. The volume of new capital
financing by state and local governments increased in 1979, bolstered by
revenue bonds issued to finance housing. Most of these housing-related
bonds were for the purpose of funding single-family mortgages at belowmarket rates of interest. When congressional legislation was introduced in
April to curtail the use of tax-exempt instruments for this purpose, the
issuance of these bonds slowed sharply; however, volume picked up again
in the second half when it appeared that the final legislation would not
apply to issues that had been postponed earlier.
The reduced aggregate supply of tax-exempt issues, along with continued strong demands by casualty insurance companies and commercial
banks, contributed to a moderate reduction in average yields on municipal
bonds through the first nine months of 1979. Although average yields on
tax-exempt bonds rose about 50 basis points following the policy actions in
October, they remained unusually low relative to yields on taxable bonds.




Monetary Policy

23

The household sector reduced its borrowing in 1979 from the record
levels of the previous year. Growth in consumer installment credit dropped
from peak rates in mid-1978 largely in response to slower growth in
consumer spending, particularly for durable goods. Severe weather early in
the year, gasoline price and supply developments with associated declines
in auto sales, and the erosion of real disposable income by inflation slowed
the pace of debt-financed consumer expenditures. In addition, the higher
rates on consumer loans and a general tightening in nonrate terms of
lending appear to have curtailed installment credit flows late in the year.
Flows of home mortgage funds, which form the major share of household net borrowing, moderated in late 1979 from their 1978 peak. Reduced
deposit flows at savings and loan associations and mutual savings banks,
coupled with concerns about liquidity, acted to constrain mortgage lending
by these institutions. Mortgage lending by commercial banks also dropped
slightly in 1979, after sharp acceleration in the previous two years. For the
year as a whole, the reduced supply of mortgage funds from the depositary
institutions was largely offset by increased support from state and local
governments, federally sponsored credit agencies and mortgage pools, and
life insurance companies.
The general firming in credit market conditions and concomitant slowing in the market supply of mortgage funds as the year progressed were
reflected in a substantial rise in mortgage interest rates that began in the
second quarter and accelerated in the final period. The average rate on new
commitments for conventional home mortgages in December 1979 was
about 2lA percentage points higher than it had been a year earlier. The
marked increase in the cost of mortgage financing encouraged households
to postpone or scale down planned expenditures for housing, thus lowering
the quantity of mortgage credit demanded. In states with usury ceilings
below market rates of interest, supply constraints on the flow of mortgage
credit were severe. Such constraints were effectively removed late in the
year, however, by federal legislation that temporarily overrode state
usury ceilings.
Among nonfinancial sectors, businesses were the only group to record a
substantial increase in credit market borrowing in 1979. Net funds raised
by this sector totaled $156 billion for the year, 22 percent more than in
1978. The external financing needs of nonfinancial corporations have risen
steadily since 1975, as each year the growth in capital outlays by these
firms—in particular, plant and equipment expenditures—has exceeded the
increase in their gross internal funds. In 1979 corporations continued the




24

Monetary Policy

Funds Raised by Nonfinancial Sectors
Billions of dollars

All nonfinancial

300

200

100

1973

1975

1977

1979

Government includes federal and state and local governments. Private domestic includes households and
nonfinancial businesses.
Row of funds data at seasonally adjusted annual rates. Data for 1973-78 are half-yearly; for 1979
quarterly.

pattern of financing observed in 1978, relying relatively heavily on shortterm sources and avoiding long-term bond issuance at the high interest
rates that prevailed during the year. Businesses expanded further their use
of mortgage credit from the strong 1978 pace, in association with a sustained high level of commercial construction activity, while net stock
issuance continued to be depressed by historically low price-earnings ratios
and by retirements associated with mergers and with share repurchases by
firms.




Monetary Policy

25

The bulk of corporate short- and intermediate-term credit in 1979 was in
the form of commercial bank loans. Finance company loans, however,
were unusually large in the first half, while commercial paper issuance rose
to record levels in the middle of the year. The increased use of short-term
financing since 1976 has resulted in a marked rise, to historically high
levels, in the ratio of short-term to long-term debt outstanding for nonfinancial corporations. In the fourth quarter of 1979, as credit conditions
tightened, corporations greatly reduced their borrowing from banks. The
sharp rise in interest rates late in the year, coupled with stricter nonprice
loan terms and more stringent screening of loan applications by banks,
apparently encouraged firms to curtail bank borrowing.
Funds provided to nonfinancial sectors by private financial institutions
increased moderately in 1979, bolstered by lending activities of money
market funds and insurance and pension funds. Pension funds and life
insurance companies absorbed a large share of corporate bond issues, and
life insurance companies also channeled considerable funds into commercial mortgage activity. In contrast, net funds provided by thrift institutions
fell markedly, reflecting the reduced deposit inflows at these institutions.




26

During 1979 growth of economic activity in major foreign industrial countries was relatively well maintained, and a much better alignment of current-account balances among industrial countries was achieved. The large
surpluses of Japan and Germany, in particular, were eliminated in 1979
while the position of the United States shifted from a large deficit toward
near balance. These shifts in current-account positions were brought about
by relative trends in economic activity and especially by the lagged effects
of the depreciation of the dollar against major currencies during 1977 and
1978. The gradual improvement in the relative current-account position of
the United States combined with the effects of the stabilization measures
initiated by the United States in November 1978 checked the long slide in
dollar rates. By mid-1979, however, the dollar came under renewed selling
pressure. Responding to an acceleration in U.S. inflation and persistently
high rates of monetary growth, which were depressing the dollar, the
Federal Reserve on October 6 raised the discount rate 1 percent and took
other measures to assert stronger control over money and credit expansion.
These actions had a strong initial effect on the dollar's exchange rate, but
U.S. Balances on Trade and
Current Account

Gross National Product
1970=100

Billions of dollars

20

V
no
40

1975

1977

1979

1975

1977

1979

Foreign is multilaterally weighted average of G-10 countries plus Switzerland, using 1972-76 trade
weights.
Data for the United States are from the U.S. Department of Commerce and are seasonally adjusted at
annual rates.




International Developments

27

were offset somewhat by a firming of interest rates in other countries and
by uncertainties surrounding the U.S. confrontation with Iran and the
Soviet invasion of Afghanistan. These uncertainties tended to overshadow
economic developments and to give further impetus to the rise in the price
of gold.
CURRENT-ACCOUNT BALANCE
Considerable progress was made toward a strong U.S. current account in
1979. The deficit in merchandise trade peaked in early 1978 and then
settled at a lower level, declining from an average of $34 billion in 1978 to
about $29 billion in 1979, despite an $18 billion rise in payments for
imported oil. U.S. exports scored major gains; there was a sizable rise in
sales of agricultural products, while other exports rose about 30 percent,
including a 12 percent increase in volume. In contrast, U.S. imports from
abroad, apart from oil, rose only slightly in volume terms in 1979, but
higher import prices raised the value of non-oil imports about 11 percent.
As for petroleum, the volume imported showed virtually no change year
over year, though inventories were built to record levels in 1979. However, oil import prices in 1979 averaged 40 percent higher than in 1978:
they rose about 75 percent over the four quarters of 1979. By the fourth
quarter oil imports were at an annual rate of $76 billion, compared with
$43 billion a year earlier.
Further gains were registered in the nontrade sector of the current account in 1979; the net return on foreign direct investments was especially
buoyant. Total earnings of U.S. direct foreign investment reached about
$37 billion, reflecting continued expansion and rising prices abroad, as
well as sharply higher profits in the petroleum industry. About half of these
earnings were reinvested abroad and were therefore reflected also as an
outflow of U.S. private capital. Earnings of foreign direct investments in
the United States also rose but on a much smaller scale.
With a reduced trade deficit and higher service income, the U.S. current
account moved close to balance late in 1978 and throughout 1979. In
contrast, the combined current-account balances of Germany and Japan
moved from a surplus of $25 billion in 1978 to a deficit of more than $10
billion in 1979.
While the U.S. current-account balance was on a fairly level path in
1979, private and official capital flows varied widely. Following the dollar-support measures taken on November 1, 1978, there was a strong net
inflow of capital through banking channels during the first half of 1979,




28

International Development

and the statistical discrepancy in the international accounts also showed
Sizable net inflows, probably representing shifts in financing leads and
lags. Foreign authorities sold large amounts of dollars in this period to
moderate depreciations of their currencies, and U.S. authorities were able
to reverse the large sales of foreign currencies that had occurred in the final
months of 1978.
U.S. International Transactions'
Billions of dollars
1978

1979

Transaction
Year

Q4

Year

Ql

Q2

Q3

Current account 3
Merchandise trade balance
Exports
Imports
Investment income (net) 4
Other services
Unilateral transfers, private
and government

-13.5
-33.8
142.1
175.8
21.6
3.7

.1
-6.0
39.4
45.4
6.6

-.4
-29.1
182.4
211.5
31.0

.4
-6.1
41.3
47.4
6.9

-1.1
-7.7
42.7
50.5
7.5

.8
-7.3
47.3
54.6
8.8

-5.1

-1.3

Private capital flows
Bank-reported capital, net
(outflow, —)
U.S. net purchase ( - ) of foreign
securities
Foreign net purchase ( + ) of
U.S. Treasury securities . . .
Foreign net purchase of other
U.S. securities
U.S. direct investment abroad 4 .
Foreign direct investment in
United States 4
Other corporate capital flows,
net

-27.1

-19.0

-16.0

-14.4

-3.5

-.9

2.2

1.5

2.9
-16.7
6.3

Foreign official assets in
United States (increase, + )
U.S. government foreign assets,
net (increase, - )
Reserve position in IMF
Convertible currencies and other
reserve assets
U.S. government foreign credits
and other claims, net
Allocation of special drawing
rights
Statistical discrepancy

Q4
-.5
-7.9
51.1
59.0
7.8

3.2

1.0

.6

.6

1.0

-5.5

-1.3

-1.4

-1.4

-1.4

33.8
-3.9

7.9

.6

-7.9

-10.0

8.4

13.7

3.8

-2.9

-6.2

-4.8

-1.1

-.6

-2.1

-1.0

2.6
.8
-5.8

-.2
1.2
-7.3

1.6

.5
-4.6

4.9
2.9
-26.4

.9
.3
-6.0

1.0

7.3

1.0

2.0

-2.1

-1.6

-3.4

1.8

18.8

-14.8

-9.4

-10.0

5.6

-1.0

-.8

-5.0
-.3

-4.7
-.1

-.7
-.1

2.0
-.1

-1.6

3.3

-2.2

-9.4

-3.5

.4

2.8

-.6

-1.1

-1.0

1.1
4.6

0
11.2

4.2
-3.1

-.9

-1.0

-3.9

0
.9

1.1
28.5

-3.5

.6
-7.3
2.3

2.0

0)
-1.0

-4.7
10.7

0
-.5

0
13.1

1. Details may not add to totals because of rounding.
2. Data for fourth quarter are partial and preliminary, and include Federal Reserve staff estimates.
3. Current account seasonally adjusted; other accounts not seasonally adjusted.
4. Includes reinvested earnings.
5. Less than $50 million.
SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis.




International Developments

29

By midyear the dollar was again subjected to downward pressure as the
market reacted to an acceleration of growth in the U.S. monetary aggregates, rapid inflation, and another surge in oil prices. This pressure was
met by heavy intervention by U.S. and foreign authorities, as detailed
later, and was reversed on October 6 when the Federal Reserve signaled
still more clearly its determined resistance to inflation. Indeed, the threat of
rising inflation, stemming in part from further sharp increases in oil prices,
touched off a firming of monetary policy in all industrial countries in the
closing months of the year, and the relatively large gap between U.S. and
foreign interest rates that had been opened by the October 6 measures was
considerably narrowed by year-end.
In the year as a whole (though data for recent months are incomplete), a
notable feature of the U.S. international accounts was a reported net inflow
of private capital through banks of about $8 billion, compared with a net
outflow of $16 billion in 1978. Other recorded net private capital outflows,
including direct investments, other corporate flows, and dealings in U.S.
and foreign securities, rose to about $18 billion in 1979 from about $11
billion in 1978, but more than half of that increase reflected higher reinvested foreign profits of U.S. corporations.
The net capital inflow reported by U.S. banking offices in 1979 reflected
mainly flows of liquid funds vis-a-vis foreign affiliated and unaffiliated
banking offices. At the same time, U.S. banks added a further $12 billion
to their credits to nonbank foreigners.
U.S. and Foreign Three-Month Interest Rates
Percent

U.S. certificates of deposit

1977

1978

1979

Foreign is multilaterally weighted average of G-10 countries plus Switzerland, using 1972-76 trade
weights.




30

International Developments

OPERATIONS IN FOREIGN CURRENCIES
From the beginning of the year through late May, the trade-weighted
average foreign exchange value of the dollar rose about 5 percent; the
dollar advanced about 5 percent against the mark, 616 percent against
the Swiss franc, and nearly 14 percent against the yen. The strength of
the dollar enabled U.S. authorities to purchase about the same amount
of foreign currencies as they had sold in 1978. By the end of May, the
System had repaid all of its outstanding swap debts and had acquired
small foreign currency balances. The Treasury had also been able to
reconstitute nearly all of the funds raised through drawings on the International Monetary Fund, sales of special drawing rights (SDRs), and
sales of the Carter note issues, as well as to accumulate yen balances. In
addition, with the strengthened dollar, the U.S. authorities decided to
accelerate the purchases of Swiss francs needed to repay pre-1971 swap
debt; the last payment was made in March 1979.
When the downward pressure on the dollar emerged in mid-June, the
System and the Treasury began intervening in support of the dollar on June
14, selling more than $4.5 billion equivalent of foreign currencies, primarily German marks, in the next six weeks as uncertainties about the direction of U.S. economic policy persisted. The dollar declined more than 4'/2
percent from mid-June to late July despite the intervention support. With
the resolution of some of the domestic political uncertainties and a moderSelected Exchange Rate Indexes
1975=100

100

80
Japanese yen
1976

1977

1978

1979

Weighted-average dollar is multilaterally weighted average of G-10 countries plus Switzerland, using
1972-76 trade weights.




International Developments

31

ate firming in U.S. interest rates in August, the dollar stabilized in exchange markets and the System was able to acquire a small amount of
foreign currency for swap repayments. However, in mid-September downward pressure on the dollar reemerged as the growth in U.S. monetary
aggregates showed little sign of slowing. By the end of the month, U.S.
authorities had provided an additional $3.2 billion in support of the dollar
by sales of foreign currencies, again primarily German marks. Nevertheless, the dollar reached a new low for the year at the beginning of October.
On a weighted-average basis, the dollar was more than 6 percent below its
level at the end of May; it had depreciated 9Vi percent against the mark and
6!/2 percent against the pound. It had appreciated slightly more than 1
percent against the yen, which continued to weaken on exchange markets
because of rising oil prices and a growing Japanese current-account deficit.
The October 6 measures by the Federal Reserve spurred a sharp recovery
in the value of the dollar, and the United States was able to reverse the
direction of its intervention and to purchase small amounts of German
marks and Swiss francs. In late October the Treasury announced plans to
borrow an additional $2.2 billion equivalent of marks, part in November
and part in January 1980, bringing the Treasury's planned issues of foreign-currency securities since November 1, 1978, to $6.4 billion equivalent.
Following the Iranian seizure of U.S. hostages and threats to repudiate
U.S. bank credits that led to the freezing of Iranian assets in U.S. banks on
November 14, exchange markets became quite unsettled. The dollar generally drifted down through year-end, losing all of the ground gained following the October 6 announcements. While the yen was adversely affected by
concern over rising oil prices, the pound sterling benefited from the relative self-sufficiency in oil of the United Kingdom. Central bank intervention was generally light through the year-end. On a net basis, the System
acquired a moderate amount of marks for swap repayments, while the
Treasury was a net purchaser of dollars in the final months of the year.
At the end of 1979 the weighted-average foreign exchange value of the
dollar was slightly less than 1 percent lower than it had been a year earlier;
the dollar rose nearly 24 percent against the yen but depreciated against all
other major currencies. The depreciation against the Canadian dollar and
Swiss franc was slightly more than 1 percent; it was 5 percent against the
German mark and nearly 8 percent against the U.K. pound. At year-end,
the System's swap debt was valued at $3,176 million, all in marks. The
equivalent outstanding swap debt at the end of 1978 was $5,752 million




32

International Developments

U.S. Government Purchases and Sales ( - ) of Foreign Currencies, 1979
Millions of dollars equivalent
Currency

Ql'

Q2

Q3

Q4

/ 1,973
1-289
/ 1,140
\ -46
/ 316
\ -34

2,887
-897
50
-86
10
0

836
-3,596
67
-67
0
0

1,117
-548
46
-10
0
0

6,814
-5.329
1,303
-208
326
-34

/ 3,428
\-368

2,947
-982

903
-3,662

1,164
-557

8,442
-5.571

Japanese yen

f 912
\-456
/ 1,205
\ -25
f
9
1-17

1,064
-1,533
0
0
0
0

172
-3,137
0
0
0
0

115
-472
0
0
0
0

2,263
-5,598
1,205
-25
9
-17

TOTAL

(2,127
\-497

1,064
-1,533

172
-3,137

115
-472

3,477
-5,639

Year

Federal Reserve
German marks
Swiss francs
Japanese yen
TOTAL
Treasury
German marks
Swiss francs

1. Purchases of Swiss francs in the first quarter include $299 million equivalent by the System and
$1,180 million equivalent by the Treasury to repay pre-August 15, 1971. swap debt. Figures include
purchases by the Federal Reserve of Swiss francs against sales of German marks in the first quarter in the
amount of $8 million equivalent. Details may not add to totals because of rounding.

equivalent, mostly in marks. At the end of 1979 the System held balances,
primarily yen, marks, and Swiss francs, equivalent to $257 million (the
1978 year-end balance was $35 million). The System had a net loss of $4
million on its foreign exchange operations in 1979, including a net loss of
$14 million on current operations (of which $6 million was unrealized) and
a net gain of $10 million, which is the difference between the exchangetranslation liability outstanding on Swiss franc debt as of the end of 1978
and the smaller loss actually realized upon repayment of that debt early in
1979.




33

Monetary Policy Reports to Congress
Given below are reports submitted to the Congress by the Federal Reserve on February 20, 1979, and on July 17, 1979, pursuant to the Full
Employment and Balanced Growth Act of 1978.
kr!* » i OS FEBRUARY 20, 1979
K
Recent Economic and Financial Developments
Overview
The current economic expansion is about to enter its fifth year. It thus
outranks in longevity every prior cyclical upswing of the postwar era
with the exception of that in the 1960s. Yet it has maintained considerable vigor, with real gross national product rising more than 4 percent
during the past year. The attendant increases in employment and industrial capacity utilization have reduced considerably the margin of unutilized productive resources in the economy.
The narrowing of the gap between actual and potential output implies
that a tighter hold on the nation's aggregate demand for goods and services is necessary if inflationary forces are to be contained. The urgency
of such restraint is reinforced by the fact that there has already been an
acceleration in the rise of wages and prices. Aggregate measures of unit
labor costs and prices advanced around 9 percent in 1978, appreciably
more than in the preceding years of this economic expansion.
Apart from the hardship that this large and generally unanticipated
surge in inflation created for many families and business enterprises, the
behavior of prices deepened concerns around the world regarding the
stability of the U.S. economy and the soundness of the dollar. The
value of the dollar on foreign exchange markets declined through most
of 1978, exacerbating domestic inflationary pressures in the process. To
prevent a serious disruption of the international financial system, a
broad program of corrective actions was initiated last November. The
dollar has since strengthened but remains vulnerable to shifts in sentiment among exchange-market participants.
The longer-range strength of the U.S. economy and of the dollar depends greatly on our success in retarding inflation. This was recognized
during the past year in actions taken to reduce the size of the federal




34

Monetary Policy Reports

budget deficit, in the establishment of voluntary wage-price standards,
and in efforts to curtail the inflationary impact of federal regulation. In
the monetary sphere, too, there was movement toward moderation of
growth in aggregate demand and restraint of inflation as the Federal
Reserve acted to prevent excessive growth of money and credit.
Aggregate Economic Activity
The current economic upswing, which began in the spring of 1975,
ranks among the most durable in this nation's history. In the period
since World War II, only the expansion in the 1960s was longer, and it
was marked by massive increases in military outlays associated with the
Vietnam War.
The past four years have seen sizable gains in production and employment. Between the first quarter of 1975 and the fourth quarter of
1978, real gross national product rose more than 20 percent. By last
month, industrial production had increased about 35 percent and nonfarm payroll employment more than 14 percent from their levels at the
cyclical trough in March 1975.
The momentum of expansion, furthermore, has been well maintained.
Real GNP increased 4.3 percent from the fourth quarter of 1977 to the
fourth quarter of 1978—a bit slower than the average pace over the
earlier part of the expansion, but still well above the trend growth of
potential output in the economy. The persistent strength of aggregate
demand was demonstrated by the surge in activity during the final quarter of last year, when GNP grew at an annual rate in excess of 6 percent. Available indicators suggest that the economy has remained generally strong in the opening months of 1979.
Residential construction, which provided a good deal of impetus to
the early recovery, stayed on a high plateau last year in the face of
rising interest rates and a continued rapid escalation in building costs.
Household demands for shelter have been bolstered by demographic
trends as well as by an inflation-hedging motive. The sustained advance
in economic activity also has been fostered in good part by strength in
consumer spending. A marked turnaround in the willingness of consumers to spend—reflected in a sharp drop in the personal saving rate—
provided much of the impetus to overall expansion in the early stages of
the economic recovery, and consumption expenditures have remained
unusually robust throughout the upswing.
In the business sector, spending on new plant and equipment has




Monetary Policy Reports

35

continued to rise, but there have not as yet been the large increases seen
in some earlier cycles. Business fixed investment actually declined during the initial quarters of the economic expansion as firms concentrated
on the repair of strained financial positions in an environment of low
capacity utilization. Capital spending policies have continued to be
characterized by considerable caution, and it was not until mid-1978
that the previous peak level of real outlays was reattained. Firms also
have exercised caution in managing their inventory positions, and stocks
generally have remained lean relative to sales.
Government purchases of goods and services rose briskly at both the
federal and state and local levels during the second half of 1978 but
have been a moderating influence on overall activity during most of the
cyclical upswing. The overall budgetary position of the government sector, including transfer payments and revenues, has remained stimulative
throughout the expansion, albeit in diminishing degree. An improving
net export position contributed to the expansion of GNP during the early
recovery phase, but deterioration in the trade balance was a decidedly
negative factor from 1976 to early 1978. The U.S. trade deficit did
narrow over the course of 1978, however, owing in part to the
strengthening of economic expansion in other major industrial countries.
Personal Consumption Expenditures
Consumer outlays grew 3.8 percent over 1978 after averaging 5Vi percent, at an annual rate, earlier in the economic recovery and expansion.
The slower growth of spending reflected relatively smaller recent gains
in real disposable income; increases in real personal income were eroded
by larger tax burdens related to higher contributions for social security
and the interaction of inflation and a progressive tax system.
The proportion of consumption in gross national product has held at a
high level over the course of this upswing. In prior cycles this share
typically fell as the expansion matured. In particular, household spending for durable goods has hovered at around 10 percent of GNP
throughout the past three years, while during other economic expansions
it accounted, on average, for about IVz percent. This exceptional
strength in consumption and the associated rapid increase in installment
credit and low saving rates can be attributed, in part, to the higher
relative number of younger households. But it also appears to be in
some degree a reaction of households to persistently high inflation rates.




36

Monetary Policy Reports

For example, opinion surveys suggest that many consumers have been
buying durable goods in anticipation of price increases.
Business Fixed Investment
Real business fixed investment rose 8!/4 percent over 1978. This was
nearly the same pace of advance as in the two previous years and almost twice the rate of expansion in aggregate activity. Recently, nonresidential construction activity has become an important source of business investment growth. In 1978, real spending for such structures increased 123/4 percent as outlays for commercial and industrial buildings
showed particularly impressive gains. On the other hand, investment in
producers' durable equipment grew about 6!/2 percent in real terms during 1978 compared with increases of more than 10 percent in each of
the previous two years. Demands for motor vehicles, which were exceptionally strong earlier in the expansion, began to tail off in 1978, while
machinery outlays continued to advance at about the same moderate
pace experienced since early 1976.
Inventory Investment
Investment in business inventories was characterized by caution in 1978,
as it generally was in the three previous years. As a result, aggregate
inventory-sales ratios remained at or below historical averages. This
caution, which can be traced back to the severe inventory cycle of
1974-75, appears to have been responsible for the avoidance of the
types of overhangs that preceded several prior cyclical downturns. Incipient buildups of stocks have been met with prompt increases in sales
promotion or curtailments of orders and production. Most recently,
overhangs that developed at general merchandise retail outlets in the fall
apparently were corrected by the sharp rise in sales during the holiday
season and a slowing of production of durable home goods.
Residential Construction
The rate of private housing starts advanced briskly during the 1975-77
period and in 1978 they were sustained at the high annual rate of 2
million units. Spending for residential construction in real terms increased at an average annual rate of 21 percent from the 1975 trough
before leveling off in 1978. In addition to constraints on production
capacity, the recent developments in housing activity reflect the tightening in financial markets. Interest rates on both construction loans and
long-term mortgages rose appreciably in 1978 and by year-end they had




Monetary Policy Reports

37

reached usury ceilings in a number of states and record postwar highs in
many other areas. Even so, the variable-ceiling, six-month time accounts introduced in June of last year buoyed deposit growth at key
mortgage lenders and helped maintain the high rate of housing construction.
Within the housing sector, the rise in single-family starts led activity
early in the recovery. More recently, multifamily starts—supported by
an increase in federally subsidized rental units—have increased while
single-family starts have remained above their 1972-73 peak levels. Indeed, in the fourth quarter of 1978, total housing starts averaged an
annual rate of 2.1 million units, the same as a year earlier.
International Trade
After providing some initial stimulus to economic growth during the
early recovery period in 1975, the U.S. balance of trade began deteriorating. In large part this reflected the relatively stronger rate of economic expansion in the United States compared with our major trading
partners. The deficit in net exports narrowed during 1978, however, as
activity abroad picked up in contrast to the moderation in the U.S. expansion. In addition, the more favorable trade balance reflected a 20
percent rise in agricultural exports last year, associated with unusually
poor harvests of wheat and soybeans in the Southern Hemisphere.
Government
Growth of purchases by the federal government has been uneven in this
expansion. In real terms, such purchases increased little during 1975
and 1976, rose substantially in 1977, and then—despite a surge in the
second half of the year—declined slightly in 1978. Total expenditures,
however, have risen consistently, reflecting increased grants to state and
local governments and transfers to individuals for social security, food
stamps, and retirement benefits. Revenues have increased even more
than outlays over the past several years, so that the federal budget deficit has declined from $66.4 billion in fiscal year 1976 to a projected
$37 billion for the current fiscal year that ends next September.
State and local government purchases also have grown irregularly
over the past four years. In real terms, outlays by this sector for goods
and services expanded at a 2VA percent annual rate during the second
half of 1978, matching the average pace over the expansion as a whole.
This is well below the trend rate of increase experienced during the
1960s and early 1970s. The slowing of growth reflects changing re-




38

Monetary Policy Reports

quirements for services, associated with demographic developments, and
a degree of fiscal conservatism prompted partly by the financial difficulties encountered by some communities in recent years. In 1978, however, a tendency toward tax relief—occasioned in part by voter preferences expressed in California's Proposition 13 and like measures elsewhere—outweighed the impact of spending economies on budgets. As a
result, although the aggregate operating surplus of state and local governments totaled $6 billion for the year, this was only half the size of
the 1977 surplus.
Labor Markets
Labor demand has been strong throughout the current economic expansion. During the three years following the cyclical trough in early 1975,
nonfarm payroll employment advanced at an average annual rate of 3.7
percent—compared with a 2.8 percent median rate of gain during the
five previous postwar expansions. During the past year—at a stage
when in earlier cycles employment levels had begun to level off or even
to fall—payroll employment has continued to advance at a 4.2 percent
annual rate. Over the almost four years of expansion, employment has
increased by 12 million, and today the ratio of employment to total
civilian population aged 16 and over stands at the highest level on record.
Employment in the goods-producing sector of the economy rose
rather slowly early in this recovery, reflecting in part the sluggish behavior of business fixed investment. It was not until late 1978—as a
result of large hiring increases in the hard goods industries—that factory
employment reached its prerecession peak. Similarly, construction hiring
showed only small increases for nearly three years after the trough.
During 1978, however, employment in contract construction surged
ahead to record levels.
In the private service-producing sector, employment dipped only
briefly in early 1975 and has been on a steady uptrend since then—far
exceeding the gains of previous expansions. The trade and service industries have continued to grow faster than other sectors, and by the end
of 1978 they accounted for more than 4 of every 10 jobs in nonfarm
establishments. In contrast to the private sector, government hiring has
been modest. Federal government civilian employment has been fairly
stable at around 2% million over the past four years, about the same
level that has prevailed since the late 1960s. State and local government




Monetary Policy Reports

39

employment has risen, but growth has been slowed substantially in recent years as a consequence of reduced needs for education personnel
and fiscal retrenchment by many units.
The reduction of demand for labor in education reflects the shift in
the age structure of the population that has been affecting not only
school enrollments but also the size of the work force. Growth of the
teenage population (ages 16 to 19) in the late 1960s and early 1970s
was exceedingly large, reflecting the attainment of working age by the
postwar baby boom cohort. At the same time, labor force participation
rates for teens rose sharply. In the mid-1970s, growth of the 16 to 19
age group slowed, and in 1978 the teenage population actually began to
contract. Nonetheless, with participation rates still rising rapidly, the
teenage labor force continued to grow at a rapid pace (up 3.2 percent in
1978 compared with 1.6 percent on average in the preceding four
years).
An even more significant factor in the expansion of the work force
has been the continued rise in the participation rates of adult women.
The longer-run trend, which reflected low birth rates as well as changing attitudes and social trends, apparently was augmented in the 1970s
by a desire of families to maintain their material living standards in the
face of rapid inflation. As a result of these participation-rate patterns,
the total civilian labor force grew 3 percent during 1978—about the
same as in 1977, but up considerably from the 214 percent annual rate
during preceding years of the decade.
With the growth of employment outstripping even the large increase
in the size of the labor force, the unemployment rate fell Vi percentage
point over the course of 1978 to just under 6 percent. Labor market
conditions improved significantly for most groups of skilled and experienced workers. For example, unemployment rates for workers 25 to 54
years old, skilled blue collar workers, and workers seeking full-time
employment all were at or near the levels reached in 1972 when labor
and product markets were beginning to tighten noticeably. While there
was as yet no general shortage of skilled workers during 1978, many
firms reportedly were finding it increasingly difficult to fill certain job
vacancies at prevailing wage rates.
The improvement in employment conditions during the current expansion has not been uniform. Despite the gains made by many groups,
unemployment rates for younger workers, minorities, and the unskilled
were still very high at the end of 1978. For example, the unemployment




40

Monetary Policy Reports

rate for teenagers at the end of 1978 was 16!/4 percent, more than four
times the rate for workers 25 to 54 years old; for minority youth the rate
was over 35 percent. Younger workers between 16 and 24 years of age
accounted for about half of all of the joblessness in the fourth quarter of
1978.
The enlarged proportion of the labor force accounted for by teenagers
and women means that the overall unemployment rate does not imply
the same degree of labor force pressure that it would have in past years.
These groups tend to have relatively high rates of joblessness for a
number of reasons, including generally more limited training and work
experience. As a rough adjustment for such structural influences, the
average unemployment rate can be recomputed using the age-sex composition of the labor force in the mid-1950s. The result of such a calculation is an unemployment rate about one percentage point below its
current level, which vividly illustrates that the level of labor utilization
consistent with price stability may change considerably over time. To
enhance the possibility of simultaneously achieving low unemployment
and price stability, it may be necessary to augment monetary and fiscal
policies with carefully focused programs to facilitate job placement and
to provide skill training.
Productivity
The 3.5 million increase in payroll employment during 1978 was much
larger than would have been expected on the basis of the historical
relationships between output changes and labor demand. Although
growth in real GNP decelerated from 5V2 percent in 1977 to 4lA percent in 1978, businesses added to their payrolls at almost the same rate.
Output per hour of work rose only slightly over the four quarters of
1978.
Much of the slowdown in productivity growth last year occurred outside the manufacturing sector; output per hour in manufacturing increased 3Vi percent during 1978. Normally, productivity growth slows
as labor markets tighten and capacity constraints are approached, but the
falloff in productivity gains in the past two years has been particularly
sharp.
This poor performance of labor productivity continues a trend toward
slower growth evident since the late 1960s. During the period from
1947 to 1967, productivity in the nonfarm business sector rose on average by 2% percent per year, and accounted for almost 70 percent of the




Monetary Policy Reports

41

gain in output for this sector. Since 1967 the rise in output per hour has
slowed, with average annual gains of only 1.2 percent recorded since
1973. As a result, less than 50 percent of output growth over the last
five years can be attributed to gains in efficiency.
The deterioration of productivity performance in recent years is a
complex phenomenon that is not completely understood. It appears,
however, that a crucial factor has been the failure to maintain an adequate rate of capital formation. Indeed, the nation's stock of capital has
shown little growth relative to the size of the labor force over the past
decade; in contrast, the capital-labor ratio trended upward rapidly in the
preceding 20 years. Other factors that may have contributed to reduced
productivity growth in recent years are the influence of environmental
and safety regulations that divert resources to uses not measured in the
national income and product accounts and the increase in the proportion
of young and inexperienced workers in the labor force.
Investment
Since the early 1960s there has been a marked trend toward slower
growth of the stock of business capital in the United States. Although
real gross business fixed investment last year surpassed the 1973 record,
still stronger investment activity will be needed if there is to be a sustained reversal of this trend. In part this merely reflects the arithmetic
truth that unchanged absolute amounts of investment translate into declining percentage increases in a growing stock of plant and equipment.
Also important, however, is the fact that it is net investment—that is,
gross investment less the depreciation of existing capital goods—that
adds to the capital stock, and real net investment has yet to reach its
previous peak level. Because the fraction of the capital stock in the
form of relatively short-lived equipment has been increasing in recent
years, a higher level of gross investment is now needed simply to maintain the existing capital stock.
It also must be noted that even the figures for net investment probably overstate the contribution that capital outlays have been making recently to the expansion of productive capacity. A significant share of
plant and equipment spending has been undertaken to meet government
pollution, health, and safety regulations. During the past several years
roughly 5 percent of total capital spending has been for the purpose of
pollution abatement, and some estimates suggest that perhaps an additional 2 percent of investment has been for improvements in health and




42

Monetary Policy Reports

safety conditions. Although these outlays may well yield important
benefits to society, they do not directly enhance productive capacity.
When an economy is near full employment, the commitment of additional resources to capital formation will require some near-term sacrifice of consumption by individuals or government. However, there is
ample evidence that higher levels of investment effort can enhance longrange economic growth and raise living standards. The increase in U.S.
capital spending last year raised the ratio of real gross business fixed
investment to GNP to 10.2 percent—the first time since 1974 that it
reached the 10 percent level, but still somewhat below the average of
the late 1960s and early 1970s. Although international comparisons
must be made with caution, owing to differences in accounting and
other technical problems, it is clear that other major industrial nations
have allocated greater shares of GNP to investment and, as a result,
have enjoyed substantially faster increases in productivity and output.
While this does not lead to the conclusion that the United States should
attempt to achieve the same investment-GNP ratios as prevail elsewhere,
it tends to confirm the proposition that this nation would benefit from
higher proportions of capital spending to GNP than have been experienced in recent years.
International Trade and Payments
From the mid-1960s through the early 1970s, the U.S. merchandise
trade balance moved gradually from surplus to deficit. Then, during the
1974_75 worldwide economic slowdown the United States suffered a
disproportionately sharp contraction, so that—despite an enormous increase in our outlays for imported oil—the U.S. trade balance swung
into surplus in 1975. The surplus proved temporary, however; the subsequent economic recovery was stronger here than abroad, and this
played a major role in the steep increase of our trade deficit from 1976
through early 1978.
The trade deficit in 1978 was $34 billion, slightly larger than in
1977. But the deficit peaked at an annual rate of $45 billion in the first
quarter of 1978, and developments in both exports and imports contributed to a narrowing of the imbalance to a rate of about $30 billion in
each of the subsequent quarters.
The growth of exports accelerated in the second quarter. The step-up
was partly attributable to temporary causes—for example, demand for
U.S. agricultural commodities was stimulated by poor harvests in the




Monetary Policy Reports

43

Southern Hemisphere. More important was a strengthening of economic
activity abroad and the improved competitiveness of U.S. goods resulting from the substantial depreciation of the U.S. dollar that had begun
in the fall of 1977. The real volume of nonagricultural exports increased
6 percent in 1978, and growth picked up strongly in the second half of
the year. Prices of exports increased in line with the general pace of
domestic inflation, and the total value of merchandise exports rose 17
percent from 1977.
The relatively moderate rise in the volume of imports in 1978, following two years of very large increases, resulted primarily from a
slower increase in nonoil imports, but it was reinforced by some decline
in petroleum imports. Although total U.S. petroleum consumption is
estimated to have increased 3 percent, the higher demand was more than
met by the increased Alaskan production and by a drawing down of
inventories from unusually high levels. The total value of imports increased 16 percent in 1978 with the gain spread over most major commodity categories. Almost half of this increase was in volume terms as
imports responded to the continuing strength in U.S. economic activity.
Prices of nonoil imports were boosted by the decline in the international
value of the dollar.
The current-account deficit in 1978, estimated at $17 billion, was
slightly larger than in 1977. As in other recent years, net receipts from
service transactions provided a substantial offset to the merchandise
trade deficit. Earnings, fees, and royalties from foreign direct investments have shown a strong uptrend during the 1970s.
In the period between the onset of generalized floating of currencies
in March 1973 and September 1977, the exchange value of the dollar
went through several phases of appreciation and depreciation. The average value of the dollar increased sharply (nearly 15 percent) from October 1973 to January 1974, despite large sales of dollars by foreign central banks. Continued large sales of dollars by foreign central banks in
1974, later reinforced by the easing of domestic interest rates associated
with the U.S. recession, contributed to a decline in the dollar that began
in the first quarter of 1974 and did not end until the spring of 1975.
Thereafter, the emergence of a large current-account surplus and a relative firming of U.S. interest rates led to a substantial appreciation of the
dollar until the spring of 1976. The dollar subsequently held relatively
steady until the fall of 1977.
The dollar began to depreciate markedly against most major foreign




44

Monetary Policy Reports

currencies in late September 1977 as forecasts for 1978 suggested that
the U.S. trade deficit would be no smaller than in 1977. The decline
continued through the end of 1977, despite large intervention purchases
of dollars by foreign central banks. An announcement in January 1978
that the U.S. Treasury would join the Federal Reserve in exchangemarket intervention in German marks, followed by an increase in the
discount rate, improved market sentiment only temporarily, and by early
April the dollar had declined about 10 percent on a weighted-average
basis. Between early April and mid-May, a relative firming of U.S.
interest rates contributed to a recovery, but the dollar declined fairly
steadily thereafter in response to continuing concerns about the size of
the U.S. trade deficit and increasing fears that U.S. price performance
was deteriorating.
Although some depreciation of the dollar was justified by the need to
restore external balance in the face of differential growth rates in the
United States and major foreign economies and a relative worsening of
U.S. inflation, by mid-summer it was clear that the dollar's decline was
becoming excessive in trading that was increasingly disorderly. Consequently, in August the Federal Reserve announced a Vi percentage point
increase in the discount rate and reduced to zero the reserve requirements on borrowings by member banks in the Eurodollar market. The
Treasury later announced that it would increase the size of its regular
monthly gold auctions. These measures produced a brief rally and then
a few weeks of stability for the dollar. However, the dollar's slide soon
resumed. After the President announced his wage-price program on October 24, the decline steepened alarmingly, threatening to undercut the
anti-inflation effort at home and to lead to further erosion of confidence
abroad. By late October, the dollar had fallen 21 percent from its September 1977 level.
Under these circumstances, more forceful action was required. On
November 1, the Federal Reserve increased the discount rate by 1 percentage point and imposed a supplementary reserve requirement of 2
percentage points on large time deposits. To increase the availability of
foreign currencies for exchange-market intervention, enlarged swap lines
were arranged with the central banks of Germany, Japan, and Switzerland. The U.S. Treasury simultaneously announced its intention to draw
on its reserve position in the International Monetary Fund, to sell special drawing rights, and to issue foreign-currency-denominated securities. In addition, it announced a doubling in its rate of gold sales.




Monetary Policy Reports

45

The aim of these measures was to correct the excessive depreciation
of the dollar and thereby to counter upward pressures on the domestic
price level. When viewed in its entirety, the policy initiative of the
administration and the Federal Reserve System indicated that the United
States recognized the need for an integrated approach in addressing domestic and international economic concerns. The announcement of these
measures on November 1 produced a dramatic jump in the dollar's exchange value. On that day alone the dollar advanced by 5 percent on a
weighted-average basis. Heavy cooperative central bank intervention
over the following few weeks provided support for the dollar as market
participants tested the authorities' resolve, but the need for such intervention abated in January. As of mid-February of this year, the dollar
was more than 7 percent above its October low on a weighted-average
basis.
Prices
Inflation typically has accelerated over the course of cyclical expansions
in economic activity, and this upswing has proven no exception. However, the marked increase in the pace of price advance during the past
year was in large measure a consequence of forces not directly related
to an intensification of general demand pressures on available productive
resources. Government-mandated increases in costs and special developments in the agricultural and international sectors contributed substantially to the pickup in inflation during 1978.
Inflation moderated during the first stages of the cyclical recovery in
1975 and 1976. The earlier extraordinary pressures (associated with the
rise in oil prices, the sharp escalation in food prices, a worldwide boom
in other commodities, and domestic price decontrol) subsided, and the
considerable slack in labor and product markets restrained wages and
prices. Inflation began to speed up again in 1977, however, and prices
then surged in 1978. The consumer price index, the producer price index, and the fixed-weight price index for gross business product all
registered increases of around 9 percent during 1978, about 2 percentage
points more than in the preceding year.
The acceleration of inflation last year reflected importantly the pressure of rising labor costs. Wage rates in the private nonfarm sector
increased SlA percent, compared with about IV2 percent in each of the
preceding two years. A boost in the federal minimum wage contributed
appreciably to the accelerated rise of wages; the impact was especially




46

Monetary Policy Reports

noticeable in the trade sector, which has the largest concentration of
lower-wage workers and had average wage increases of more than 9
percent last year.
Hourly compensation, which includes, in addition to wages, the costs
to employers of social insurance contributions and of privately negotiated fringe benefits, rose 93A percent—about 2 percentage points faster
than in 1977. About one-quarter of the acceleration resulted from increased social security taxes and unemployment insurance contributions.
In addition, private fringe benefits continued to rise faster than wages.
Given the weak performance of labor productivity, the larger compensation gains were translated into rapid increases in unit labor costs. Unit
labor costs in the nonfarm business sector rose 9 percent during 1978
versus 6V3 percent in 1977. As 1979 began, labor costs again were
given an upward jolt by further increases in the minimum wage and
social security taxes.
Apart from the broad pressures exerted by rising unit labor costs, the
general level of prices was affected considerably in 1978 by developments in the farm and food sector. Retail food prices rose 12 percent
over the year—the largest increase since 1974. The increases at the
retail level reflected a rise of almost 20 percent in farm prices during
1978 following little change in the preceding year. Meat price increases
were particularly rapid, as beef production continued to decline.
The decline in the foreign exchange value of the dollar also aggravated inflation. Aside from the direct impact of higher prices for imported merchandise, the price-restraining pressure of foreign competition
was weakened for many domestic products. Large price increases for
domestically produced automobiles and other durable goods reflected
both of these effects. The inflationary pressures associated with the
steep depreciation of the dollar that had begun in September 1977 appear to have accounted for about 1 percentage point of last year's rise in
the consumer price index.
At the producer level, the inflation of prices of capital equipment
accelerated considerably less than that for consumer finished goods. But
crude materials prices, for both food and nonfood items, increased
sharply, and prices for construction materials also rose rapidly. In the
first month of this year the continuing strength of inflationary forces
was demonstrated by a 1.3 percent jump in the producer price index;
although consumer foods posted an especially large increase, all major
groupings of finished goods and materials showed accelerated advances.




Monetary Policy Reports

47

Financial Markets
Interest Rates. Interest rates generally declined during the early part
of the current economic expansion. This departure from usual cyclical
patterns probably was attributable in part to a diminution of inflation
expectations associated with the observed slowing in the advance of
prices and to the limited credit needs of businesses, which were pursuing cautious capital spending policies. Interest rates began to move upward in the spring of 1977, however, as the Federal Reserve acted to
restrain accelerating growth in money and credit. Over the course of
1977, yields on short-term market instruments generally rose about 2
percentage points, while corporate and Treasury bond yields increased
around 3A percentage point.
With inflation picking up, the margin of unutilized resources narrowing, and the dollar under downward pressure in foreign exchange markets, the Federal Reserve applied increasing restraint to the expansion of
money and credit in 1978. This was reflected in further increases of 3 to
4 percentage points in most short-term rates over the course of the year.
The combination of rising short-term rates and heightened inflation expectations resulted in increases of roughly 1 percentage point in bond
yields. By year-end, a number of interest rates were near or above the
peak levels of 1974.
Monetary Aggregates. The monetary aggregates have exhibited some
unusual patterns of behavior during the past several years. This has been
especially true with respect to the narrow money stock, M-l. During
1975 and 1976, growth in M-l averaged just over 5 percent per year.
Given the concurrent decline in interest rates, the sizable increases in
M-l velocity—that is, the ratio of GNP to M-l—were much larger than
would have been predicted on the basis of previous historical relationships among money, income, and interest rates.
The moderation of the public's demand for M-l may have reflected to
a degree an unusually strong cyclical swing in confidence and increased
willingness to spend out of existing cash balances as the economy recovered from a severe recession. However, there is also considerable
evidence that other factors played an important role. The unprecedentedly high level reached by interest rates in 1974 stimulated the creation and adoption of new cash management techniques that permitted
individuals and businesses to economize on nonearning demand deposits. This development apparently continued to exert a significant influence even after interest rates turned downward, and it was reinforced




48

Monetary Policy Reports

by several important legislative and regulatory developments and innovations affecting the payments system. These included the authorization
of negotiable order of withdrawal (NOW) accounts in all of New England, of savings accounts for businesses and governmental units, and of
preauthorized third-party and telephone transfer privileges for personal
savings accounts.
By the beginning of 1977, the level of M-l was well below that
predicted by most standard econometric models of the demand for
money. This downward shift in money demand abated in early 1977,
however, and growth of M-l generally conformed to historical patterns
until the final months of 1978. M-l expanded 8 percent during 1977
and at about the same pace over the first three quarters of 1978; rising
interest rates and slowing economic expansion worked to moderate M-l
growth over this span, but these influences were offset by the effect of
accelerating inflation on transactions requirements.
On a quarterly average basis, M-l growth in the fourth quarter of
1978 was at a 4.4 percent annual rate, but the average level of the
money stock in January was slightly below that for October. A portion
of this weakness is the direct consequence of the introduction of automatic transfer services (ATS) last November 1; many individuals have
shifted their transactions balances from checking accounts to savings
accounts from which funds are automatically transferred to cover
checks. These shifts appear to have reduced M-l growth rates by
roughly 3 percentage points per month, on average. Even after allowance for this, however, growth in M-l has been weaker than might have
been expected in light of the recent expansion of income and spending.
It may be that, as in 1974, interest rates have reached a high threshold
level at which households and businesses are induced to seek out and
adopt cash management techniques that permit major economies in demand deposit holdings. The advent of ATS—which occasioned basic
changes in the checking account pricing policies of many banks—
undoubtedly has caused many individuals to assess more carefully the
opportunity costs of holding non-interest-earning demand deposit balances as compared not only with ATS accounts but also with other
highly liquid interest-earning assets.
The behavior of the interest-bearing components of the broader monetary aggregates—M-2 and M-3—was generally in line with historical
patterns during the first three years of the economic upswing, but there
has been a marked deviation since last June. Commercial banks and




Monetary Policy Reports

49

thrift institutions experienced rapid growth of savings and smalldenomination time deposits until the latter part of 1977. At that point a
gap began to develop between interest rates on short- and intermediateterm market securities and the rates permitted on insured deposits by
federal regulations. As the gap grew, inflows to savings and small time
accounts gradually diminished through the spring of 1978. Commercial
banks found it necessary to rely more heavily during this period on
large time deposits and other managed liabilities to fund their lending
activities, and savings and loan associations borrowed heavily from Federal Home Loan Banks.
To prevent a repetition of past episodes when markedly reduced deposit inflows led to an abrupt curtailment of credit to homebuyers and
others reliant on the depositary institutions for credit, the federal regulatory agencies authorized two new time deposit categories effective June 1.
One was an 8-year account paying up to IVA percent at commercial
banks and 8 percent at thrift institutions. The other was a 6-month
"money market certificate" (MMC) whose maximum rate varies weekly
with the average yield on newly issued 6-month Treasury bills. Given
rate relationships, the 8-year certificate has not added significantly to
overall deposit flows, but quite the contrary is true of the MMCs. During the first 5 months of 1978, time and savings deposits subject to rate
ceilings at commercial banks, savings and loan associations, and mutual
banks grew at a 7.9 percent annual rate; since the beginning of June,
these deposits have grown at a 10.3 percent rate despite substantial further increases in market interest rates. MMC balances at the end of
January totaled about $105 billion and accounted for 13A percent of
savings and small time deposits at banks and almost 13 percent at thrift
institutions.
The MMCs have greatly reduced the sensitivity of time and savings
deposit growth to changes in market interest rates, but they have not
eliminated it. Indeed, inflows have moderated during the past few
months, at least partly in response to the substantial further rise in interest rates. Increased noncompetitive tenders in auctions of Treasury securities and record growth of money market mutual funds are indications that recent interest rate levels have been inducing some diversion
of funds from savings and small time accounts subject to fixed rate
ceilings.
Credit Flows. Although accelerating inflation has tended to dampen
the impact of rising nominal interest rates on credit demands, there has




50

Monetary Policy Reports

been a perceptible flattening of the overall pace of borrowing in the
economy over the past year. Total funds raised in credit markets by *the
private domestic nonfinancial sectors have expanded only moderately
since the second half of 1977 after having risen rapidly during the earlier part of the economic expansion. Although the liquidity of depositary
institutions has declined over the past two years, the introduction of the
MMC has prevented the disintermediation that accompanied previous
interest rate cycles and has permitted banks and thrift institutions to
continue to account for a very large share of the funds advanced to
ultimate borrowers.
Households, in particular, are heavily reliant on depositary institutions
for credit, and their demands for funds have remained strong. Home
mortgage borrowing in 1978 was slightly larger than in 1977, and consumer installment borrowing rose to a new record as households financed purchases of autos and other large ticket items. The aggregate
flow of credit to households in 1978, at more than $160 billion, was 15
percent greater than in 1977 and three times the volume recorded in
1975.
The buildup of indebtedness by households over the last three years
has outstripped both the growth of this sector's financial asset holdings
and of disposable income. Repayment burdens have reached record proportions. Although loan delinquency data indicate that families have not
as yet encountered significant difficulty in meeting their obligations for
debt service, the diminished liquidity of household financial positions
suggests a greater fragility and vulnerability to any deterioration of income flows.
The nonfinancial business sector also experienced some decline in
liquidity in the past year. The gap between corporate capital spending
and internal cash flow widened, and firms met a substantial portion of
their external financing needs through short-term borrowings—
particularly from commercial banks. While commercial mortgage borrowing increased and private bond placements remained large, many of
the big, highly rated industrial firms that have ready access to the public
bond markets evidently preferred to defer long-term financings in the
expectation that long-term rates would eventually decline. As a consequence, the aggregate ratio of liquid assets to short-term liabilities in the
nonfinancial corporate sector declined over the course of 1978, to a
level only slightly above the 1974 low.
State and local borrowing was about the same in 1978 as in 1977.




Monetary Policy Reports

51

Advance refundings again accounted for a sizable share of tax-exempt
bond issuance, but such operations virtually ceased after August owing
to the combination of restrictive Internal Revenue Service regulations
and rising interest rates. Despite some rise in the past few months, the
ratio of yields on municipal bonds to those on taxable obligations has
remained relatively low by historical standards, reflecting in part the
continued demand for tax-exempt securities by casualty insurance companies, by commercial banks, and by individuals.
Borrowing by the U.S. Treasury has declined over the past year,
reflecting the diminution of the federal budget deficit. Government borrowing from the public totaled $59 billion in fiscal year 1978, but is
projected by the administration at about $40 billion in the current fiscal
year. The preponderance of the increase in outstanding Treasury debt
during 1978 was absorbed by state and local governments, which purchased a large volume of nonmarketable Treasury securities with proceeds of advance refundings, and by foreign official institutions, which
invested dollars obtained in exchange-market intervention.
Commercial banks satisfied a substantial proportion of the credit demands of households, businesses, and state and local governments during 1978. Total bank credit expanded 10.9 percent over the course of
the year, with loan portfolios increasing by 14.6 percent. To meet loan
demands many banks had to liquidate holdings of Treasury securities
and to borrow either from correspondents or in the open market through
the issuance of large CDs or nondeposit liabilities such as federal funds
and repurchase agreements. Aggregate bank liquidity ratios declined appreciably, especially among the smaller and regional institutions that
have experienced the strongest business loan growth during this expansion.
Thrift institutions experienced considerable cash-flow pressure during
the first half of 1978, but they have been able to rebuild their liquid
asset positions since the MMCs began to bolster deposit growth. Thrift
institution mortgage lending declined moderately during 1978, although
there was some upturn in the final quarter in lagged reaction to the
midyear pickup in deposit inflows. Outstanding loan commitments also
rose during the second half but in December were slightly below the
year-earlier level.
Life insurance companies and pension funds have continued to experience large inflows of investable funds. In 1978 as in previous years of
the economic expansion, these institutions absorbed the bulk of the net




52

Monetary Policy Reports

issuance of corporate bonds. The insurance companies also have supplied a large share of commercial mortgage credit.

Objectives and Plans of the Federal Reserve
The Objective of Monetary Policy in 1979
The objective of the Federal Reserve is to foster financial conditions
conducive to a continued, but more moderate, economic expansion during 1979 that should permit a gradual winding down of inflation and the
maintenance of the stronger position of the dollar in international exchange markets. Given the limited margin of unutilized labor and industrial resources remaining in the economy, it is critically important to
avoid strong aggregate demand pressures that would aggravate our already serious inflation problem. At the same time, the current condition
of general balance in the economy suggests that it should be possible to
continue restraint to relieve inflationary pressures without triggering a
recession.
Growth of Money and Credit in 1979
The Federal Open Market Committee (FOMC) has selected growth
ranges for the monetary aggregates that it believes will bring to bear an
appropriate degree of restraint in light of the current outlook for fiscal
policy and the underlying strength of private demand in the economy.
Over the year ending with the fourth quarter of 1979, M-l is expected
to grow between Wi and AVi percent; M-2, 5 to 8 percent; and M-3, 6
to 9 percent. Commercial bank credit has been projected to increase
between IVi and IOI/2 percent during the year.
The growth range for M-l calls for a marked deceleration from the
pace of recent years. This reflects in part an expectation that the shifting
of funds to savings accounts with automatic transfer facilities and to the
NOW accounts recently authorized in New York State will continue to
depress the growth of demand deposits throughout 1979. The Board's
staff has projected that such shifting will damp growth in M-1 this year
by around 3 percentage points. Because there has been only a brief
period of experience upon which to base an analysis of the attractiveness of the ATS accounts, this projection carries a broad range of uncertainty.
The unexplained flatness of M-l in recent months introduced another
uncertainty in the FOMC's deliberations regarding the monetary growth




Monetary Policy Reports

53

ranges. At this stage it is impossible to tell whether the weakness of M1 relative to what would have been expected on the basis of historical
relationships among money, income, and interest rates is a transitory
phenomenon or one that is likely to persist for some time. The range for
M-l assumes that the recent weakness does in some degree reflect a
change in the public's desired allocation of funds among various financial assets that may persist for some time ahead, though not so strongly
as in recent months.
The breadth of the specified growth range for M-l recognizes the
considerable uncertainties that currently exist. As subsequent information begins to resolve those uncertainties, the range may be adjusted. In
the meantime, M-l may continue to be a somewhat ambiguous indicator
of monetary policy, and it will be especially important to monitor carefully the behavior of other financial variables.
It may be noted that the Federal Reserve is studying possible redefinitions of the monetary aggregates. Among the proposals made in a staff
paper published for public comment in the January Federal Reserve Bulletin is that M-l be redefined to encompass ATS, NOW, and other
similar transactions accounts.1 While such a redefinition would not eliminate the need to understand the behavior of the various financial assets,
it might produce an aggregate that is more reflective of the public's
need for transactions balances in light of ongoing institutional changes.
The behavior of M-l was not the only puzzling development confronting the FOMC early this month as it considered the appropriate
ranges for monetary growth during 1979. There were questions as well
regarding the movements of the interest-bearing components of the
broader aggregates—especially the time and savings deposits at commercial banks that, along with M-l, constitute M-2. Bank savings deposits have declined appreciably in the past few months, despite the
influx of funds to ATS savings accounts. While savings deposit inflows
might be expected to exhibit weakness when market interest rates are so
far above regulatory ceilings, a large gap had existed for a considerable
time and it might have been expected that most of the interest-sensitive
funds had already moved into other instruments. It is possible, however,

1. "A Proposal for Redefining the Monetary Aggregates," Federal Reserve Bulletin,
vol. 65 (January 1979), pp. 13-42.




54

Monetary Policy Reports

that—as perhaps with demand deposits—the recent further sharp increase in interest rates to historically high levels has prompted many
people to seek out alternative assets carrying market yields more aggressively. The M-2 range adopted by the FOMC reflects an expectation
that growth of the interest-bearing component will be somewhat stronger
in the months ahead, buttressed by further sizable increases in the largedenomination time deposits included in the total and by abatement of
the recent unusually large withdrawals of funds from savings deposits.
The range for M-3 implies a continued substantial growth of deposits
at nonbank thrift institutions. The money market certificates have
proven a reliable source of funds. While some institutions have reduced
their promotion of MMCs, the certificates have continued to be widely
offered at ceiling rates—although there has been some erosion of earnings at thrift institutions since mid-1978 as these relatively high cost
deposits have taken a growing share of thrift institution liabilities.
The projected range for bank credit expansion reflects an expectation
that loan demands will be less intense in 1979 than in 1978, in line with
the prospect of more moderate growth of economic activity. Banks
likely will have to continue to rely heavily on large time deposits and
other money market liabilities to fund asset growth, and this implies
some further decline in traditional measures of institutional liquidity.
The Economic Outlook
Despite the surge in real GNP during the fourth quarter, it appears that
underlying economic and financial conditions will lead to a moderation
of economic growth in the year ahead. The absence of the sorts of
distortions and imbalances that have often precipitated economic downturns in the past indicates that it should be possible to slow the pace of
expansion—and thereby relieve inflationary pressures—without prompting a recession. However, any further acceleration of inflation or the
occurrence of severe shortages of critical commodities, such as oil,
would imperil this outcome.
The monetary restraint applied over the past year by the Federal Reserve is expected increasingly to affect the residential construction sector. Higher costs of credit will cause land developers and builders to put
aside marginally profitable projects, and the combination of higher
house prices and mortgages rates will lead some families to defer home
purchases. Nonetheless, owing to the MMCs and various institutional
developments that have broadened the sources of mortgage funds, as




Monetary Policy Reports

55

well as to the strong underlying demand for shelter, the decline in housing activity should be moderate by comparison with past cycles.
Business fixed investment likely will continue to grow during 1979,
but at a slower rate than in 1978. There has been some indication in the
past few months of a slowing in the steep upward trend of contracts and
orders for plant and equipment, and this is generally consistent with
surveys of capital spending plans, which point to smaller gains in outlays this year than last. On the other hand, the climate for investment
can be expected to improve as business managers begin to perceive
some progress in retarding inflation and become more confident about
the sustainability of expansion.
Government spending probably will post only a small increase in real
terms this year. Indeed, real federal purchases could decline during the
first half due partly to expected repayments of Commodity Credit Corporation loans (which are, in effect, sales of agricultural stocks). At the
state and local level, slower growth of federal financial aid and the
pressure for tax relief will tend to hold spending increases to small
proportions.
Foreign demand for U.S. exports should tend to strengthen during
1979. Economic expansion abroad is generally expected to continue at
its recent more rapid pace, and the effects of the substantial depreciation
of the dollar on the U.S. trade position should become more evident as
the year progresses.
On balance, the aforementioned sectors are likely to provide a reduced impetus to income growth during the year ahead. As a consequence, consumer spending is likely to grow less vigorously. Moreover,
the substantial debt repayment burdens faced by many households and
generally reduced liquidity of the household sector could prompt households to increase their recent relatively low saving rate. The demand for
imports also should moderate this year, not only because of the slower
expansion of domestic income and production but also because of the
lagged effects of the 1977-78 decline in the international exchange
value of the dollar. Inventory investment is likely to be relatively flat in
the projected economic environment.
With a slower growth of activity, pressures on productive capacity
should ease a bit. Industrial capacity utilization rates, which in the
manufacturing sector are not now far below past cyclical peaks, should
decline slightly. In labor markets, the growth of employment should
moderate from its recent rapid pace. Labor force increases also are




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Monetary Policy Reports

likely to diminish, as the growth of the working age population slows
slightly and as labor force participation rates—especially for growth—
respond to the slackening in economic expansion. Together, the prospective changes in employment and the labor force point to a small
increase in the overall unemployment rate during 1979.
The moderation of demand pressures in labor and product markets
will tend to slow the advance of wages and prices and thus to reduce
the present, unacceptable rate of inflation. However, uncertainties will
remain as a result of highly volatile and largely exogenous influences
such as farm prices and oil prices. It now appears that food prices will
increase somewhat less this year than last. Unfortunately, the price of
imported oil will be boosted substantially this year as a result of the
decisions taken by the Organization of Petroleum Exporting Countries in
December, and the unsettled situation in Iran raises the possibility of
even larger price increases.
Setting aside these special factors, a key determinant of the rate of
inflation this year will be the performance of unit labor costs. Although
there may well be some improvement in productivity in the next few
years as the work force tends to become, on average, somewhat older
and more experienced, there is little reason to expect any marked acceleration of productivity growth during 1979. Consequently, if there is to
be a noticeable slowing in the rise of unit labor costs, compensation
gains will have to moderate significantly.
Toward this end, the administration's wage-price program can play an
important role. By providing a standard for constructive behavior on the
part of both business and labor, the program can be a vehicle for helping to brake the wage-price spiral. Broad compliance with the
administration's standards would make a significant contribution to the
slowing of inflation. Of course, the wage-price program can be successful only if there is complementary restraint in monetary and fiscal policy—to contain aggregate demand pressures and to assure the public of
the government's commitment to the restoration of price stability.
The Short-Term Goals in the Economic Report of the President
As specified by the Full Employment and Balanced Growth Act, the
President's Economic Report, transmitted to the Congress last month,
lays out a detailed set of economic goals for 1979 and 1980. The discussion of the act's requirements points out that the administration's
"short-term goals for [1979] and 1980 represent a forecast of how the




Monetary Policy Reports

57

economy will respond over the next 2 years not only to the budgetary
policies proposed by the President for fiscal 1979 and 1980 but to the
anti-inflation program announced on October 24. " 2
The administration's goals, along with the comparable figures for
1978, are summarized in the following table:
Level

Item
1978 Q4
Employment (millions)
Unemployment rate (percent)

95.6
5.8

1979 Q4

1980 Q4

97.5
6.2

99.5
6.2

Percentage change, Q4 to Q4
Consumer prices
RealGNP
Real disposable income
Productivity

8.9
4.3
3.3
.2

7.5
2.2
2.8
.4

6.4
3.2
2.3
1.1

The Relationship of the Federal Reserve's Plans to the
Administration's Goals
The Relationship of the Federal Reserve s Monetary Growth Ranges to
the Short-Term Goals in the Economic Report
The Full Employment and Balanced Growth Act directs the Federal Reserve to assess the relationship of its plans for monetary growth to the
short-term goals in the Economic Report. This task is complicated by
the fact that goals are specified for a variety of economic variables, and
monetary policy does not affect each of them separately. Monetary policy has its most direct short-term impact on aggregate nominal GNP.
Within the context of a particular nominal GNP outcome, the mix of
real output gains and inflation, the growth of employment, and the
movements in other variables are influenced importantly by conditions
at the beginning of the period, by other governmental policies, by the
structural and behavioral relationships in the economy, and by developments outside the domestic economy.
As required by the Full Employment and Balanced Growth Act, the
Federal Reserve at this time has established ranges for monetary growth
through the end of 1979. It will reassess these and report preliminary
2. Economic Report of the President, January 1979 (Government Printing Office 1979)
;
p. 108.
'




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Monetary Policy Reports

ranges for 1980 in July, unless developments in the months ahead necessitate earlier reconsideration. At this juncture, the monetary growth
ranges and the administration's 1979 economic goals appear reasonably
consistent. The administration's forecast implies an expansion in nominal GNP of around 93A percent from the fourth quarter of 1978 to the
fourth quarter of 1979. The midpoint of the FOMC's growth range for
M-l is about 6 percent after adjustment for the expected impact of shifts
of funds to ATS and NOW accounts. This suggests an increase of M-l
velocity on the order of 3!/2 percent, a figure somewhat above the
longer-term trend, but reasonable in light of the lagged effects of the
recent substantial increases in interest rates and the downward shift in
money demand that has been occurring. The upper and lower boundaries of the M-l range, of course, allow for the possibility of smaller or
faster increases in velocity over the year.
The output-price mix in the administration's 1979 forecast appears
attainable if there is reasonable compliance with the wage-price standards and as long as there are no untoward shocks such as an unanticipated surge in food or energy prices. The employment and productivity
forecasts appear consistent with the output goal, and the unemployment
rate forecast seems consistent with reasonable assumptions about labor
force growth in the projected economic environment.
Considerably greater uncertainties naturally are encountered with respect to the administration's goals for 1980, a period that is still rather
distant. Nothing in the monetary or economic projections for 1979 suggests to us that conditions prevailing at year-end will bar the achievement of the administration's forecasted 9l/z percent growth in nominal
GNP during 1980. At this time, however, the achievement of the output-price mix projected for 1980 appears to be more difficult.
The administration has forecast a marked acceleration of growth in
real GNP in 1980 and a marked deceleration of inflation. Such an outcome is certainly attainable, but given the projected levels of resource
utilization—with the unemployment rate remaining around 6]A percent—this result will require considerable progress in the lowering of
inflation expectations. There will have to be broad conformance to the
administration's wage-price standards, and the government will have to
give careful attention to the potential cost-raising impacts of its regulatory and legislative actions. Continued budgetary restraint also will be
necessary, both to build confidence in the government's commitment to
avoid fiscal excesses and to minimize pressures on the capital markets.




Monetary Policy Reports

59

Recognizing the risks and uncertainties that currently exist, the
administration's 1980 forecast can serve as an appropriate goal for the
Congress as it considers its budgetary plan for fiscal 1980. If inflationary pressures subsequently should prove stronger than the administration
has projected, then the prudent course for government policy would be
to exercise a substantial degree of restraint even if it risks less real
growth in 1980 than the 3.2 percent goal. Such a policy would lay the
foundation for balanced economic growth over the years to come and
would help to maintain the integrity of the dollar.
RHP* »K! ' ^

:!"i \

*:"

The performance of the economy this year has been distinctly unsatisfactory. Starting from a base of rapid inflation and the lagged effects of
the 1977-78 dollar depreciation, a series of unexpected events this year
has disrupted economic activity and intensified inflationary pressures.
These events have included labor disputes, severe weather, and adverse
agricultural supply conditions, but the most disturbing development, in
terms of its implications for future economic performance, has been an
enormous increase in the price of imported oil. The adjustment to this
oil price shock poses major problems for governmental policy and represents a serious setback to progress toward the longer-range goals enunciated by the Full Employment and Balanced Growth Act.
Increased energy costs have greatly aggravated our inflation problem.
In February, when the Board submitted its first report to the Congress
under the Humphrey-Hawkins Act, it was anticipated that oil prices
would rise moderately this year, entailing some small upward pressure
on the general level of prices. However, the developments since then—
including the effects of the Iranian revolution and the latest decisions by
the Organization of Petroleum Exporting Countries—are generating major increases in the prices of imported oil and, consequently, in the
prices of other energy sources as well.
The inflationary effects of the increases in energy prices could, in
principle, be offset if other prices on average declined or at least rose
less then they otherwise would have. There will be some tendency in
this direction as the diversion of a larger share of spendable income to
energy results in a reduction in demand for other goods and services. In
recent years, however, nominal wages and prices have not generally
exhibited much flexibility in a downward direction; rather, relative price
adjustments typically have occurred in the context of an overall rise in




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Monetary Policy Reports

the average level of prices as economic units attempted to avoid losses
of real income.
It also must be recognized that the rise in the relative price of imported oil involves a transfer of real income and wealth from the U.S.
public to foreign oil producers. This loss will, in turn, have at least
temporarily depressing effects on domestic economic activity as the demand by foreign countries for U.S. exports expands only with a lag.
Thus, over the next year or two it appears that exogenous forces will
be causing both intensified inflationary pressures and downward adjustments in the demand for goods and services. Clearly, the problems confronting monetary policy, and macroeconomic policy generally, have
been made much more difficult. If monetary policy encourages a more
rapid expansion of money and credit in an attempt to strengthen aggregate demand, it risks building even greater inflation into the economic
system through the aggravation of the price-wage-price spiral. On the
other hand, if no account is taken of added upward price pressures in
the formulation of policy, the risks are increased of deepening or
lengthening the transitional downward adjustments in real economic activity that now appear in train.
The Federal Reserve remains firmly resolved to direct its policies toward a reduction in the rate of inflation. But in the current circumstances, a combination of added inflationary pressures, a slowing of
economic activity, and a probable increase in unemployment may delay
progress toward price stability. This problem highlights the need to
solve some of the major structural defects in our economy. It is important that we begin to break down the barriers, both private and governmental, that inhibit innovation and competition and thereby contribute to
the inflationary bias of the economy. We must ensure that our system of
taxation does not discourage the saving and capital investment necessary
to reverse the deterioration of productivity performance observed in recent years.
And it is absolutely essential that this nation develop an energy program that reduces its reliance on foreign sources of energy.

Recent Economic and Financial Developments
Economic Activity During the First Half of 1979
Official Commerce Department data for the second quarter of this year
have yet to become available, but it appears likely that they will indi-




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61

cate that real gross national product declined somewhat after advancing
only marginally in the first quarter. The sluggishness of overall economic activity thus far in 1979 stands in marked contrast to the gain of
AXA percent in real GNP in 1978. Although the events of the first half
do not in themselves compel a conclusion that the economy has entered
a recession, the pause in growth does represent a signficant interruption
of the relatively long cyclical upswing that began early in 1975.
The sluggishness of economic activity since the beginning of the year
is partly a consequence of the rising inflationary pressures of 1978, but
it is also traceable in considerable measure to special exogenous factors—as distinguished from such problems as widespread inventory
overhangs or other fundamental imbalances or distortions that have
characterized the terminal stages of previous cyclical expansions. During
January and February, production in many parts of the country was
disrupted by unusually inclement weather; the construction industries
were especially hard hit, but other sectors also were affected. In the
early spring, labor contract disputes in the trucking, airline, and rubber
industries interfered with activity in many areas of the economy. However, a more pervasive—and less transitory—influence on the course of
the economy this year has been the sharp rise in energy and food prices.
The resultant acceleration of inflation has had a serious impact on real
disposable personal income and has had a broadly adverse effect on
consumer spending attitudes.
Personal Consumption Expenditures. Personal consumption expenditures account for almost two-thirds of GNP, and their weakness during
the past two quarters has been an important element in the flatness of
overall economic activity. Some softness in consumer demand was not
unexpected following the surge in spending during the final months of
1978. However, retail sales in real terms exhibited a clear downward
trend through the first six months of this year, with the June level
sharply depressed by a drop in auto sales. Rising gasoline prices and
uncertainty about gas supplies initially had a mixed impact on auto
sales: sales of large, fuel-inefficient cars plunged, while sales of smaller
domestic and foreign cars recorded an offsetting increase. Most recently, however, the weakness in auto sales has broadened; this may in
part reflect supply constraints as domestic makers shift facilities to the
manufacture of small cars, but there appears to have been a general
falloff in demand during June.
The weakness in consumer spending has extended beyond the market




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Monetary Policy Reports

for motor vehicles, and it appears symptomatic of broader pressures on
household finances. The personal saving rate reached historically low
levels last year, so that a further rise in the spending propensities of
households seemed unlikely. Moreover, the record indebtedness and
debt repayment burdens of the household sector suggested that consumers might manifest, on the whole, a more cautious spending behavior. These influences have been substantially reinforced this year by the
effects of accelerated inflation on the real disposable income of households. The budgets of many families have been squeezed by the upsurge
in the prices of food, fuel, and other basic necessities. This has increased their uneasiness about their personal financial positions and contributed to a noticeable deterioration in consumer sentiment, as
measured by most surveys.
Residential Construction. As noted above, adverse weather depressed
building activity during the opening months of 1979. Private housing
starts, which had consistently run at an annual rate of just over 2 million units since a similar weather-related disruption the previous winter,
fell to a \Vi million rate in January and February. However, as construction picked up again in subsequent months, the rate of housing
starts remained below the 1978 pace, averaging about PA million units
in the March-May period. Thus, there has been a moderate, but significant, downturn in residential building since the end of 1978.
Several fundamental economic and demographic factors have continued to bolster the demand for housing—especially single-family dwellings and condominium apartments. One of these is the widespread view,
based in large part on the actual experience of the past several years,
that houses are a good hedge against inflation and therefore an attractive
investment apart from the shelter services they provide. Another is the
movement of a large portion of our population into the age group in
which the rate of initial home purchases historically has been relatively
high.
Nonetheless, other underlying supply and demand influences have
acted to constrain the construction of new housing units. The rise in
interest rates and the general tightening of credit markets over the past
year have been particularly important factors. Homebuilders have found
that lenders are charging substantially higher rates for land development
and construction credit and are showing greater selectivity in the projects they will finance. At the same time, potential builders and homebuyers have been affected by increasingly stringent terms on mortgage




Monetary Policy Reports

63

loans and, in some localities, by shortages of mortgage credit caused by
usury ceilings. The combination of inflated house prices and record
mortgage rates implies costs of homeownership that bulk large relative
to the current incomes of many families. This fact has deterred some
potential homebuyers and caused lending institutions to reject some
credit applications. It also has given impetus to the development and use
of graduated-payment mortgages, which are designed to alleviate the
cash-flow problems encountered in the early years of the traditional
level-payment loan in an inflationary environment; however, these instruments have not thus far attained an important role in the mortgage
market.
In recent months, localized shortages of gasoline and generally uncertain prospects about future fuel prices and supplies likely have been
another factor deterring home purchase and prompting a reassessment of
building plans. Still, unit sales of new and existing single-family houses
have declined only moderately this year from the record pace of 1978.
Stocks of unsold single-family units, while perhaps less comfortable
than a few months ago when demand was stronger, do not appear to be
a significant depressant on new building activity. Nor, in major contrast
to the last—and severe—housing cycle, is there a substantial overhang
of multifamily rental and condominium units for rent or sale.
Business Investment. Business firms have continued to pursue generally cautious spending policies, but their investment in inventories and
fixed capital nevertheless appears to have expanded significantly in real
terms during the first half. Despite this further advance in business
spending, there is little evidence to date of the development of broad
imbalances between stocks or productive capacity and final sales that
might seriously impede the resumption of economic expansion.
The surge in final sales in the last quarter of 1978 drew down stocks
in many lines to the point where it seemed quite likely that some rebound in inventory investment would occur in ensuing months. However, the book value of business inventories increased very rapidly in
the early part of 1979, causing some concern that the unexpected
strength of demand at year-end and the acceleration of inflation might
have prompted a speculative hoarding of commodities—perhaps reminiscent of 1973-74. These concerns abated as it became clear that the
accumulation of inventories was relatively well balanced across sectors
and across levels of processing and that much of the acceleration in the
rise of book values reflected nothing more than the replacement of mer-




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Monetary Policy Reports

chandise bought earlier at lower prices with stocks acquired at current,
inflated prices. GNP accounts data for the first quarter in fact indicate
that, while there was an appreciable .pickup in real inventory investment, the rate of accumulation remained moderate.
Inventory data for the second quarter are fragmentary. Book-value
figures showed exceptionally high rates of accumulation in April—
especially at manufacturing concerns—but this evidently was attributable in part to delays in shipments caused by the labor dispute in the
trucking industry. Inventory growth, again on a book-value basis,
slowed in May; however, it appears likely that real inventory investment
for the second quarter as a whole was considerably above the pace of
the first quarter.
Nevertheless, inventories appear generally to have remained in reasonably comfortable alignment with sales. There are, of course, exceptions, the most notable being in the motor vehicle sector. With the drop
in demand for large cars this spring, dealers' stocks became very sizable
in relation to the current pace of sales. Stocks of smaller cars, in contrast, have been very lean in recent months, and customers desiring
particular models and features sometimes have encountered long delivery lags. On balance, the aggregate ratio of real business inventories to
real sales in the first quarter was well in line with recent norms, but
there probably was some deterioration in the picture during the second
quarter.
Business spending for new plant and equipment rose strongly during
the first quarter, providing substantial impetus to overall economic activity; however, available evidence suggests that some decline occurred
during the second quarter. The first-quarter surge reflected a sharp rise
in equipment purchases. Outlays for transportation equipment—
especially airplanes and automobiles—accounted for a good deal of the
strength. During the spring, outlays for equipment apparently retraced
their earlier advance, owing in part to delays in shipments caused by the
labor disputes in trucking. In contrast, spending on nonresidential structures lagged in the first quarter, as the adverse weather conditions interfered with building activity, but then snapped back smartly in the

spring.
An important factor bolstering demands for fixed capital has been the
higher rates of industrial capacity utilization that have prevailed since
the latter part of 1978. Slower growth of industrial production has resulted in a slight decline in utilization rates, but the rates have remained at




Monetary Policy Reports

65

levels that have been associated in the past with periods of strong investment demand. Despite deep cutbacks in auto production, capacity
utilization in manufacturing last month averaged about 85 percent—only
3 percentage points below the peak of 1973 and a fairly high level
historically. Capacity utilization rates in the materials-producing industries are not, on average, so close to the 1973 peaks. However, that
period was marked by extraordinary pressures on production facilities
caused by a worldwide boom in demand for basic commodities, and by
normal standards, operating rates currently are quite high in some materials sectors.
Government Spending. Budgetary policy at both the federal and state
and local levels of government has continued to be characterized by
restraint in spending. Indeed, government outlays for goods and services
declined in real terms during the first half of 1979.
Federal purchases had fallen slightly, after adjustment for inflation,
during 1978, and declines were recorded in each of the first two quarters of this year. Total federal expenditures—including transfer payments as well as outlays for goods and services—have been running just
a bit higher in nominal terms than had been anticipated in the
administration's budget plans. However, the impact of inflation on incomes has resulted in considerably stronger tax receipts than projected, so
the budget deficit has been substantially smaller than expected.
At the state and local level, weather-related curtailments of construction reduced spending in the first quarter. However, the subsequent rebound in building activity was sluggish and may be indicative of a tendency to defer further capital expenditures following a surge last year.
Moreover, states and localities also have been limiting spending by
holding down employment: the number of workers on their payrolls in
June was about the same as one year earlier.
The growth of the economy after 1975, combined with tax-rate increases enacted earlier, had led to the development of sizable surpluses
in the budgets of many states. This pattern was reversed in the past
year. Numerous tax cuts were passed in 1978, and as a result personal
tax receipts were 5 percent lower in the first quarter of this year than in
the same period last year—even though the tax base had increased 16
percent. With nominal expenditures therefore rising relative to receipts,
the operating surplus of state and local governments fell to $3.8 billion,
at an annual rate, in the first quarter; it appears that the operating budgets may have moved into slight deficit in the second quarter.




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Monetary Policy Reports

International Trade. The large decline in the exchange value of the
dollar in 1977 and 1978 has enhanced foreign demands for U.S. exports. This, along with a relative strengthening of economic expansion
abroad, has brought about a distinct trend of improvement in the U.S.
trade position. The nation's merchandise trade deficit—although quite
variable from month to month—has been considerably smaller this year
than on average during 1978. Moreover, the current-account balance
edged into modest surplus in the first quarter for the first time since
1976 as receipts from overseas investments remained strong.
Total exports advanced further in real terms during the first quarter
despite a falloff in shipments of agricultural products. The impact of the
1977-78 dollar depreciation was also evident in continued relatively
slow growth of non-oil imports. On the other hand, the volume of oil
imports averaged about 9.3 million barrels per day (MMB/d) during the
first three months of the year as compared with an average of 8.7
MMB/d during 1978. In April and May the trade deficit widened as
exports remained at about their first-quarter level while the value of
both oil and non-oil imports advanced. A fall in the quantity of oil
imported to 8.7 MMB/d in April and May was more than offset by
price changes that began to reflect the OPEC price increases and surcharges. The unit value of imported oil in May was 22 percent above its
level in the fourth quarter of 1978.
The improvement in the U.S. trade and current accounts this year has
helped to bolster the private demand for dollars in foreign exchange
markets. The dollar rose almost 5 percent, on a trade-weighted average
against other major currencies, during the first five months of 1979—
even while the United States and other governments unwound the heavy
official intervention of late last year. Over the past month, however, the
dollar has come under downward pressure; despite official support, it
has lost much of the earlier gain. A relative firming of money market
conditions abroad has been a factor in this recent weakness but is not
likely in itself to be a full explanation. Foreign exchange market participants seem to have been questioning whether the United States will be
able to deal successfully with its inflation problem, particularly in light
of the recent oil price jolt.
Employment and Unemployment
Almost four years of exceptionally rapid growth in employment had, by
the end of 1978, given rise to considerable tautness in labor markets.




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67

Although businesses reportedly were encountering increasing difficulty
in finding workers with the desired experience and skills at prevailing
wage rates, the overall unemployment rate, at just under 6 percent, was
well above past cyclical lows. This seeming paradox reflects in part
longer-run changes in the composition of the labor force and in the
output mix of the economy; in addition, the increased availability of
unemployment compensation and other income maintenance programs
may have altered the incentives to seek or accept employment.
Despite a leveling off in production during the first quarter of the
year, monthly increases in payroll employment averaged 330,000—well
above the average gain of 280,000 per month during 1978. Gains in the
manufacturing industry were quite large, and the average factory
workweek remained at a high 403A hours. Some easing in labor demands has become perceptible since March, however, with employment
gains averaging only one-third of their first-quarter pace. Manufacturers
have been reducing employment levels by about 35,000 each month—
with the auto industry accounting for the bulk of the decline—and the
average workweek has dropped to about 40 hours due to a cutback in
overtime. Outside of manufacturing, hiring has continued in recent
months, albeit at a reduced pace. Still, the unemployment rate has
changed little since year-end, and such indicators as the average duration of unemployment and labor turnover rates have remained at levels
typical of fairly tight labor markets.
Wages, Productivity, and Prices
The pace of inflation has accelerated markedly this year. The consumer
price index rose at an annual rate of 13!/2 percent through May compared with the increase of 9 percent over the course of 1978. There has
been a comparable stepup in the advance of prices at the producer level.
Although the relatively high level of resource utilization has been a
factor sustaining the momentum of inflation, supply developments specific to the food and energy sectors have accounted for much of the
acceleration this year in inflation.
Food prices played a substantial role in the increase in inflation that
occurred last year, and agricultural supply developments have continued
to be unfavorable. In particular, beef production has remained on a
downtrend, leading to sharp increases in meat prices. In addition to
raising farm prices, the rapid increase in costs of nonfarm inputs involved in processing and marketing has contributed to the acceleration




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Monetary Policy Reports

of food price inflation. The further rise of the federal minimum wage,
for example, was an important ingredient in the faster increase of prices
for restaurant meals in the first half.
Energy prices have risen dramatically this year. Enormous increases
in the prices charged by the OPEC cartel, occurring against a backdrop
of significant worldwide pressures of demand on available supply, contributed to a 37 percent annual rate of increase in the energy component
of the consumer price index during the first five months of 1979. The
rise in petroleum fuel and feedstock prices has in addition intensified
cost pressures across a broad range of U.S.industries.
The acceleration in the rise of other prices has been less striking than
that for food and energy, but it has been appreciable. Exclusive of food
and energy items, the consumer price index rose at an annual rate of 10
percent through May, Wi percentage points faster than the average pace
throughout 1978.
Pressures placed on prices of final products by rising materials costs
have played some role in the broad pickup in inflation. Prices of nonferrous metals and of other actively traded nonfood commodities rose
sharply early in the year when the year-end strength of the economy
apparently led to some upward revision in expectations of future production levels and fears of consequent commodity shortages. In subsequent
months, however, prices of many basic nonenergy commodities
weakened as the slackening of economic activity became evident.
In addition to materials prices, labor costs have been a source of
pressure on prices this year. The rise in wage rates generally does not
appear to have accelerated, and surveys conducted by the Council on
Wage and Price Stability indicate broad compliance with its wage standard, especially among large firms. However, total labor costs were
boosted by enlarged employer contributions for social security and unemployment insurance, and compensation per hour (including private
fringe benefits) in the nonfarm sector rose at a 10!/4 percent annual rate
in the first quarter of the year.
Meanwhile, output per hour dropped markedly in the first quarter, so
that the unit labor costs of nonfarm businesses increased at an annual
rate of more than 15 percent. Labor productivity apparently declined
again in the second quarter, and while the rise in unit labor costs likely
was not quite so rapid as in the first three months of the year, it probably was fast enough to raise the advance in the first half of 1979 to a
rate exceeded only in 1974.




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69

Financial Developments
Growth of the monetary aggregates was considerably slower during the
first half of 1979 than in 1978. At midyear, all of the major monetary
measures—M-l, M-2, and M-3—were within the expected ranges of
expansion reported by the Federal Reserve to the Congress in February.
Commercial bank credit at midyear stood slightly above the path implied by its projected growth range, but the pace of overall credit expansion in the economy had moderated appreciably. Although businesses
stepped up their borrowing somewhat during the first half of the year,
there were more than offsetting declines in borrowing by other nonfinancial sectors.
Interest Rates. The general level of interest rates on market securities
has changed relatively little since the beginning of the year after a
marked rise during 1978. The federal funds rate—established in trading
of immediately available funds on an overnight basis—remained around
10 percent until late April, when it edged upward about one-quarter
percentage point as the Federal Reserve moved to restrict bank reserve
availability somewhat further in light of a surge in the monetary aggregates. Despite the small increase in the federal funds rate, other shortterm market rates generally have declined somewhat on balance since
December. This appears to be primarily a reflection of changing expectations about future interest rate movements as economic activity gave
evidence of weakening.
In long-term securities markets, bond yields reached new cyclical
highs during the first half, but retraced much of their advance in the
latter part of the spring as many investors became convinced that the
peak in money market rates had been reached. Mortgage interest rates
have continued to rise, however, reaching record levels and prompting
liberalization of usury ceilings in many states in order to sustain lending
activity.
Monetary Aggregates. After expanding rapidly earlier in 1978, M-l—
demand deposits and currency—leveled off in the fourth quarter and
continued virtually flat through the first quarter of this year. Growth in
this monetary aggregate resumed in the spring, but the rise over the first
half of 1979 was at only a 2.7 percent annual rate—considerably slower
than the increases of 7.9 percent and 7.2 percent registered in 1977 and
1978 respectively. With nominal gross national product increasing at
about a 9 percent rate thus far this year, the very moderate expansion of
M-l represents a substantial shortfall from what might have been ex-




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Monetary Policy Reports

pected on the basis of historical relations among money, GNP, and interest rates.
As was noted in the Board's February report to the Congress, some
weakness in the public's demand for M-l was anticipated because of the
introduction last November of automatic transfer services (ATS) nationwide and of negotiable order of wthdrawal accounts in New York State.
The Board staff had projected that transfers from demand deposits to
savings accounts associated with these innovations might reduce M-i
growth by roughly 3 percentage points over the year ending in the
fourth quarter of 1979. The impact of such transfers on M-l growth was
about that much early in the year, but it apparently has dropped off in
recent months. Over the past two quarters it appears that the impact of
ATS and NOWs on M-l growth has been about 2lA percent, at an
annual rate.
Even after taking account of ATS-NOW effects, the demand for M-l
was unusually weak in the past half year, especially in the first quarter.
It appears that, again as suggested in the February report, the high level
of interest rates reached in late 1978 prompted greater-than-normal efforts to economize on non-interest-earning cash balances. Individuals
evidently have shifted demand balances into a variety of interest-bearing
assets, including small-denomination time deposits, Treasury securities,
and shares in money market mutual funds. The growth of the money
market funds this year has been quite striking: over the past six months,
the total assets of these funds rose from less than $11 billion to almost
$26 billion. While these funds are an imperfect substitute for checking
accounts for transactional purposes, they have provided many individuals with a high-yielding liquid asset that may be purchased in small
denominations.
The relatively high level of interest rates this year has also had an
appreciable impact on the interest-bearing component of M-2—that is,
commercial bank time and savings deposits other than large certificates
of deposit. Deposits subject to fixed interest rate ceilings have been
weak since last fall. Inflows to six-month money market certificates
(MMCs) provided an offset to this weakness in the fall and winter. With
a change in regulations in mid-March that eliminated the differential of
one-quarter of a percentage point between MMC ceilings at thrift institutions and commercial banks when the six-month Treasury bill rate
exceeds 9 percent, MMC growth at banks accelerated and provided the
impetus for a pickup in the expansion of the time and savings deposit




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71

component of M-2. Over the first half as a whole, this component expanded at a 7 percent annual rate and brought M-2 growth to a 5.2
percent rate, substantially below the 8.4 percent average rate of 1978.
Growth of M-3 also has moderated in recent quarters, averaging 6lA
percent, at an annual rate, during the first half. This deceleration was
partly a reflection of the slower growth of the narrower monetary aggregates, but reduced deposit inflows at nonbank thrift institutions also
played a role. The slowing in deposit growth at thrift institutions was
especially noticeable after mid-March when a share of the MMC market
was lost to commercial banks, but inflows in the second quarter still
exceeded the very low rates of past periods when high market interest
rates caused serious disintermediation. Savings and loan associations
made increased use of large-denomination time deposits, which are not
subject to regulatory rate ceilings, to offset some of the weakness in
other accounts.
Credit Flows. Net funds raised in credit markets by nonfinancial sectors of the economy during the first half totaled about $355 billion, at
an annual rate, according to preliminary estimates. This is well below
the $393 billion figure for 1978 and reflects the combined impacts of
monetary restraint and a number of other factors.
One of these other factors was the diminished size of the federal
budget deficit. With a very large year-end 1978 cash balance further
reducing the Treasury's needs for new money during the first half, federal government borrowing fell off sharply from the 1978 pace. In contrast with the pattern in late 1978, when they effectively financed the
Treasury's deficit with the proceeds of dollar-support operations, foreign
central banks sold a large volume of Treasury securities in the first half.
A part of the sizable private capital inflow to the United States during
the first half was channeled through the Eurodollar market to the U.S.
banking system, which acquired a substantial volume of Treasury securities. Households were important buyers of Treasury securities, as
they responded to the enlarged gap between rates on such instruments
and those available on deposits subject to regulatory ceilings.
State and local governments have borrowed at a reduced pace in
1979. This decline reflects the absence of advance refundings since last
August, when more restrictive regulations were promulgated by the Internal Revenue Service. Tax-exempt bond issuance for new capital in
the first half was maintained at about the 1978 level, owing largely to a
sharp increase in sales of revenue bonds for mortgage financing pur-




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Monetary Policy Reports

poses; the pace of such housing-related financing slowed markedly in
the second quarter, however, as a consequence of congressional proposals to curtail the use of tax-exempt bonds to fund low-rate, singlefamily mortgages. Casualty insurance companies and commercial banks
have absorbed the bulk of tax-exempted bonds sold this year.
Household borrowing in the consumer installment and mortgage credit
markets has leveled off this year. Although interest rates on consumer
loans have risen during the past year, the moderation in growth of installment debt appears to be primarily a consequence of other factors
tending to reduce consumer spending. The flattening in mortgage flows,
on the other hand, does appear more directly a consequence of rising
interest rates and the tightening of mortgage credit supplies.
On the demand side, households have deferred home purchases or
scaled down expenditure or borrowing plans in light of the higher cost
of mortgage credit. On the supply side, even when usury ceilings have
not been a constraint, depositary institutions have pursued more cautious
loan commitment policies because of concerns about current or prospective liquidity pressures. Thrift institutions have reduced their mortgage
lending considerably this year as their deposit flows have diminished;
although the aggregate liquidity ratio of savings and loan associations
has remained well above the regulatory requirement, that liquidity cushion has shrunk somewhat and the associations have borrowed heavily
from Federal Home Loan Banks and other sources. Commercial banks,
too, have expanded their residential mortgage portfolios at a slower pace
this year, but there have been partial offsets to reduced lending by depositary institutions in the form of credit flows from state and local governments, life insurance companies, and federally sponsored agencies.
In the nonfinancial business sector, the growth of outlays for inventories and fixed capital has outstripped that of internally generated funds,
and firms have increased their borrowing substantially. An increased
share of the credit flow to business has been accounted for by commercial banks, as many bigger firms have preferred—at current interest
rates—short- or intermediate-term bank loans to long-term bond issues
with lengthy call protection. Commercial mortgage flows have remained
large, however, in reflection of the strength in nonresidential construction activity. Life insurance companies have provided a large portion of
these mortgage loans and, with pension funds, have absorbed the bulk
of a reduced volume of bond issues. Issuance of commercial paper was
an increased source of short-term credit for businesses in the first half,




Monetary Policy Reports

73

and finance company business loans continued to grow rapidly with
much of the credit being extended to automobile dealers to finance inventories.
Foreigners, who had borrowed in U.S. credit markets when the dollar
was weak in 1978, apparently did not expand their debt during the first
half of 1979. This change was a significant element in the overall decline in funds raised by nonfinancial sectors.
Financial sectors increased their borrowing in credit markets during
the first half. Government-sponsored credit agencies stepped up security
issuance to finance assistance to the residential mortgage market. Commercial banking firms and finance companies sold substantial volumes
of commercial paper and of bonds, including a number of floating-rate
issues that offered investors a hedge against future interest rate fluctuations. Savings and loan associations, after receiving approval from the
Federal Home Loan Bank Board, issued commercial paper for the first
time; toward midyear there were also a number of mortgage-backed
bond issues by savings and loan associations.
Objectives and Plans of the Federal Reserve
Outlook for Monetary Growth
In February the Federal Reserve reported to the Congress on the growth
in the monetary aggregates that it expected would occur during the current calendar year. Expressed as ranges, and measured from the fourth
quarter of 1978 to the fourth quarter of 1979, the increases indicated
were: for M-l, lJ/2 to 4Vi percent; for M-2, 5 to 8 percent; for M-3, 6
to 9 percent. The range for M-l reflected an expectation that shifts of
funds from demand deposits to newly authorized ATS and NOW accounts would reduce M-l growth by about 3 percentage points. In addition, bank credit was projected to expand between IV2 and lO1/^ percent.
At its most recent meeting, the Federal Open Market Committee reassessed the ranges for monetary expansion in 1979 and formulated preliminary monetary ranges for 1980. With respect to 1979, the Committee decided that it was appropriate to retain the previous established
ranges for the aggregates. In reaching this decision, particular attention
was focused on the uncertainties surrounding the behavior of M-l. As
was noted earlier, the estimated impact of ATS and NOW accounts on
M-l expansion has been somewhat smaller to date than had been ex-




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Monetary Policy Reports

pected when the range was initially adopted. However, the future extent
of shifts to these accounts cannot be predicted with precision, especially
in light of the April court decision barring ATS and certain other payments services as of January 1, 1980. Thus, while the Committee retained its original range for M-l, it expected growth to vary in relation
to the range to the extent that the actual ATS-NOW impact deviates
from the figure of 3 percentage points projected earlier.
Even greater uncertainties faced the Committee in its consideration of
monetary growth ranges for 1980. Apart from the question of possible
judicial or legislative action that might affect the menu of transactions
accounts available to the public, the economic circumstances and financial requirements of a period extending 18 months into the future obviously cannot be foreseen with much confidence. The Committee tentatively decided that the ranges for 1980 should be the same as those for
1979, with the understanding that adjustments might be necessary in
response to legal or legislative developments affecting M-l and, more
generally, in light of emerging economic conditions. In any event, it
was recognized that the current reexamination of the definitions of the
monetary aggregates, being undertaken in light of the major institutional
changes that have occurred in the payments system, might lead in the
near future to a new and improved set of money stock measures.
The ranges for the broader monetary aggregates, M-2 and M-3, allow
for continued moderate growth of the interest-bearing components of
those aggregates. In past periods of high market interest rates, inflows
of deposits subject to regulatory interest rate ceilings weakened markedly; investors "disintermediated," shifting their funds from banks and
thrift institutions into higher-yielding market securities. In the past year,
however, inflows to such accounts—though smaller than in 1975-77—
have been fairly well maintained. The six-month money market certificate, with a rate linked to Treasury bill yields, has permitted the depositary institutions to compete successfully for savings against money market mutual funds and other instruments.
The growth ranges for the broader monetary aggregates imply that the
depositary institutions will experience adequate inflows of lendable
funds over the remainder of 1979 and in 1980. The projections for bank
credit reflect an expectation that loan demands at commercial banks will
begin to moderate in the months ahead. Business loan demands, in particular, should diminish, with the corporate financing gap likely narrow-




Monetary Policy Reports

75

ing and firms probably funding short-term debts in longer-term credit
markets.
The monetary ranges established by the FOMC are consistent with a
policy of gradual reduction in rates of increase of the monetary aggregates in order to curb inflation. Growth in the aggregates slowed in
1978, and a further deceleration should occur this year. A further deceleration in M-l is likely to develop even in the absence of any shifting
of funds from demand deposits to ATS savings and NOW accounts. The
ranges tentatively adopted for 1980 would permit continued slowing in
monetary expansion. However, there is considerable variability over
time in the behavior of the monetary aggregates, owing in part to financial innovations and to changes in the asset preferences of the public.
Since satisfactory economic performance remains the basic objective of
the Federal Reserve, monetary policy, from time to time, may have to
permit growth rates in the aggregates that temporarily interrupt the
downward trend.
Outlook for the Economy
As noted in the introduction, the economy faces a difficult adjustment to
this year's oil price increases, which are aggravating inflationary pressures and intensifying forces likely to depress aggregate demand. It now
appears that economic activity may well decline somewhat over the next
few quarters, before turning upward in 1980.
In the near term, real disposable income is likely to show no more
than modest gains, and consumers probably will spend cautiously. Business spending may decline in real terms, reflecting the correction of
inventory imbalances—particularly in the auto industry—and a mild retrenchment in fixed investment occasioned by the sluggishness of consumer demand. Housing construction activity can be expected to decline
somewhat further this year in response to the recent tightening of credit
conditions and to the weakness in income flows. Export demand should,
however, tend to support activity.
In this period, industrial production and employment are likely to
edge downward. The resulting easing of demands on productive resources should help to contain inflation. Pressures on credit markets may
abate and lay the groundwork for an upturn in homebuilding in 1980.
Moderate growth in real GNP should resume next year as the initial
effects of the oil shock abate and consumers begin to expand their




76

Monetary Policy Reports

spending. The completion of the inventory correction should lead to a
resumption in the growth of orders and production. Employment growth
would pick up in this environment, but it seems probable that the pace
of hiring will not be strong enough to cut into unemployment. Inflation
should edge lower, though progress may be quite gradual owing to the
strong upward momentum of unit labor costs, the continuing relatively
tight supplies of some agricultural commodities, and the further adjustment of the system to higher energy costs.
The economic outlook currently is obscured by exceptional uncertainties, and the range of possible outcomes appears quite wide. However,
in order to improve understanding of the monetary objectives, an economic projection representing the consensus of the Board members at
this time has been summarized in the table below.
Actual

Projections

Item
1978
Percentage change, Q4 to Q4
Nominal GNP
RealGNP
Implicit price deflator
Average level, Q4
Unemployment rate (percent)

1979

1980

13.1
AA
8.3

8 to 10
- 2 to -'/2
9'/2 to 11

8'/2 to 11 Vi
-'/2 to 2
8'/2 to 10'/2

5.8

6'/4 to 7

6->4 to 8'/2

Relationship of the Federal Reserve's Plans to the
Administration's Goals
The Administration's Short-Term Goals
The administration has recently announced its forecast of key economic
variables in association with the midyear budget update.1 This forecast
(shown in the following table) assumes no major new fiscal initiatives
and contains some significant changes from the figures in the January
Economic Report of the President. In particular, real economic growth
through 1980 has been reduced and inflation has been raised.
The Administration's Goals and the Federal Reserve's Plans for
Monetary Growth
The monetary ranges set by the Federal Reserve should be adequate to
finance the amount of spending in current dollars projected by the ad1. The Economic Report of the President, January 1979 (Government Printing Office,
1979), equated the 1979-80 forecast with short-run goals.




Monetary Policy Reports

77

Item
Percentage change, Q4 to Q4
Nominal GNP
Real GNP
Implicit price deflator
Average level, Q4
U n e m p l o y m e n t rate ( p e r c e n t ) . . . .

ministration. However, the administration's forecast does seem to envision a somewhat more favorable combination of real output and inflation than that suggested by the Board's consensus projection. The actual
price-output mix will be determined primarily by supply conditions and
by other structural or behavioral characteristics of the economy. These
relationships are not known with certainty, of course, and thus many
different price-output combinations must be viewed as possible for given
rates of monetary growth.
Monetary growth rates are much more closely related in the short run
to nominal GNP than they are to the division of nominal GNP between
output and prices. The tradeoff between output and prices might be
improved, however, through the use of other policy tools. Governmental
action to eliminate regulatory or market impediments to price competition could be helpful in tempering inflationary pressures. So, too, could
a continuing program of voluntary wage-price guidelines, which may
help in restraining the anticipatory actions that have made the wageprice spiral so intractable. The nation's ability to avoid an escalation of
inflation over the next year or so—without serious recession—will depend in considerable degree on whether a means is found to overcome
the tendency for workers and businesses to seek higher wages and prices
in an effort to offset the effects of the income transfer associated with
the rise in oil prices. Over the longer run, the ability of the nation to
achieve sustained growth of real income will depend importantly on
whether it can solve its energy problem.




Records Operations,
•.^wi Organization




81

Record of Policy Actions
of the Board of Governors
REGULATION B (EQUAL CREDIT OPPORTUNITY)
April 11, 1979—Amendment
The Board amended Regulation B, effective May 21, 1979, to clarify the definition
of creditor.
Votes for this action: Messrs. Miller, Wallich, Coldwell, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Partee.1
The amendment brought within the definition of creditor those persons
who, in the ordinary course of their business, refer potential borrowers to
creditors or who select creditors to whom applications for credit may be
referred but who do not participate in decisions to grant credit. Examples
of persons who regularly make credit referrals include automobile dealers,
home improvement contractors, and real estate brokers. Such persons are
defined as creditors for purposes of the regulation's general prohibitions
against discrimination; however, they are not subject to the mechanical
requirements of the regulation—for example, those dealing with notices
and record retention.
REGULATION D (RESERVES OF MEMBER BANKS)
October 6, 1 9 7 9 — A m e n d m e n t
The Board amended Regulation D to establish a marginal reserve requirement on
certain managed liabilities, effective October 11, 1979.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell,
Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.
The Board took several complementary actions that would provide
greater control over the expansion of money and bank credit and thereby

1. On this and subsequent pages, footnote 1 indicates that there were two vacancies on the
Board at the time the action was taken.




82

Board Policy Actions

help curb speculative excesses in the financial, foreign exchange, and
commodities markets and reduce inflationary pressures. The amendment to
Regulation D, which affects member banks, Edge corporations, and U.S.
agencies and branches of certain large foreign banks, establishes a reserve
requirement of 8 percent on the amount by which an institution's total
managed liabilities exceed the amount outstanding during the base period
(September 13 to 26, 1979) or $100 million, whichever is greater.
Managed liabilities include (1) time deposits in denominations of $100,000
or more with maturities of less than one year; (2) federal funds borrowings
with maturities of less than one year from U.S. offices of depositary
institutions that are not subject to federal reserve requirements; (3) certain
repurchase agreements with maturities of less than one year; and (4) Eurodollar borrowings from foreign banking offices and certain other transactions. The amendment is directed at the sources of funds that banks have
used actively to finance the expansion of bank credit.

REGULATION D (RESERVES OF MEMBER BANKS),
REGULATION K (INTERNATIONAL BANKING OPERATIONS),
REGULATION M (FOREIGN ACTIVITIES OF NATIONAL BANKS),
AND REGULATION Y (BANK HOLDING COMPANIES
AND CHANGE IN BANK CONTROL)

February 14 and June 8, 1979—Amendments, Adoption, and
Rescission of Regulations
The Board revised its foreign banking regulations to comply with the requirements
of the International Banking Act of 1978 and to meet the objectives of the Board's
Regulatory Improvement Project.
Effective February 14, 1979, the Board approved technical amendments to
Regulations D and M that transferred from Regulation M to Regulation D the
provisions governing reserve requirements for foreign branches of member banks.
Votes for these actions: Messrs. Miller, Coldwell, Partee, and Mrs.
Teeters. Votes against these actions: None. Absent and not voting:
Mr. Wallich.
On June 8, the Board adopted a new Regulation K and rescinded the former
Regulation K, Regulation M, and part of Regulation Y, effective July 14, 1979.
Votes for these actions: Messrs. Miller, Wallich, Partee, and Mrs.
Teeters. Votes against these actions: None. Absent and not voting:
Mr. Coldwell.1




Board Policy Actions

83

The International Banking Act directed the Board to revise its regulations governing Edge corporations in order to stimulate competition in
providing international banking and financial services throughout the
United States. The Board revised its foreign banking regulations pursuant
to the act and to the Regulatory Improvement Project, which is a program
to revise, clarify, and update all Federal Reserve regulations. The Board
was guided by the directives in the International Banking Act that Edge
corporations be given sufficiently broad powers to enable them to compete
with foreign banking institutions in the United States and abroad, and that
Edge corporations serve as a means to foster the participation of regional
and smaller banks in international banking and financing services.
In February, the Board approved technical amendments that removed
the provisions governing reserve requirements on foreign deposits from
Regulation M and consolidated them within Regulation D. In June, the
Board approved substantive revisions to the regulations governing the
international operations of member banks, Edge and Agreement corporations, and bank holding companies, and combined them in a new, comprehensive Regulation K, International Banking Operations. The previous
Regulation K, Corporations Engaged in Foreign Banking and Financing
under the Federal Reserve Act, was rescinded, as were Regulation M and
the foreign banking provisions (section 225.4(f)) of Regulation Y.
REGULATION E (ELECTRONIC FUND TRANSFERS)

March 7, 1979—Adoption of Regulation
The Board approved adoption of certain portions of Regulation E, effective March
30, 1979, to comply with requirements of the Electronic Fund Transfer Act.
Votes for this action: Messrs. Miller, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Wallich.1

The Electronic Fund Transfer Act was designed to protect consumers
who use electronic fund transfer (EFT) services. The sections of Regulation E that were adopted implement the two provisions of the act that
became effective February 8, 1979, by establishing limitations on consumer liability for unauthorized use of an EFT card and by specifying the
conditions under which EFT cards may be issued.
Additional sections of the regulation will be adopted to implement the
remaining portions of the Electronic Fund Transfer Act that become effective May 10, 1980.




84

Board Policy Actions

June 6, 1979—Amendment
The Board amended Regulation E, effective August 1, 1979, to require disclosure
of certain information before a consumer can be held liable for unauthorized use of
an EFT access device.
Votes for this action: Messrs. Miller, Wallich, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Coldwell.1
The amendment provides further guidance regarding consumer liability
for unauthorized use of an EFT access device and supplements the rules
issued in March, when portions of the regulation were adopted to implement the sections of the Electronic Fund Transfer Act that became effective
earlier this year. Although the general disclosure requirements of the act
are contained in the portion that becomes effective in 1980, the Board
adopted this amendment in the interim to inform consumers of their potential liability.
The amendment states that consumers will have no liability for unauthorized transfers if a creditor has not made the following disclosures, in
writing: (1) the extent of a consumer's financial liability for unauthorized
use; (2) the institution's telephone number and address for reporting a lost
or stolen card; and (3) the institution's normal business days for reporting a
lost or stolen card. These interim disclosure requirements serve to inform
consumers of their potential liability and of their responsibility to report
promptly any unauthorized use so that such liability can be minimized.
August 1, 1979—Amendment
The Board amended Regulation E, effective September 10, 1979, to change the
time when a written notice of unauthorized use of an EFT card becomes effective.
Votes for this action: Messrs. Schultz, Partee, and Mrs. Teeters.
Votes against this action: Messrs. Wallich and Rice. Absent and not
voting: Messrs. Miller and Coldwell.
Regulation E, which implements the Electronic Fund Transfer Act,
limits the amount for which consumers will be liable if their EFT access
card is lost, stolen, or otherwise used in a manner unauthorized by the
cardholder. As stipulated in the act, a consumer's liability for unauthorized
transfers varies according to the time that elapses before the consumer
notifies the financial institution of the unauthorized use. Liability rises
from $50 to $500 if notification is delayed more than two business days
from the time the consumer learns of the loss or theft of the card; it is




Board Policy Actions

85

unlimited for transfers occurring more than 60 days after transmittal of the
statement showing the unauthorized use, if the consumer fails to notify the
institution within the 60-day period. The regulation, as amended, makes
the written notice of loss, theft, or unauthorized use effective at the time it
is mailed by the consumer rather than upon receipt by the institution.
Governors Wallich and Rice opposed the amendment because they believed that the two-day time period specified in the Electronic Fund Transfer Act should be lengthened to allow consumers additional time to provide
the notice, and that the provision currently in Regulation E governing
effective date of the written notice should remain unchanged. They were
concerned because liability for unauthorized use would be transferred from
the consumer to the institution despite the fact that the institution may not
know of the unauthorized transfer. They also questioned the ability of an
institution to verify the time when a consumer learns of an unauthorized
use or mails the notice.
The other Board members sympathized with these concerns but favored
adoption of the amendment because of the consumer's escalating liability
when notice is delayed and because of the uncertainties of mail delivery.
They also noted that an institution's risk of loss was minimized by the fact
that most consumers give notice of a lost or stolen EFT card by telephone
rather than by mail. They therefore approved the amendment that makes
the written notice effective at the time it is mailed.

October 3, 1979—Amendments and Additions
The Board amended certain provisions of Regulation E, effective November 15,
1979. It also adopted several new sections of the regulation and additional amendments to existing sections, effective May 10, 1980.
Votes for these actions: Messrs. Schultz, Coldwell, Partee, Mrs.
Teeters, and Mr. Rice. Votes against these actions: None. Absent and
not voting: Messrs. Volcker and Wallich.

The amendments pertained to: exemptions for certain types of securities
or commodities transfers and for intrainstitutional transfers; consumer liability for unauthorized transfers; definitions; and issuance of access devices. The new sections govern the following areas: special requirements,
initial disclosures, changes in terms and error resolution notices, preauthorized transfers, relation to state law, and administrative enforcement.
These sections implement the portions of the Electronic Fund Transfer Act
that will become effective May 10, 1980.




86

Board Policy Actions

REGULATION F (SECURITIES OF MEMBER STATE BANKS)

November 21, 1979—Amendments
The Board amended the disclosure provisions of Regulation F, effective December
31, 1979, to conform with recent changes in comparable rules of the Securities and
Exchange Commission.
Votes for this action: Messrs. Volcker, Schultz, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Wallich.
The amendments, which specify the public disclosures required of member state banks whose stock is registered pursuant to Regulation F, pertain
to the following areas: (1) beneficial ownership and acquisition statements;
(2) corporate governance; (3) management remuneration; (4) changes in
independent auditor fees; and (5) simplification and other amendments.
REGULATION H (MEMBERSHIP OF STATE BANKING
INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM)
June 20, 1979—Amendment
The Board amended Regulation H, effective January 1, 1980, to prescribe recordkeeping and confirmation requirements for state member banks that make securities transactions for their customers.
Votes for this action: Messrs. Coldwell, Partee, Mrs. Teeters, and
Mr. Rice. Votes against this action: None. Absent and not voting:
Messrs. Miller and Wallich. 2

The Board amended its regulation governing bank practices to provide
new, uniform standards for recordkeeping, confirmation, and other procedures involving securities transactions for trust departments and other bank
customers. These changes were effected to provide the same type of investor protection at state member banks that customers of investment firms
receive.
Similar regulations were adopted by the Federal Deposit Insurance Corporation and the Comptroller of the Currency.

2. On this and subsequent pages, footnote 2 indicates that there was one vacancy on the
Board at the time the action was taken.




Board Policy Actions

87

December 19, 1979—Amendments
The Board amended Regulation H, effective January 1, 1980, to revise the uniform
standards and requirements adopted in July for member banks that make securities
transactions for trust department and other bank customers.
Votes for this action: Messrs. Schultz, Wallich, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Volcker.

The amendments revise the existing standards by exempting transactions
in U.S. government and federal agency securities from internal reporting
requirements applicable to certain bank officers and employees. In addition, government obligations are excluded from the securities transactions
required to be counted when determining whether a bank qualifies for a
previously adopted exception from certain of the recordkeeping requirements. The amendments also make minor clarifying revisions and language changes in the existing standards.
REGULATION K (INTERNATIONAL BANKING OPERATIONS)
February 14 and June 8, 1979—Amendments, Adoption, and
Rescission of Regulations
These actions are discussed under Regulation D.
REGULATION L (MANAGEMENT OFFICIAL INTERLOCKS)
June 20, 1979—Adoption of New Regulation and Rescission of
Old Regulation
The Board adopted a new Regulation L and rescinded the previous Regulation L,
Interlocking Bank Relationships under the Clayton Act, effective July 19, 1979.
Votes for this action: Messrs. Coldwell, Partee, Mrs. Teeters, and
Mr. Rice. Votes against this action: None. Absent and not voting:
Messrs. Miller and Wallich.2

The Depository Institution Management Interlocks Act (Title II of the
Financial Institutions Regulatory and Interest Rate Control Act of 1978)
generally prohibits interlocking relationships between officers and directors of competing financial institutions, including banks and savings and
loan associations and their parent holding companies, mutual savings
banks, and credit unions. The Board and the other federal regulators of




88

Board Policy Actions

financial institutions adopted regulations to implement the act that prohibit
a management official of one depositary institution from holding the following positions: (1) service as an official of a nonaffiliated institution if
the two institutions are located within the same standard metropolitan
statistical area (institutions having less than $20 million in assets are exempt); (2) service as an official of another institution if the two are located
in the same or adjacent communities; and (3) service as an official of
another depositary institution with more than $500 million in assets if the
official holds a similar position with an institution having more than $1
billion in assets. These prohibitions also apply to U.S. offices of foreign
banks.
The regulation provides that the agencies may grant exemptions—either
temporary or permanent—in situations such as the following: to establish
new institutions, to establish minority-owned institutions, or to preserve
the soundness of an institution in financial difficulty. In addition, interlocking relationships in existence before November 10, 1978, will be
allowed to continue for up to 10 years.
REGULATION M (FOREIGN ACTIVITIES OF NATIONAL BANKS)
February 14 and June 8, 1979—Amendments, Adoption, and
Rescission of Regulations
These actions are discussed under Regulation D.
REGULATION O (LOANS TO EXECUTIVE OFFICERS, DIRECTORS,
AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS)
February 28, 1979—Amendments
The Board approved amendments to Regulation O, effective March 10, 1979, to
implement portions of the Financial Institutions Regulatory and Interest Rate Control Act of 1978.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1
One portion of the Financial Institutions Regulatory Act was designed to
prevent bank insiders from abusing their positions by ensuring that bank
officials do not receive loans or other services on terms more favorable
than those available to the general public for comparable transactions. The
Board's implementing regulation imposed four lending limitations on




Board Policy Actions

89

member banks: (1) a limit equal to 10 percent of a bank's capital and
surplus for aggregate loans to officers, directors, or principal shareholders
of a member bank, its parent holding company or affiliate, or the officials'
related interests; (2) a prohibition on banks from paying an overdraft for an
executive officer or director except in certain specified instances; (3) a
requirement that every extension of credit to bank officials or their related
interests be on substantially the same terms as those prevailing for comparable credits to others, and that the loan not involve more than the
normal amount of risk of repayment; and (4) a requirement that every
extension of credit to officials or their related interests that exceeds
$25,000 in the aggregate, per individual, be approved in advance by the
bank's board of directors. The regulation applies not only to bank and
holding company officials, but also to executive officers of all other subsidiaries of the holding company if the officials participate in policymaking
functions of the bank.
Pursuant to these revisions, the Board also changed the title of Regulation O from "Loans to Executive Officers of Member Banks" to "Loans
to Executive Officers, Directors, and Principal Shareholders of Member
Banks."
November 14, 1979—Amendments
The Board amended Regulation O, effective December 31, 1979, to adopt the
reporting requirements imposed by two sections of the Financial Institutions Regulatory and Interest Rate Control Act of 1978.
Votes for this action: Messrs. Schultz, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent and not
voting: Messrs. Volcker and Wallich.

One section of the act prohibits a bank that maintains a correspondentaccount relationship with another bank from extending credit on preferential terms to that bank's executive officers, directors, or principal shareholders. The amendments to Regulation O require officials to report annually to the bank's board of directors the amount of their own indebtedness
to each of the institution's correspondent banks, as well as any indebtedness of their related interests. Each bank must prepare annually, for transmittal to the appropriate federal supervisory agency, a report that lists the
name of each executive officer or principal shareholder who files a report
of indebtedness, and the aggregate amount of indebtedness of those persons or their related interests to the institution's correspondent banks.




90

Board Policy Actions

The amendments also require, pursuant to a second section of the act,
that each insured bank prepare an annual report—to be available to the
public upon request—that contains a list of its principal shareholders; a list
of executive officers, principal shareholders, and related interests who
were indebted to the bank during the year; and the aggregate amount of
such debt.
REGULATION Q (INTEREST ON DEPOSITS)

March 8, 1979—Amendment
The Board approved an amendment to Regulation Q, effective March 15, 1979, to
prohibit the compounding of interest on money market certificates by member
banks.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1
Money market certificates are 26-week time deposits issued by financial
institutions in denominations of $10,000 or more that earn interest at a rate
tied to the discount rate on 26-week Treasury bills sold at the weekly
auction. Commercial banks may pay interest at a rate equal to the bill rate;
thrift institutions may pay VA of a percentage point more than the bill rate.
The Board and the other federal regulators of financial institutions
authorized two changes in the terms under which such certificates can be
issued. One change, which affects all financial institutions, prohibits the
compounding of interest earned on such deposits. The second change,
which affects only thrift institutions, eliminates the differential of V* percentage point that those institutions may pay when the discount rate on
Treasury bills is above 9 percent; the differential would be phased back in
as the Treasury bill rate fell between 9 and 8-V4 percent. The agencies took
these actions to reduce the cost of time deposits for thrift institutions and to
moderate the flow of credit to housing, in an effort to restrain inflationary
pressures.

May 30, 1979—Amendments and Interpretation
The Board amended Regulation Q, effective July 1, 1979, to change certain terms
applicable to time and savings deposits. It also issued an interpretation on pooling
of deposits, effective immediately.
Votes for these actions: Messrs. Miller, Wallich, Partee, and Mrs.
Teeters. Vote against these actions: Mr. Coldwell.1




Board Policy Actions

91

The Board, together with the Federal Deposit Insurance Corporation and
the Federal Home Loan Bank Board, approved four amendments that
modify the terms on time deposits and increase the rate of return on time
accounts of less than $10,000. The amendments had the following provisions:
1. The introduction of a new category of time deposit with a maturity of
four years or longer, a variable ceiling, a fixed rate of return, and no
minimum denomination. The maximum rate that could be paid on the new
time deposit would be tied to the yield on four-year Treasury securities, as
determined at the monthly auctions by the Treasury Department. The
ceiling for commercial banks would be 1 lA percentage points below the
yield on comparable Treasury securities, while the ceiling for thrift institutions would be 1 percentage point below the auction yield.
2. An increase of lA percentage point in the maximum rate payable on
savings accounts at commercial banks and thrift institutions.
3. The removal of all minimum-denomination requirements on time
deposits other than the 26-week money market certificates.
4. A reduction of the penalties imposed on withdrawals from time deposits prior to maturity. For time deposits with an original maturity of one
year or less, the maximum penalty would be a forfeiture of three months'
interest; the maximum penalty for all other time accounts would be a
forfeiture of six months' interest.
Governor Coldwell opposed the amendments for two reasons: He believed that the amendments, although a step in the right direction, did not
do enough to improve the rate of return for small savers. He preferred that
the rates on time deposits more nearly approximate the rate of return on
money market instruments. He also feared that the formula for determining
the rates payable on the new four-year savings certificates was too complicated. Other Board members also thought that the amendments were not a
complete solution, but they believed that the changes were a helpful interim step toward improving the rate of return for small savers. Those
Board members also pointed out that thrift institutions were hampered by
the nature of their loan portfolios from increasing significantly in the short
run the rates paid on time and savings deposits.
In a second action, the Board adopted an interpretation of Regulation Q
that permits member banks to accept pooled deposits but prohibits them
from advertising or actively soliciting such deposits. This interpretation
supersedes an earlier ruling on pooled deposits that stated that acceptance
by member banks of deposits believed to have been combined with the




92

Board Policy Actions

funds of others to obtain the higher yield available on larger-denomination
time deposits was a violation of the spirit of Regulation Q.
Governor Coldwell opposed the interpretation because he felt that it was
unenforceable and that it would discriminate against the unsophisticated
saver. Other Board members thought that the interpretation was a better
alternative than the other three options available to the Board: (1) prohibiting pooled deposits entirely; (2) continuing the previous ruling; or (3)
permitting both the acceptance and solicitation of pooled deposits. Those
Board members felt that enforcement problems would develop from an
outright prohibition on pooling, while permitting member banks actively to
promote pooled deposit arrangements would sanction an evasion of the
interest rate ceilings mandated by the Congress. They were concerned,
moreover, about the competitive disadvantage to thrift institutions, which
are less able than commercial banks to pay the higher rates on pooled
deposits.

July 30, 1979—Amendments
The Board amended Regulation Q, effective August 1, 1979, to subject certain
repurchase agreements to interest rate ceilings and to change the terms governing
time deposits.
Votes for this action: Messrs. Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent and not
voting: Messrs. Miller and Coldwell.

The Board approved the following changes in the rules governing payment of interest on deposits:
1. Redefined the term "deposit" to include repurchase agreements
(RPs) of less than $100,000 with maturities of 90 days or longer, thereby
making such RPs subject to interest rate ceilings. The Board authorized a
three-year phase-out period during which banks could continue to issue
such RPs without regard to interest rate ceilings, provided the total amount
of RPs outstanding at any one time did not exceed the volume outstanding
on August 1, 1979.
2. Required banks to waive the penalty for withdrawals from a time
deposit prior to maturity if the depositor dies or is declared mentally
incompetent.
3. Allowed banks, with the consent of the depositor, to apply the more
liberal provisions governing early withdrawal from time deposits that became effective July 1, 1979, to time deposit contracts entered into prior to
that date.




Board Policy Actions

93

4. Clarified that funds added to an existing time deposit account are
subject to the interest rate ceilings in effect at the time the additional
deposits are made.
5. Increased from 5 percent to 5lA percent the maximum rate payable
by member banks on time deposits with maturities of 30 to 89 days.
Similar amendments were adopted by the other federal regulators of
financial institutions.
December 14, 1979—Amendments
The Board amended Regulation Q, effective January 1, 1980, to authorize a new
category of time deposit and to change the ceiling rates payable on certain time
deposits of member banks.
Votes for this action: Messrs. Schultz, Wallich, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Volcker.
The Board approved three amendments that modify the terms on time
deposits to help the small saver and to improve the ability of banks to
compete for funds. The amendments provide for the following changes:
1. Replacement of the four-year time deposit authorized in July with a
new category of time deposit having a maturity of two and one-half years
or longer and a maximum interest rate set at 3A of a percentage point below
the yield on Treasury securities having remaining maturities of two and
one-half years.
2. An increase of lA percentage point (to 53A percent) in the ceiling on
deposits maturing in 90 days to 1 year.
3. Elimination of the lA percentage point differential in the maximum
rates payable by banks and thrift institutions on individual retirement accounts, Keogh plan accounts, and governmental unit funds that are deposited in the new 21/2-year time deposits or in the 26-week money market
certificates.
The other federal regulators of financial institutions authorized similar
changes affecting the institutions under their jurisdictions.

REGULATION S (BANK SERVICE ARRANGEMENTS)
February 28, 1979—Rescission of Regulation
The Board rescinded Regulation S, effective March 10, 1979, and modified the
interpretations relating to bank service arrangements.




94

Board Policy Actions

Votes for this action: Messrs. Wallich, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Miller.1
The Board reviewed Regulation S in connection with its Regulatory
Improvement Project, which is a program to determine whether the
Board's regulations need clarification, simplification, or cancellation.
Regulation S, which was adopted in 1963 to implement the Bank Service
Corporation Act, governs the performance of certain clerical services, such
as check sorting, data processing, and bookkeeping, for state member
banks by companies other than the bank itself. During the review, the
Board determined that an amendment to the Bank Service Corporation Act
made the regulation unnecessary if certain outstanding interpretations were
modified. Accordingly, the Board made appropriate modifications in the
interpretations to conform to the amended act and rescinded Regulation S.
REGULATION S (REIMBURSEMENT TO FINANCIAL
INSTITUTIONS FOR ASSEMBLING OR PROVIDING FINANCIAL
RECORDS)

September 26, 1979—Adoption of Regulation
The Board adopted a new Regulation S, effective October 1, 1979, that provides
for reimbursing financial institutions for the costs associated with furnishing customers' financial records that are requested by a federal agency.
Votes for this action: Messrs. Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent and not
voting: Messrs. Volcker and Coldwell.

The regulation implements a portion of the Right to Financial Privacy
Act, which places restrictions on access by the federal government to the
financial records of individuals and requires that federal authorities seeking
such information follow certain procedures. Regulation S specifies the
rates and the conditions for reimbursement of the necessary costs incurred
by financial institutions in assembling or providing their customers' financial records or other information to a government authority. Financial
institutions are entitled to payment for costs directly incurred in providing
the information requested, including personnel costs for searching and
preparing the documents, reproduction costs, and any transportation costs.
The federal financial regulatory agencies are exempt from the restrictions of the act in connection with the exercise of their supervisory, regulatory, or monetary functions.




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95

Rf-:Gl LATION V iI.OAN GUARANTEES FOR DEFENSE
PRODI T

February 7, 1979—Revision
The Board revised Regulation V, effective February 12, 1979, to simplify and
improve the language of the regulation and to adjust the interest rates and guarantee
fee structures applicable to such loans.
Votes for this action: Messrs. Wallich, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Miller.1
Regulation V, which was adopted in 1950 to facilitate the financing of
contracts and other operations necessary for national defense production,
sets forth the procedures to be followed by the Federal Reserve Banks
when acting as fiscal agents for those government agencies that are authorized to guarantee loans for defense purposes. It also sets forth the maximum rates of interest, guarantee fees, and commitment fees that may be
charged for a guaranteed loan.
As part of its Regulatory Improvement Project, the Board revised Regulation V by updating and simplifying language and by incorporating within
the regulation certain previously unpublished rulings. The revision also
eliminated the fixed maximum interest rate that had been established for
such guaranteed loans and allowed instead a rate tied to the prime rate of
the financing institution. In addition, the revised regulation grants the
guaranteeing agencies some discretion in the setting of loan guarantee fees.

REGULATION Y (BANK HOLDING COMPANIES AND CHANGE IN
BANK CONTROL)

January 24, 1979—Amendments and Policy Statement
The Board approved amendments to Regulation Y and to the Rules regarding
Delegation of Authority, effective March 10, 1979, that implement the Change in
Bank Control Act of 1978. Effective February 5, 1979, the Board also issued a
policy statement concerning the requirements, procedures, and objectives of the
act.
Votes for these actions: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against these actions: None.1




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Board Policy Actions

The Change in Bank Control Act of 1978, which became effective
March 10, 1979, gave the federal bank supervisory agencies the authority
to disapprove a proposal by any person to acquire control of an insured
bank or bank holding company. The Board's policy statement issued pursuant to the act provided that persons seeking to acquire a bank holding
company or a state member bank must notify the Board 60 days prior to the
acquisition. The statement also specified the types of transactions that
require submission of a notice to the Board, the types of transactions that
are exempt, the information to be contained in the notice submitted to the
Board, and the procedures the Board will follow in evaluating changes in
control.
The Board amended Regulation Y, which was renamed Bank Holding
Companies and Change in Bank Control, to establish the procedures for
complying with the act; it also amended its Rules regarding Delegation of
Authority to specify those actions the Reserve Banks may take regarding
proposed changes in control.

February 1, 1979—Termination of Rulemaking
The Board terminated, effective February 2, 1979, the rulemaking proceeding that
would have added check verification to the list of activities permissible for bank
holding companies. Instead, the Board decided it would consider applications to
provide verification services on a case-by-case basis.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1

The rulemaking proceeding had been initiated because of an application
by a bank holding company to acquire a nonbank subsidiary that would
verify the acceptability and guarantee the payment of checks written by
customers of subscribing merchants if the merchants fulfilled certain requirements. After determining that the activity was generally related to
banking, the Board approved the specific application; however, since so
few other bank holding companies had expressed an interest in providing
check verification services, the Board decided not to add this activity to the
list of activities permissible for all holding companies.
The Board noted that another bank holding company had applied to
perform similar verification services, including those for electronic fund
transfers, and that it would consider the matter further during its review of
that application.




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97

February 14 and June 8, 1979—Amendments, Adoption, and
Rescission of Regulations
These actions are discussed under Regulation D.
February 21, 1979—Amendment
The Board approved an amendment to Regulation Y, effective April 2, 1979, that
permits bank holding companies to sell at retail money orders, travelers checks, and
savings bonds at the offices of their nonbank subsidiaries.
Votes for this action: Messrs. Wallich, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Miller.1

The amendment added to the list of activities permissible for bank
holding companies the activity of selling at retail money orders having a
face value of $1,000 or less, travelers checks, and U.S. savings bonds.
When this amendment was proposed initially, it also included a provision
that would have permitted holding companies to provide consumeroriented financial management courses. The Board declined to adopt the
provision at this time and decided instead to consider applications to
engage in such activity on a case-by-case basis.
October 24, 1979—Amendments
The Board amended Regulation Y, Rules of Procedure, and Rules regarding
Delegation of Authority, effective immediately, to provide that a foreign bank that
has no subsidiary in the United States, but that operates branches, agencies, or
commercial lending companies in more than one Federal Reserve District, shall file
its applications or reports with a Reserve Bank of only one of the Districts in which
it operates.
Votes for these actions: Messrs. Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against these actions: None.
Absent and not voting: Mr. Volcker.

These actions assign responsibility for receiving applications and reports
of such foreign institutions to the Federal Reserve Bank of the District in
which the banking assets of the institution are largest. In addition, these
amendments transfer primary responsibility for the supervision, examination, and processing of applications of Edge corporations from the Reserve
Bank in whose District the corporation is located to the Reserve Bank
responsible for supervising the Edge corporation's parent holding company
or bank.




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Board Policy Actions

October 31, 1979—Amendment
The Board amended Regulation Y, effective December 5, 1979, to permit bank
holding companies to sell general insurance in communities with a population of
5,000 or less.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Coldwell.
In 1971, the Board authorized bank holding companies or their nonbank
subsidiaries to act as agent for the sale of general insurance in towns with a
population of 5,000 or less, or in communities having inadequate insurance
agency facilities. That rule was challenged, and in 1977 a Federal Court
of Appeals remanded to the Board for further consideration that part of the
rule permitting the sale of insurance in small towns.
After reviewing public comment on the provision, the Board decided to
permit the sale of general insurance in towns with a population of 5,000 or
less. The Board also decided that the sale of insurance in communities
having inadequate insurance facilities was not an activity closely related to
banking and it deleted that provision from Regulation Y. In addition, the
Board amended the language of the regulation to specify that the sale of
insurance in small towns from offices that are located in larger communities is not permissible.
REGULATION Z (TRUTH IN LENDING)
September 19, 1979—Revocation of Amendment and
Interpretations
The Board revoked an amendment and related interpretations of Regulation Z,
effective March 31, 1980, pertaining to the "cooling off" period for consumers
who pledge their homes in certain credit arrangements.
Votes for this action: Messrs. Volcker, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Vote against this action: Mr. Schultz. Absent and
not voting: Mr. Coldwell.
The Board revoked an amendment adopted in mid-1978 that provided
certain creditors who offer open-end credit plans secured by customers'
residences with an alternative method of complying with a requirement of
the Truth in Lending Act. The act requires creditors who offer such plans
to disclose to consumers that they have the right to rescind a transaction
within three business days; the amendment exempted individual transac-




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99

tions made under those plans and allowed creditors instead to provide the
disclosure once each year and when the credit plan is established or when
the terms of the plan are changed.
Consumer representatives had urged revocation of the amendment because they believed consumers faced a higher risk of losing their homes
under this type of credit arrangement than under closed-end credit plans
secured by residences. It was argued that open-end credit plans enabled a
consumer to make a series of credit transactions each for a small amount
relative to the collateral pledged, but which collectively could exceed the
consumer's ability to repay. It also was alleged that the Board's adoption
of the amendment in 1978 abrogated the right of rescission granted in the
act.
Governor Schultz opposed revocation of the amendment because he
feared that consumers who are denied access to this important source of
relatively inexpensive credit will have to seek more expensive types of
credit.
The other Board members shared Governor Schultz' concern, but they
favored revocation of the amendment because of the controversy surrounding it, including questions about the Board's authority to adopt it. Consequently, the Board agreed to suspend the amendment and related interpretations and to seek clarification from the Congress regarding the right of
rescission.
December 19, 1979—Amendments
The Board approved several amendments to Regulation Z, effective October 1,
1980, relating to the method of calculating and disclosing the annual percentage
rate and finance charge of a credit transaction.
Votes for this action: Messrs. Schultz, Wallich, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Volcker.

The amendments permit greater uniformity and simplicity in the calculation of annual percentage rates (APRs) by creditors and thereby facilitate
comparison of creditors' rates by consumers. The amendments adopted
include the following:
1. A change in the tolerance permitted in disclosing annual percentage
rates. Generally, an APR will be considered accurate if it is within !/s of a
percentage point of the actual rate.
2. A change in the special rules for the treatment of minor irregularities




100

Board Policy Actions

in payment schedules. The change simplifies the procedures for computing
APRs and finance charges.
3. An extension of the current creditor protection against liability in
cases of reliance in good faith on erroneous charts or tables. The protections now extend to errors resulting from inaccuracies in any calculation
tool, including a computer or a calculator, used by the creditor in good
faith.
In taking these actions, the Board stated that compliance may begin on
January 10, 1980, but is not required until October 1, 1980. Until October,
creditors may continue to comply with the previous rules.
REGULATION BB (COMMUNITY REINVESTMENT)

February 21, 1979—Amendment
The Board amended Regulation BB, effective April 26, 1979, to implement a
revision in the Community Reinvestment Act.
Votes for this action: Messrs. Wallich, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Miller.1
The revision in the Community Reinvestment Act affects financial institutions whose principal business is serving military personnel who are not
located within a defined geographic area. The amendment to Regulation
BB permits institutions that serve military installations to delineate a "military community" of nonlocal customers, in addition to their local community or communities. Together, these delineations constitute the
institution's "entire community" for purposes of assessing its record of
meeting the credit needs of the area.
POLICY STATEMENTS AND ACTIONS

January 10, 1979—Expanded Rulemaking Procedures
The Board adopted a policy statement, effective immediately, describing new
rulemaking procedures designed to improve the quality and minimize the burden of
its regulations.
Votes for this action: Messrs. Miller, Wallich, Partee, and Mrs.
Teeters. Vote against this action: Mr. Coldwell.1
The expanded rulemaking procedures will entail, during the initial phase
of the rulemaking process, designation of particular Board members to
oversee the development of substantive regulatory proposals. During this




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101

phase and prior to publication of a proposal for comment, the views of
those most likely to be affected by the proposal will be sought. When a
proposal is ready to be published for comment, the Board will also publish
an analysis that includes: (1) a description of the need and purpose of a
proposed new regulation or of a change in an existing rule; (2) an examination of alternative courses of regulatory action; (3) an assessment of the
economic impact of the proposal; and (4) an estimate of the burdens of
compliance, recordkeeping, and reporting imposed by the proposal. The
Board stated that these procedures will be undertaken in conjunction
with the Regulatory Improvement Project initiated in June 1978 to improve
the organizational framework of the Board's regulations and to clarify and
increase their readability.
Because these more detailed procedures at times may result in delays
detrimental to those seeking relief, the Board included in the policy statement a number of circumstances under which it might follow more accelerated procedures, such as (1) when the Board adopts a technical or
clarifying amendment; (2) when a proposal requires prompt action in the
public interest; (3) when a proposal will reduce a burden where further
delay would cause unnecessary harm; (4) when the regulation is a reformulation of a proposal previously published for comment; or (5) when the
regulation must be adopted within a statutorily imposed deadline.
Governor Coldwell objected to the new procedures because he thought
that they would prove too costly and would cause unnecessary delays in the
rulemaking process.
January 10, 1979—Remote Disbursement
The Board issued a policy statement, effective January 11, 1979, concerning the
practice of remote disbursement, and also announced a course of action to discourage the practice.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1

Remote disbursement refers to a practice under which a depositor establishes a checking account at a bank geographically removed from the
depositor's normal business area in order to extend the processing time
required for clearing checks. The Board noted that these arrangements
expose the paying banks and the recipients of checks remotely disbursed to
a greater risk of loss during the prolonged check-clearing period. Recipients of remotely disbursed checks also may be unfairly denied prompt
access to funds due them.




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Board Policy Actions

To correct these abuses, the Board adopted several measures to encourage more efficient corporate payments systems: (1) contacting the banks
and bank holding companies believed to be engaging in remote disbursement to urge that they terminate the practice; (2) directing the System's
bank examiners to review banks' settlement procedures for such practices;
(3) providing a new option in the check-clearing system that would accelerate the collection of checks drawn on remote points; and (4) assessing the
need for regulatory or legislative action to curb remote disbursement arrangements.

February 21, 1979—Foreign Bank Holding Company Supervision
The Board adopted a statement, effective February 23, 1979, describing its policy
toward the supervision of foreign bank holding companies in the United States and
summarizing the steps it will undertake to carry out that policy.
Votes for this action: Messrs. Wallich, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting: Mr.
Miller.1
The policy statement said that the Board will be guided by the principle
of national treatment in administering the International Banking Act of
1978 and the provisions of the Bank Holding Company Act that relate to
foreign banks. In its supervisory efforts, the Board will seek to ensure that
U.S. subsidiary banks are operated in a safe and prudent manner and that
the parent holding company is a source of strength to the U.S. banking
subsidiary. The Board will not attempt, however, to extend domestic bank
supervisory standards to parent foreign banking institutions.
The statement also described several measures that the Board will initiate to implement this supervisory policy: (1) increase examiner surveillance of intercompany transfers and common customer credits involving
the U.S. subsidiary bank and its foreign parent company; (2) require
additional financial information about the foreign company; (3) institute
quarterly reports on transactions between the U.S. subsidiary and the foreign parent; and (4) continue to work with bank supervisory authorities
in other countries to improve overall cooperation in international bank
regulation.




Board Policy Actions

103

September 19, 1979—Amendments to Rules of Practice
for Hearings
The Board amended its Rules of Practice for Hearings, effective September 24,
1979, to implement the expanded supervisory authority granted by the Financial
Institutions Regulatory and Interest Rate Control Act of 1978.
Votes for this action: Messrs. Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent and not
voting: Messrs. Volcker and Cold well.

The amendments, which include a change in title from the previous
''Rules of Practice for Formal Hearings," establish procedures by which
the Board can exercise the authority granted by the act (1) to assess and
collect civil money penalties for violations of certain provisions of law,
and (2) to suspend or remove bank officials charged with a felony. The
existing rules also were amended to incorporate the prohibitions contained
in the Government in the Sunshine Act against communication with individual Board members about a particular case during formal administrative
proceedings.

September 26, 1979—Adoption of Rules regarding Foreign Gifts
and Decorations
The Board adopted new rules entitled Rules regarding Foreign Gifts and Decorations, effective November 1, 1979.
Votes for this action: Messrs. Schultz, Wallich, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent and not
voting: Messrs. Volcker and Coldwell.

The rules were adopted to implement recent amendments to the Foreign
Gifts and Decorations Act that in general prohibit federal employees
from retaining tangible or intangible gifts valued at more than $100 from
foreign governments. The amended act also imposes more stringent reporting requirements and provides for civil action against an employee who
accepts a gift but does not report it. The Board's rules incorporate guidelines issued by the Department of State and regulations of the General
Services Administration.




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Board Policy Actions

October 10, 1979—Discrimination
The Board issued a policy statement on discrimination, effective October 11, 1979.
Votes for this action: Messrs. Schultz, Wallich, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Volcker.

The statement, issued jointly with the other member agencies of the
Federal Financial Institutions Examination Council, emphasized that the
federal regulatory agencies are committed to eliminating discrimination
and to encouraging nondiscriminatory practices in the operations of the
commercial banks and thrift institutions they supervise. The agencies stated that they will use their enforcement authority to encourage institutions
to develop nondiscriminatory employment practices and procedures that
comply with civil rights laws, covering circumstances such as the payment
of employee fees or dues to private clubs.
November 9, 1979—Futures, Forward, and Standby Contracts
The Board issued a policy statement, effective January 1, 1980, to provide procedures and guidelines for commercial banks that make futures, forward, or standby
contracts in U.S. government or agency securities. The statement, issued jointly
with the Comptroller of the Currency and the Federal Deposit Insurance Corporation, affects contracts outstanding at that time as well as contracts entered into after
that date.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell,
Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.

The statement provides procedures that commercial banks should follow
to ensure that their participation in interest rate futures contracts, forward
contracts, or standby contracts on government or agency securities are
consistent with safe and sound banking practices. The guidelines for banks
that are authorized to participate in the markets for such contracts include
directives on the role of bank boards of directors, recordkeeping, valuation
of contracts, treatment of fee income from standby contracts, disclosure of
participation by a bank in the futures markets, monitoring such participation and the associated credit risks, and internal controls at banks.
In issuing this statement, the Board said that it would assess bank
involvement in these markets to determine if other safeguards against
unsound banking practices are needed.




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105

December 10, 1979—Divestiture of Nonbank Subsidiaries
The Board issued a policy statement, effective December 12, 1979, describing the
penalties that will apply to holding companies that fail to comply with the divestiture requirements of the 1970 amendments to the Bank Holding Company Act.
Votes for this action: Messrs. Schultz, Partee, Mrs. Teeters, and
Mr. Rice. Votes against this action: None. Absent and not voting:
Messrs. Volcker, Wallich, and Coldwell.

Certain organizations that became bank holding companies as a result of
the 1970 amendments to the Bank Holding Company Act were required
either to divest the impermissible nonbank activity, to divest the bank and
thereby cease being a bank holding company, or to qualify for an exemption that would allow retention of the nonbank activity. The deadline for
completing the action is December 31, 1980. Since the Board is not authorized to extend the deadline, it has urged affected companies to make the
appropriate filing early, in order to allow sufficient time for the Board to
review the application or divestiture plan and for the company to complete
whatever action is required by the Board.
The policy statement emphasizes that the Board will regard as an extremely serious matter any violation resulting from failure to comply with
these requirements and that it will take appropriate enforcement action,
such as cease-and-desist proceedings, assessment of civil penalties, or
referral for criminal prosecution, to assure compliance.
December 19, 1979—Interagency Coordination of Examination and
Supervisory Action
The Board adopted two statements of policy that provide for coordination among
the federal bank supervisory agencies in certain examination, supervisory, and
corrective actions affecting bank holding companies and their subsidiary commercial banks.
Votes for these actions: Messrs. Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against these actions: None.
Absent and not voting: Mr. Volcker.

One policy statement, which concerned the supervision of bank holding
companies and their subsidiary banks, described the circumstances under
which the agencies will coordinate the inspection of holding companies
with the examination of subsidiary banks. The second statement described




106

Board Policy Actions

the procedures to be followed by the agencies to coordinate formal corrective actions, such as the issuance of cease-and-desist orders and written
agreements. These policies will enhance particularly the supervision of
institutions needing special attention and will promote consistency in the
use of formal corrective action.
Similar policies were adopted by the Comptroller of the Currency and
the Federal Deposit Insurance Corporation.

December 21, 1979—Information Statement on the Community
Reinvestment Act
The Board issued an information statement, effective January 3, 1980, describing
the criteria the Board will use to analyze applications that are protested under the
Community Reinvestment Act of 1977.
Votes for this action: Messrs. Schultz, Wallich, Coldwell, Partee,
Mrs. Teeters, and Mr. Rice. Votes against this action: None. Absent
and not voting: Mr. Volcker.
The Community Reinvestment Act (CRA) requires that supervisory
agencies evaluate an institution's record of meeting the credit needs of its
entire community, including the low- and moderate-income areas, when
considering applications to expand the banking activities of the bank or its
parent holding company.
The statement provides guidance to bank holding company applicants,
community groups, and other interested persons regarding the factors the
Board will consider when assessing an institution's record and the procedures to be followed when applications are protested. The statement also
indicates that the Board will develop a procedural guide for participants in
CRA matters.
1979_DISCOUNT RATES
The Board approved four increases in the discount rate during 1979,
raising the level from 9Vi percent in mid-July to 12 percent in early
October. The Board also voted on eleven occasions to turn down requests for increases submitted by individual Federal Reserve Banks. No
requests to lower the rate were submitted during 1979.
The specific reasons for the Board's decisions are reviewed in this
section. In reaching those decisions the Board also took into account
general economic and financial developments, including those affecting




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107

the value of the dollar in foreign exchange markets. These developments
are covered in more detail elsewhere in this REPORT, especially in the
Record of Policy Actions of the Federal Open Market Committee and in
the monetary policy reports submitted semiannually to the Congress pursuant to the Full Employment and Balanced Growth Act of 1978.
A listing of the Board's discount rate actions during 1979, including
the votes on the actions and reasons for dissents, follows this review.

January to Mid-July: No Change
During January the Board turned down requests by three Federal Reserve Banks to raise the discount rate from 9Vi percent—the level in
effect since early November 1978—to 93A or 10 percent. The other nine
Banks had proposed that the current rate be maintained. In the Board's
judgment, technical considerations did not then favor approval of an
increase since the discount rate was already in reasonable alignment
with other short-term interest rates and member bank borrowings were
relatively moderate. As to the broader considerations weighing on its
decisions, the Board saw a possible advantage under current circumstances in an action that would underscore the System's continuing antiinflationary policy and thereby help to restrain inflationary expectations.
However, a number of members gave more weight to recent indications
that the economic expansion might be slowing and that little growth, or
some actual decline, was occurring in key measures of the money
supply.
Subsequently, during March the Board disapproved requests from two
Banks to raise the discount rate lA percentage point. A majority of the
Board members felt that persisting weakness in the monetary aggregates
argued strongly against a higher rate. They also believed an increase
would be undesirable in light of continuing indications that the economic expansion might be slowing.
During May six of the twelve Banks proposed an increase in the discount rate to 93A percent. Those requests were disapproved in light of
further evidence of slower growth in economic activity. A majority of
the Board members also thought that the discount rate should not be
raised in a period when the Federal Open Market Committee (FOMC)
was pursuing a steady course with respect to its objective for the federal
funds rate. These broad considerations were viewed as persuasive even
though a higher rate could be justified on technical grounds, including




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Board Policy Actions

the relatively wide spread that had developed between the discount rate
and other short-term interest rates and the substantial rise in member
bank borrowings.
From the latter part of May until early July, most interest rates other
than the federal funds rate fell substantially on balance. During that
period no request to change the discount rate was submitted by any of
the Reserve Banks.

Mid-July to Early October: Four Increases Approved
On July 19 the Board voted unanimously to raise the discount rate from
9Vi to 10 percent. The action was taken partly to help strengthen the
dollar, which had been under strong downward pressure in foreign exchange markets. The increase was also intended to bring the discount
rate into better alignment with other short-term interest rates that had
risen considerably since early July. Furthermore, the action was viewed
as consistent with the general thrust of monetary policy and in particular
with an increase in the FOMC's objective for the federal funds rate in a
period of rapid growth in the monetary aggregates.
On August 16 the Board unanimously approved a further increase of
V2 percentage point in the discount rate to 10V2 percent. In the Board's
judgment, the increase was needed as a timely indication of the System's concern about the persisting strength of inflationary forces in the
economy. The action was also intended to complement a recent decision
by the FOMC to raise further its objective for the federal funds rate in
the effort to curb continued rapid growth in the monetary aggregates.
An increase in the discount rate would bring it into better alignment
with the emerging federal funds rate.
Prior to this action, on August 13, the Board had turned down a
request by one Reserve Bank to raise the discount rate lA percentage
point. That decision was based mainly on considerations of timing,
especially in view of the approaching meeting of the FOMC at which
the overall thrust of monetary policy would be reviewed. Moreover,
conditions in the money market, including spreads between the discount
rate and other short-term interest rates and the level of member bank
borrowings, did not appear to present a strong case for raising the discount rate.
In late August the Board voted not to approve requests by five Reserve Banks to raise the discount rate lA or Vi percentage point. The




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109

members agreed that a case could be made for approval, especially in
light of the continued virulence of inflation, the renewed weakness of
the dollar in foreign exchange markets, and the further strength of the
monetary aggregates. However, a majority preferred to await further developments before raising the discount rate. They emphasized the substantial firming of money market conditions that had already been fostered over the course of recent months, and some members expressed
concern about overdoing the degree of monetary restraint. It was also
suggested that the technical reasons for raising the discount rate—those
relating to interest rate spreads and to the level of member bank borrowings—were not strong, especially for an increase of Vi percentage point.
On September 18 the Board approved by a vote of 4 to 3 an increase
in the discount rate from \QVi to 11 percent. The Board members who
favored this action stressed the strong technical case for approval. Other
short-term interest rates, including the federal funds rate, had risen
appreciably in recent weeks, and an upward adjustment in the discount
rate would bring it into closer alignment with other rates and would tend
to discourage excessive borrowing by member banks. It was also suggested that an increase under present circumstances would tend to dampen inflationary sentiment by signaling the System's concern about inflation and might have a favorable impact on the dollar in foreign exchange markets.
An increase of a full percentage point in the discount rate to a level
of 12 percent was approved unanimously on October 6. This action was
designed to complement policy initiatives that included a change in the
method of conducting monetary policy through open market operations
and the establishment of an 8 percent marginal reserve requirement on
increases in certain bank liabilities. As explained elsewhere in this REPORT, the purpose of this series of actions was to assure better control
over the expansion of money and bank credit and to help curb speculative excesses in financial, foreign exchange, and commodity markets,
thereby dampening inflationary forces in the economy.
The Board believed that an increase of a full percentage point in the
discount rate would best complement the other measures, especially in
light of the objectives of forestalling speculative excesses in financial
markets and curbing expectations of a new inflationary outburst.
Moreover, although the impact of the change in the procedure for conducting open market operations was uncertain, it was thought prudent to
raise the discount rate significantly so that restraint on bank reserves




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Board Policy Actions

through open market operations would not be offset by excessive member bank borrowings.

Mid-October through December: No Change
In late October and early November several Federal Reserve Banks
proposed further increases in the discount rate to HV2 or 13 percent. A
majority of the Board members were opposed to such increases despite
the strong technical reasons for them. Most short-term interest rates,
including the federal funds rate, had risen to levels well above the discount rate and member bank borrowings had advanced to an unusually
high average. However, given the sensitivity and volatility of financial
markets after the October 6 actions, the Board thought that an increase
in the discount rate was likely to be misread as a signal of further
monetary restraint and to be accompanied by further rises in market
interest rates. The Board also felt that more time was needed to determine whether the tight money conditions that had developed after October 6 would lead to slower'monetary growth and to a reduced demand
for borrowing. In this situation and in light of the uncertain economic
outlook, the Board decided to table the proposed increases.
The pending discount rate actions were subsequently reviewed and
tabled at meetings during the first part of November. The tabling procedure, a departure from earlier practice, did not imply a predisposition on
the part of the Board to approve pending actions at a later date. Rather,
its purpose was to keep the Board's options open in a period of marked
uncertainties and thus to facilitate the management of the discount rate.
In late November the Board decided that proposed increases still
pending for three Banks should be disapproved; five other Banks had
withdrawn requests they had submitted earlier. In reaching this decision
the Board took into account sizable declines in most interest rates over
the course of previous weeks, a considerably reduced level of member
bank borrowings, and an apparent moderation in the expansion of the
monetary aggregates.
During December market interest rates fluctuated within much narrower ranges, member bank borrowings declined further on balance, and
growth in the monetary aggregates was relatively moderate. No proposals were made to change the discount rate.




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111

Votes on Reserve Bank Actions to Change the Discount Rate
Under the provisions of the Federal Reserve Act, the boards of directors
of the Federal Reserve Banks are required to establish rates on discounts
for and advances to member banks at least every 14 days and to submit
such rates to the Board for review and determination. The Board votes
listed below are those that involved approval or disapproval of actions to
change the rate. Specific reference is made to the rate on discounts for
and advances to member banks under sections 13 and 13a of the Federal
Reserve Act.
A corresponding change in the rates under other sections of the Federal Reserve Act was approved each time the rate under sections 13 and
13a was raised during 1979. As of December 31, 1979, the structure of
rates was as follows: 12 percent for borrowings under sections 13 and
13a; 1216 percent for borrowings at the regular rate and 13 percent for
borrowings at the special rate under section 10(b); and 15 percent for
borrowings by individuals, partnerships, or corporations other than
member banks under the last paragraph of section 13.
January 12.

\{pt)

The Board disapproved actions taken on January 11 by the directors of the
Federal Reserve Bank of Chicago to increase the discount rate from 9Vi to 93/4
percent and by the directors of the Federal Reserve Banks of Cleveland and
Dallas to increase the discount rate to 10 percent.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1

January 26, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of Cleveland on January 25 to increase the discount rate to 10 percent.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1

March 9, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of Cleveland on March 8 to increase the discount rate to 93A percent.




112

Board Policy Actions

Votes for this action: Messrs. Miller, Wallich, Coldwell, and
Partee. Votes against this action: None. Absent and not voting:
Mrs. Teeters.1

March 30, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of New York on March 29 to increase the discount rate to 93/4 percent.
Votes for this action: Messrs. Miller, Partee, and Mrs. Teeters.
Votes against this action: Messrs. Wallich and Coldwell.1
Messrs. Wallich and Coldwell dissented from this action because they
felt that under prevailing circumstances even a small increase in the
discount rate would provide a desirable signal of the System's determination to persist in its anti-inflationary policy and would help to moderate
strong inflationary expectations that were feeding inflationary pressures in
the economy.
May 11, 1979
The Board disapproved actions taken on May 10 by the directors of the Federal
Reserve Banks of Cleveland, Chicago, and San Francisco to increase the discount rate to 93A percent.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1

May 16, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of Atlanta on May 11 to increase the discount rate to 93A percent.
Votes for this action: Messrs. Miller, Coldwell, Partee, and Mrs.
Teeters. Votes against this action: None. Absent and not voting:
Mr. Wallich.1

May 18, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of Philadelphia on May 17 to increase the discount rate to 93A percent.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Partee,
and Mrs. Teeters. Votes against this action: None.1




Board Policy Actions

113

May 25, 1979
The Board disapproved actions taken by the directors of the Federal Reserve Banks of
Cleveland, Chicago, and St. Louis on May 24 and by the directors of the Federal
Reserve Bank of Atlanta on May 25 to increase the discount rate to 93A percent.
Votes for this action: Messrs. Miller, Partee, and Mrs. Teeters. Vote
against this action: Mr. Wallich. Absent and not voting: Mr. Cold well.'
Mr. Wallich dissented from this action because he believed the proposed increase was desirable to bring the discount rate into closer alignment with market interest rates and to provide a timely signal of the
System's intent to continue pursuing an anti-inflationary policy.
July 19, 1979
Effective July 20, 1979, the Board approved actions taken by the directors of
the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland,
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and
San Francisco to increase the discount rate to 10 percent.
Votes for this action: Messrs. Miller, Wallich, Coldwell, Mrs.
Teeters, and Mr. Rice. Votes against this action: None. Absent and
not voting: Mr. Partee.2

August 13, 1979
The Board disapproved an action taken by the directors of the Federal Reserve
Bank of San Francisco on August 9 to increase the discount rate to 10'A percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.

August 16, 1979
Effective August 17, 1979, the Board approved actions taken by the directors of
the Federal Reserve Banks of New York, Philadelphia, Richmond, and Kansas
City to increase the discount rate to IOV2 percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.




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Board Policy Actions

The Board subsequently approved similar actions taken by the directors of the
Federal Reserve Banks of Cleveland, St. Louis, and Minneapolis, effective August 17, and the Federal Reserve Banks of Boston, Atlanta, Chicago, Dallas,
and San Francisco, effective August 20.

August 31, 1979
The Board disapproved actions taken by the directors of the Federal Reserve
Bank of Cleveland on August 23, the Federal Reserve Banks of Richmond and
San Francisco on August 30, and the Federal Reserve Bank of Atlanta on August 31 to increase the discount rate to 11 percent; and by the directors of the
Federal Reserve Bank of Minneapolis on August 30 to increase the discount rate
to 103/4 percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Partee,
and Mrs. Teeters. Vote against this action: Mr. Coldwell. Absent
and not voting: Mr. Rice.
Mr. Coldwell favored an increase of Vi percentage point. In his judgment, such an increase would underscore the System's continuing policy
of monetary restraint and tend to moderate inflationary expectations at a
time of strong and persisting inflationary pressures and rapid growth in
money and credit aggregates.
September 18, 1979
Effective September 19, 1979, the Board approved actions taken by the directors
of the Federal Reserve Banks of Boston, New York, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco to increase
the discount rate to 11 percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, and
Coldwell. Votes against this action: Mr. Partee, Mrs. Teeters, and
Mr. Rice.
The Board subsequently approved similar actions taken by the directors of the
Federal Reserve Bank of Kansas City, effective September 20, and the Federal
Reserve Bank of Philadelphia, effective September 21.
Mr. Partee, Mrs. Teeters, and Mr. Rice dissented from this action
because they preferred a steady policy course for the immediate future.
In their judgment, more time was needed to assess current uncertainties
in the economic outlook and the impact of increasing restraint on bank
reserves and money market conditions implemented over the course of
recent months.




Board Policy Actions

115

October 6, 1979
Effective October 8, 1979, the Board approved actions taken by the directors of
the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond,
St. Louis, Minneapolis, and San Francisco to increase the discount rate to 12 percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.
The Board subsequently approved similar actions taken by the directors of the
Federal Reserve Banks of Atlanta, Chicago, Kansas City, and Dallas, effective
October 9, and the Federal Reserve Bank of Boston, effective October 10.

November 26, 1979
The Board disapproved actions taken by the directors of the Federal Reserve
Bank of Cleveland on November 21 to increase the discount rate to 13 percent,
and by the directors of the Federal Reserve Banks of Chicago and Atlanta on
November 21 and November 23 respectively to increase the discount rate to
12]/2 percent.
Votes for this action: Messrs. Volcker, Schultz, Wallich, Coldwell, Partee, Mrs. Teeters, and Mr. Rice. Votes against this action: None.




116

Record of Policy Actions of the
Federal Open Market Committee
The record of policy actions of the Federal Open Market Committee is
presented in the ANNUAL REPORT of the Board of Governors pursuant to
the requirements of section 10 of the Federal Reserve Act. That section
provides that the Board shall keep a complete record of the actions
taken by the Board and by the Federal Open Market Committee on all
questions of policy relating to open market operations, that it shall record therein the votes taken in connection with the determination of open
market policies and the reasons underlying each such action, and that it
shall include in its ANNUAL REPORT to the Congress a full account of
such actions.
In the pages that follow, there are entries with respect to the policy
actions taken at the meetings of the Federal Open Market Committee
held during the calendar year 1979, including the votes on the policy
decisions made at those meetings as well as a resume of the basis for
the decisions. The summary descriptions of economic and financial conditions are based on the information that was available to the Committee
at the time of the meetings, rather than on data as they may have been
revised later.
It will be noted from the record of policy actions that in some cases
the decisions were by unanimous vote and that in other cases dissents
were recorded. The fact that a decision in favor of a general policy was
by a large majority, or even that it was by unanimous vote, does not
necessarily mean that all members of the Committee were equally
agreed as to the reasons for the particular decision or as to the precise
operations in the open market that were called for to implement the
general policy.
During 1979 the policy record for each meeting was released a few
days after the next regularly scheduled meeting and was subsequently
published in the Federal Reserve Bulletin.
Policy directives of the Federal Open Market Committee are issued to
the Federal Reserve Bank of New York as the Bank selected by the
Committee to execute transactions for the System Open Market Ac-




FOMC Policy Actions

117

count. In the area of domestic open market activities, the Federal Reserve Bank of New York operates under two separate directives from
the Open Market Committee, an Authorization for Domestic Open Market Operations and a domestic policy directive. In the foreign currency
area, it operates under an Authorization for Foreign Currency Operations and a foreign currency directive. These four instruments are shown
below in the form in which they were in effect at the beginning of
1979. Changes in the instruments during the year are reported in the
records for the individual meetings.

AUTHORIZATION FOR DOMESTIC
OPEN MARKET OPERATIONS

In effect January 1, 1979
1. The Federal Open Market Committe authorizes and directs the Federal
Reserve Bank of New York, to the extent necessary to carry out the most recent
domestic policy directive adopted at a meeting of the Committee:
(a) To buy or sell U.S. Government securities, including securities of the
Federal Financing Bank, and securities that are direct obligations of, or fully
guaranteed as to principal and interest by, any agency of the United States in the
open market, from or to securities dealers and foreign and international accounts
maintained at the Federal Reserve Bank of New York, on a cash, regular, or
deferred delivery basis, for the System Open Market Account at market prices
and, for such Account, to exchange maturing U.S. Government and Federal
agency securities with the Treasury or the individual agencies or to allow them
to mature without replacement; provided that the aggregate amount of U.S.
Government and Federal agency securities held in such Account (including forward commitments) at the close of business on the day of a meeting of the
Committee at which action is taken with respect to a domestic policy directive
shall not be increased or decreased by more than $3.0 billion during the period
commencing with the opening of business on the day following such meeting
and ending with the close of business on the day of the next such meeting;
(b) When appropriate, to buy or sell in the open market, from or to acceptance dealers and foreign accounts maintained at the Federal Reserve Bank of
New York, on a cash, regular, or deferred delivery basis, for the account of the
Federal Reserve Bank of New York at market discount rates, prime bankers
acceptances with maturities of up to 9 months at the time of acceptance that (1)
arise out of current shipment of goods between countries or within the United
States, or (2) arise out of the storage within the United States of goods under
contract of sale or expected to move into the channels of trade within a reasonable time and that are secured throughout their life by a warehouse receipt or




118

FOMC Policy Actions

similar document conveying title to the underlying goods; provided that the aggregate amount of bankers acceptances held at any one time shall not exceed
$100 million;
(c) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the
United States, and prime bankers acceptances of the types authorized for purchase under l(b) above, from dealers for the account of the Federal Reserve
Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days or less, at rates that, unless otherwise
expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with
individual dealers; provided that in the event Government securities or agency
issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or
transferred to the System Open Market Account; and provided further that in the
event bankers acceptances covered by any such agreement are not repurchased
by the seller, they shall continue to be held by the Federal Reserve Bank or
shall be sold in the open market.
2. The Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York, or, under special circumstances, such as when the
New York Reserve Bank is closed, any other Federal Reserve Bank, to purchase
directly from the Treasury for its own account (with discretion, in cases where it
seems desirable, to issue participations to one or more Federal Reserve Banks)
such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the rate charged on such certificates shall be a rate ]A of 1 percent
below the discount rate of the Federal Reserve Bank of New York at the time of
such purchases, and provided further that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed $2 billion.
3. In order to insure the effective conduct of open market operations, the
Federal Open Market Committee authorizes and directs the Federal Reserve
Banks to lend U.S. Government securities held in the System Open Market
Account to Government securities dealers and to banks participating in Government securities clearing arrangements conducted through a Federal Reserve
Bank, under such instructions as the Committee may specify from time to time.
4. In order to ensure the effective conduct of open market operations, while
assisting in the provision of short-term investments for foreign and international
accounts maintained at the Federal Reserve Bank of New York, the Federal
Open Market Committee authorizes and directs the Federal Reserve Bank of
New York, (a) for System Open Market Account, to sell U.S. Government
securities to such foreign and international accounts on the bases set forth in
paragraph 1 (a) under agreements providing for the resale by such accounts of
those securities within 15 calendar days on terms comparable to those available
on such transactions in the market; and (b) for New York Bank account, when
appropriate, to undertake with dealers, subject to the conditions imposed on




FOMC Policy Actions

119

purchases and sales of securities in paragraph 1 (c), repurchase agreements in
U.S. Government and agency securities, and to arrange corresponding sale and
repurchase agreements between its own account and foreign and international
accounts maintained at the Bank. Transactions undertaken with such accounts
under the provisions of this paragraph may provide for a service fee when appropriate.
DOMESTIC POLICY DIRECTIVE

In effect January 1, 1979
The information reviewed at this meeting suggests that in the current quarter real
output of goods and services has picked up somewhat from the rate in the third
quarter. In November, as in October, the dollar value of total retail sales expanded substantially. Industrial production and nonfarm payroll employment
rose considerably further, and the unemployment rate remained at 5.8 percent.
Over recent months, broad measures of prices and the index of average hourly
earnings have risen rapidly.
The trade-weighted value of the dollar against major foreign currencies declined sharply following OPEC's announcement on December 17 of increased
oil prices for 1979, after having declined slightly over the previous few weeks.
but it remains substantially above the low reached just prior to the actions taken
on November 1 to strengthen the dollar. The U.S. trade deficit in October was
at about the rate recorded in the second and third quarters.
M-l declined in November, only in part because of shifts of funds from demand deposits to savings deposits after the introduction of the automatic transfer
service (ATS) at the beginning of the month. Over the first 11 months of 1978.
M-l grew at an annual rate of about 714 percent. Growth of M-2 and M-3
slackened further in November; they grew at rates of about 8]A and 9]A percent,
respectively, over the first 11 months of the year. Inflows of deposits to nonbank thrift institutions slowed in November, after having grown rapidly in the
preceding 3 months. Market interest rates in general have risen further in recent
weeks.
In light of the foregoing developments, it is the policy of the Federal Open
Market Committee to foster monetary and financial conditions that will resist
inflationary pressures while encouraging continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its
meeting on October 17, 1978, in setting ranges for the monetary aggregates, the
Committee recognized the uncertainties concerning the effects that the November 1 introduction of ATS would have on measures of the money supply, especially M-l. Against that background, the Committee agreed that appropriate
monetary and financial conditions would be furthered by growth of M-2 and M-3
from the third quarter of 1978 to the third quarter of 1979 within ranges of
6V2 to 9 percent and IV2 to 10 percent, respectively. The narrowly defined
money supply (M-l) was expected to grow within a range of 2 to 6 percent over




120

FOMC Policy Actions

the period, depending in part on the speed and extent of transfers from demand
to savings deposits resulting from the introduction of ATS. The associated range
for bank credit is 8V2 to 11V2 percent. Growth of M-1 + (M-l plus savings
deposits at commercial banks and NOW accounts) in a range of 5 to IV2 percent
was thought to be generally consistent with the ranges of growth for the foregoing aggregates. These ranges are subject to reconsideration at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and money
market conditions that are broadly consistent with the longer-run ranges for
monetary aggregates cited above, while giving due regard to the program for
supporting the foreign exchange value of the dollar, to developing conditions in
domestic financial markets, and to uncertainties associated with the introduction
of ATS. Early in the period before the next regular meeting, System open market operations are to be directed at attaining a weekly average Federal funds rate
slightly above the current level. Subsequently, operations shall be directed at
maintaining the weekly average Federal funds rate at about 10 percent or
slightly above. In deciding on the specific objective for the Federal funds rate
the Manager shall be guided mainly by the relationship between the latest estimates of annual rates of growth in the December-January period of M-1 and M-2
and the following ranges of tolerance: 2 to 6 percent for M-l and 5 to 9
percent for M-2. If, giving approximately equal weight to M-l and M-2, their
rates of growth appear to be significantly above the midpoints of the indicated
ranges, the objective for the funds rate shall be raised in an orderly fashion
within its range; if their rates of growth appear to be approaching the lower
limits of the indicated ranges, the funds rate shall be lowered in an orderly
fashion within its range.
If the rates of growth in the aggregates appear to be falling outside the limits
of the indicated ranges at a time when the objective for the funds rate has
already been moved to the corresponding limit of its range, the Manager will
promptly notify the Chairman, who will then decide whether the situation calls
for supplementary instructions from the Committee.
AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS

In effect January 1, 1979
1. The Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York, for System Open Market Account, to the extent
necessary to carry out the Committee's foreign currency directive and express
authorizations by the Committee pursuant thereto, and in conformity with such
procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable
transfers through spot or forward transactions on the open market at home and
abroad, including transactions with the U.S. Treasury, with the U.S. Exchange
Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934,




FOMC Policy Actions

121

with foreign monetary authorities, with the Bank for International Settlements,
and with other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have outstanding forward contracts to receive
or to deliver, the foreign currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars
under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first
drawn, unless the Committee, because of exceptional circumstances, specifically
authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding $1.0 billion, unless a larger position is expressly authorized by the Committee. [Note. An overall open position not exceeding $8.0 billion had been expressly authorized by the Committee on December 19, 1978, and was in effect
as of January 1, 1979.] For this purpose, the overall open position in all foreign
currencies is defined as the sum (disregarding signs) of net positions in individual currencies. The net position in a single foreign currency is defined as
holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as
the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of
New York to maintain reciprocal currency arrangements ("swap" arrangements)
for the System Open Market Account for periods up to a maximum of 12
months with the following foreign banks, which are among those designated by
the Board of Governors of the Federal Reserve System under Section 214.5 of
Regulation N, Relations with Foreign Banks and Bankers, and with the approval
of the Committee to renew such arrangements on maturity:
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy




Amount of arrangement
(millions of dollars equivalent)
250
1,000
2,000
250
3,000
2,000
6,000
3,000

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FOMC Policy Actions

Foreign bank
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

Amount of arrangement
(millions of dollars equivalent)
5,000
360
500
250
300
4,000
600
1,250

Any changes in the terms of existing swap arrangements, and the proposed
terms of any new arrangements that may be authorized, shall be referred for
review and approval to the Committee.
3. Currencies to be used for liquidation of System swap commitments may be
purchased from the foreign central bank drawn on, at the same exchange rate as
that employed in the drawing to be liquidated. Apart from any such purchases at
the rate of the drawing, all transactions in foreign currencies undertaken under
paragraph 1(A) above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates.
4. It shall be the normal practice to arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit itself to maintain any specific
balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be
referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested insofar as practicable, considering needs for minimum working balances. Such investments shall be in accordance with Section 14(e) of the Federal Reserve Act.
6. All operations undertaken pursuant to the preceding paragraphs shall be
reported daily to the Foreign Currency Subcommittee. The Foreign Currency
Subcommittee consists of the Chairman and Vice Chairman of the Committee,
the Vice Chairman of the Board of Governors, and such other member of the
Board as the Chairman may designate (or in the absence of members of the
Board serving on the Subcommittee, other Board Members designated by the
Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, for the purposes of
reviewing recent or contemplated operations and of consulting with the Manager
on other matters relating to his responsibilities. At the request of any member of
the Subcommittee, questions arising from such reviews and consultations shall
be referred for determination to the Federal Open Market Committee.




FOMC Policy Actions

123

7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of
responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System
foreign currency operations, and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to
the National Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G( 1) of the Board of
Governors' Statement of Procedure with Respect to Foreign Relationships of
Federal Reserve Banks dated January 1, 1944.
FORhiGN CURRENCY DIRECTIVE

In effect January 1, 1979
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the
U.S. dollar reflect actions and behavior consistent with the proposed IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries and
with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in
particular currencies, and to facilitate operations of the Exchange Stabilization
Fund.
C. For such other purposes as may be expressly authorized by the Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the United
States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities: and
C. In a manner consistent with the obligations of the United States in the
International Monetary Fund regarding exchange arrangements under the proposed IMF Article IV.




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FOMC Policy Actions

MEETING HELD ON FEBRUARY 6, 1979

1.

Domestic Policy Directive

Growth in real output of goods and services had accelerated to an
annual rate of 6.1 percent in the fourth quarter of 1978, according
to preliminary estimates of the Commerce Department, from a rate
of 2.6 percent in the third quarter. Average prices, as measured by
the fixed-weight price index for gross domestic business product, rose
at an annual rate of 8.3 percent in the fourth quarter, slightly faster
than the rate in the third quarter.
Staff projections for 1979 suggested a marked slowing in the
expansion of economic activity by the second quarter of the year
and a sustained slow rate of growth during the remaining quarters.
Average prices were projected to continue rising at a rapid pace, and
the rate of unemployment was expected to increase somewhat from
its level in the fourth quarter.
The index of industrial production increased an estimated 0.6 percent
in December, close to its average gain in earlier months of the year.
Expansion in nonfarm payroll employment, including employment in
manufacturing, continued strong in December and January. The January rate of unemployment, at 5.8 percent, was essentially unchanged
from the previous five months.
The dollar value of total retail sales expanded considerably further
in December, following two months of substantial gains. After declining somewhat in November, unit sales of new automobiles picked
up in December and the first 20 days of January to a pace in line
with that in the July-October period.
Private housing starts were at an annual rate of 2.1 million units
in December and in the fourth quarter as a whole. In November,
however, total sales of new and existing single-family houses declined
somewhat.
The latest Department of Commerce survey of business spending
plans, taken in late November and December, suggested that spending




FOMC Policy Actions

125

for plant and equipment would expand 11.2 percent from 1978 to
1979. The estimated increase in 1978 was about 12% percent. Manufacturers' new orders for nondefense capital goods declined 11 percent
over November and December, but orders for the fourth quarter as
a whole were considerably above those in the third quarter.
The index of average hourly earnings of private nonfarm production
workers rose at an annual rate of lOVi percent in January; this rate
of increase represented an acceleration from 8 percent in the fourth
quarter and reflected in part a rise of about 9Vi percent in the minimum
wage to $2.90 on January 1. The consumer price index rose at an
annual rate of almost 8 percent, and average prices of producer finished
goods at a rate of about 10^ percent in the fourth quarter; both
measures were up about 9 percent from December 1977 to December
1978. In early 1979 there were substantial increases in prices of many
farm products and an upward adjustment in oil prices by the Organization of Petroleum Exporting Countries.
In foreign exchange markets the trade-weighted value of the dollar
against major foreign currencies moved generally upward after the
turn of the year; by the date of this meeting the advance had about
offset the sharp decline that followed the OPEC announcement on
December 17 of a larger-than-anticipated increase in oil prices for
1979. The U.S. merchandise trade deficit was at an estimated annual
rate of $30 billion in the fourth quarter of 1978, close to the rates
recorded in the second and third quarters.
In December growth of total credit at U.S. commercial banks
moderated considerably further from its reduced November pace, as
the expansion of bank loans slowed sharply and banks continued to
liquidate holdings of securities. However, data from large banks
suggested a strengthening of business loan growth in January. Outstanding commercial paper of nonfinancial businesses continued to
increase rapidly in December.
The narrowly defined money supply (M-l) declined at an annual
rate of l!/2 percent over the December-January period.1 This further
contraction appeared to reflect, among other influences, the shifts of
funds from demand deposits to savings deposits associated with the
recently introduced automatic transfer service (ATS) and negotiable
order of withdrawal (NOW) accounts in New York State. There was
1. M-l comprises private demand deposits and currency in circulation.




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virtually no growth in M-2 over the December-January period, while
growth in M-3 slackened further as relatively high market interest
rates continued to curb inflows of time and savings deposits subject
to fixed interest rate ceilings.2 However, growth in other time deposits,
including 6-month money market certificates and large-denomination
certificates of deposit, remained sizable. From the fourth quarter of
1977 to the fourth quarter of 1978, M-l, M-2, and M-3 expanded
about 7lA, SV2, and 9lA percent, respectively; for all three monetary
aggregates, growth was substantially less than it had been over the
preceding year.
At its meeting on December 19, the Committee had agreed that
early in the intermeeting period open market operations should be
directed toward attaining a weekly average federal funds rate of 10
percent or slightly higher. This objective represented a slight increase
from the prevailing level. Subsequently, the objective for the federal
funds rate was to be maintained within the range of 93A to 10*/2 percent.
In setting a specific objective for the funds rate, the Manager of the
System Open Market Account was to be guided mainly by the
relationship between the estimated annual rates of growth in M-l and
M-2 over the December-January period and ranges of tolerance for
those two monetary aggregates of 2 to 6 percent and 5 to 9 percent,
respectively. If, with approximately equal weight given to M-l and
M-2, their rates of growth appeared to be significantly above the
midpoints of the indicated ranges, the objective for the federal funds
rate was to be raised in an orderly fashion within its range. On the
other hand, the objective was to be lowered in an orderly fashion
if the two-month growth rates appeared to be approaching the lower
limits of the indicated ranges.
Immediately following the December 19 meeting the Manager of
the System Open Market Account began to seek bank reserve conditions consistent with an increase in the weekly average federal funds
rate to 10 percent or slightly higher, from a level around 9% percent.
However, federal funds traded at somewhat higher levels around the
year-end, reflecting uncertainties that affected demands for bank re-

2. M-2 comprises M-l and commercial bank time and savings deposits other
than large-denomination certificates of deposit. M-3 is M-2 plus deposits at
nonbank thrift institutions (savings and loan associations, mutual savings banks,
and credit unions).




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127

serves. By late December, staff projections suggested that growth in
M-2 over the December-January period would be at an annual rate
well below the lower limit of the range of tolerance specified for that
aggregate and growth in M-l would be in the lower portion of its
range of tolerance.
These developments pointed to a reduction in the objective for the
federal funds rate toward the 9% percent lower limit of the specified
range. However, on December 29 the Committee voted to modify
its directive by calling for open market operations directed at maintaining the weekly average federal funds rate at about 10 percent or
slightly above. This action was taken in view of uncertainties surrounding the interpretation of the behavior of the monetary aggregates
and in light of domestic economic conditions and developments in
domestic and international financial markets. On January 12 the Committee held a telephone conference to review the situation and to
consider whether supplementary instructions were needed, but no
change was made in the instruction to the Manager.
Most market interest rates declined on balance during the intermeeting period. Factors apparently contributing to this development included a market sentiment that further tightening in monetary policy
had become less likely in light of the behavior of the monetary
aggregates and the better performance of the dollar in foreign exchange
markets. Another influence appeared to be the recent modest growth
of total business credit demands. Commercial banks raised the loan
rate to prime business borrowers from IIV2 to 11% percent during
the period, but a few banks later reduced the rate back to 11V2 percent.
At this meeting, in conjunction with its discussion of the economic
situation and outlook, the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. At its meeting in October 1978
the Committee had specified ranges of 6!/2 to 9 percent for M-2 and
IV2 to 10 percent for M-3 for the period from the third quarter of
1978 to the third quarter of 1979. The committee also had indicated
that it expected growth of M-1 to be within a range of 2 to 6 percent—a
range that reflected uncertainty concerning both the size and the speed
of the expected shift of deposits from demand to savings accounts
resulting from the introduction of ATS, and of NOW accounts in New
York State. The associated range for commercial bank credit was 8V£
to 11V2 percent. The Committee also had decided that growth of M-l -h
within a range of 5 to IV2 percent appeared to be generally consistent




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with the ranges of growth for the other monetary aggregates. The
ranges being considered at this meeting were for the period from the
fourth quarter of 1978 to the fourth quarter of 1979.
The Committee's review of its longer-run ranges at this time was
undertaken for the first time within the framework of the Full Employment and Balanced Growth ("Humphrey-Hawkins") Act of 1978.
That act, which amended section 2A of the Federal Reserve Act,
requires the Board of Governors to transmit to the Congress by
February 20 and July 20 of each year written reports concerning the
objectives and plans of the Board and the Committee with respect
to the ranges of growth or diminution of the monetary and credit
aggregates for the calendar year during which the report is transmitted
and, in the case of the July report, the objectives and plans with respect
to ranges for the following calendar year as well. The act also requires
that the written reports set forth a review and analysis of recent
developments affecting economic trends in the Nation and the relationship of the plans and objectives for the aggregates to the short-term
goals set forth in the most recent Economic Report of the President
and to any short-term goals approved by the Congress. 3
With respect to the economic situation and outlook, most members
of the committee expressed little or no disagreement with the staff
projection of a marked slowing in the expansion by the second quarter
of 1979 and of a sustained slow rate of growth over the rest of the
year accompanied by some increase in the rate of unemployment.
However, a few members questioned whether a very slow pace of
growth was sustainable and suggested that the onset of a recession
before the end of the year, with a larger increase in the unemployment
rate, was the more likely development. Other members thought that
over the past few months the probabilities of the development of a
recession before the end of this year had declined somewhat. It was
also observed that expansion might prove to be stronger than projected
by the staff, especially if businessmen believed that effective steps
were being taken to moderate the rate of inflation.
The members continued to anticipate a relatively rapid rise in
average prices. Inflation was viewed as a distortion that could contrib-

3. The Board's first report under the act was transmitted to the Congress on
February 20, 1979.




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129

ute to the development of a recession, and it was noted that forecasters
typically had underestimated the strength of inflationary forces. In this
connection, it was observed that the economy was operating at a higher
rate in relation to its potential than had been thought earlier.
In contemplating ranges for the monetary aggregates for the year
ahead, the Committee continued to face unusual uncertainties concerning the forces affecting monetary growth. A staff analysis had
suggested that shifts in funds from demand deposits to savings accounts
with automatic transfer services and to the NOW accounts in New
York would depress growth of M-1 over the year by about 3 percentage
points, but that projection was based on only a brief experience.
Moreover, it appeared that the publicity associated with ATS and the
sustained high level of interest rates had induced the public to reassess
more generally the desirability of holding demand deposits. It was
expected that such a reassessment would continue over the year ahead,
reducing somewhat further the demand for M-l in relation to income
as the public moved funds from demand deposits to interest-bearing
assets.
Significant uncertainties existed with respect to growth of M-2 and
M-3 as well. It appeared that the level of market interest rates had
been inducing the public to divert large amounts of funds from deposits
subject to fixed ceiling rates into market instruments. The staff analysis
suggested that diversions of funds would continue in the period ahead,
although not in the proportions of recent months. Thus, growth of
the interest-bearing deposits included in the broader monetary aggregates was projected to pick up but to remain slower during 1979 than
during 1978.
In the Committee's discussion, stress was placed on the importance
of adopting ranges for monetary growth over the year ahead that would
be consistent with a reduction in the rate of inflation, thereby reinforcing the governmental actions over recent months in pursuit of that
objective. It was observed that the adoption of ranges for 1979 that,
after allowance for ATS, were indicative of slower monetary growth
might well influence attitudes and expectations in such a way that
the rate of inflation would decline significantly without an adverse
effect on the rate of unemployment. In this connection, it was suggested that any indication of a move toward an easing of monetary
policy might change expectations so as to aggravate inflationary forces
and thus increase rather than reduce the risks of a recession. It was




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also suggested that lowering the ranges to a degree that contributed
to the onset of a recession could lead to developments that in the
longer run would be inflationary.
At the conclusion of the discussion, the Committee decided both
to lower the ranges for growth of the monetary aggregates over the
year ahead and to widen them slightly, reflecting in part the special
factors expected to influence monetary growth and the uncertainties
with respect to the magnitude of their impact. For the period from
the fourth quarter of 1978 to the fourth quarter of 1979, the Committee
adopted a range of IV2 to 4J/2 percent for M-l. After allowance for
a dampening effect of about 3 percentage points projected to result
from the further shifts in funds from demand deposits to savings
accounts with automatic transfer facilities, that range allowed for the
possibility of a significant deceleration of growth from the pace of
recent years.
The ranges adopted for M-2 and M-3 were 5 to 8 percent and 6
to 9 percent respectively. The associated range for the growth of
commercial bank credit was reduced to IVi to 10V2 percent. It was
understood that the longer-run ranges, as well as the particular aggregates for which ranges were specified, would be reconsidered in July
or at any time that conditions might warrant. It was also understood
that short-run factors might cause growth rates from one month to
the next to fall outside the ranges anticipated for the year.
The Committee adopted the following ranges for rates of growth in
monetary aggregates for the period from the fourth quarter of 1978 to
the fourth quarter of 1979: M-l, V/z to 4Vi percent; M-2, 5 to 8 percent;
and M-3, 6 to 9 percent. The associated range for bank credit is ll/i
to 101/2 percent.
Votes for this action: Messrs. Miller, Volcker, Baughman,
Cold well, Eastburn, Partee, Mrs. Teeters, and Mr. Mayo.
Votes against this action: Messrs. Wallich and Willes. Absent:
Mr. Winn. (Mr. Mayo voted as alternate for Mr. Winn.)
Messrs. Wallich and Willes dissented from this action because,
with the Committee's objective of slowing the rate of inflation
in mind, they preferred to specify lower ranges for growth of the
monetary aggregates. Mr. Willes believed that the range adopted
for M-l, after allowance for the effects of ATS and a possible
further downward shift in the public's demand for money, represented an increase from the ranges that had been adopted during




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131

1978. Mr. Wallich thought that, after allowance for the expansion
in repurchase agreements and Eurodollars in addition to the other
forces affecting growth of M-1, the range adopted represented too
much of an increase from the ranges set earlier.
In the discussion of policy for the period immediately ahead,
most members of the Committee favored directing operations
initially toward maintaining the money market conditions currently
prevailing, as indicated by a federal funds rate of 10 percent or
slightly higher, but some sentiment was expressed for a slight
additional firming in money market conditions. The views of the
members differed primarily with respect to the influence that the
incoming evidence concerning growth of the monetary aggregates
should have on the objective for the funds rate later in the period
before the next meeting.
A few members, emphasizing the rate of inflation and the position
of the dollar in foreign exchange markets, advocated an approach
similar to that in the directive issued at the meeting in December;
that directive instructed the Manager to vary the objective for the
federal funds rate within its range more quickly in response to
relatively high than to relatively low rates of monetary growth.
A few others, emphasizing the uncertainties in the outlook for
domestic economic activity and for employment and the weakness
of monetary growth over recent months, preferred a symmetrical
approach in which the objective for the funds rate would be changed
no more promptly in response to relatively high than to relatively
low rates of monetary growth. A number of members suggested
that, in any event, the Committee consult again before any change
was made in the objective for the federal funds rate.
The Committee decided to instruct the Manager to direct open
market operations toward maintaining the weekly average federal
funds rate at about the current level, provided that over the
February—March period the annual rates of growth of M-l and M-2,
given approximately equal weight, appeared to be within ranges
of 3 to 7 percent and 5 to 9 percent, respectively. The Committee
agreed that if growth of M-l and M-2 for the two-month period
appeared to be outside the indicated limits, the Manager was
promptly to notify the Chairman, who would then consult with
the Committee to determine whether the situation called for supplementary instructions.




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The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the fourth
quarter of 1978 growth in real output of goods and services picked up
sharply from the reduced rate in the third quarter. In December, as in
the preceding two months, the dollar value of total retail sales expanded
substantially, and industrial production and nonfarm payroll employment
rose considerably further. Employment continued to grow in January,
and the unemployment rate, at 5.8 percent, was virtually the same as
in the final months of 1978. Over recent months, broad measures of prices
and the index of average hourly earnings have continued to rise rapidly.
The trade-weighted value of the dollar against major foreign currencies
has tended upward since the turn of the year, returning to about its level
in mid-December prior to the OPEC announcement of increased oil prices.
The U.S. trade deficit in the fourth quarter of 1978 was at about the
same rate as in the second and third quarters.
M-l increased little in December and appears to have declined in
January, in part because of the continuing effects of the introduction of
the automatic transfer service (ATS) on November 1, and M-2 and M-3
grew at relatively slow rates. With market interest rates relatively high,
inflows to banks of the interest-bearing deposits included in M-2 slowed
sharply, and inflows of deposits to nonbank thrift institutions slackened
further. Over the year from the fourth quarter of 1977 to the fourth quarter
of 1978, M-l, M-2, and M-3 grew about 714, SVi, and 9Vi percent,
respectively. Most market interest rates have declined on balance in recent
weeks.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal
Open Market Committee to foster monetary and financial conditions that
will resist inflationary pressures while encouraging moderate economic
expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered
by growth of M-l, M-2, and M-3 from the fourth quarter of 1978 to
the fourth quarter of 1979 within ranges of 1V2 to 4Vi percent, 5 to 8
percent, and 6 to 9 percent, respectively. The associated range for bank
credit is IV2 to IOV2 percent. These ranges will be reconsidered in July
or at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
the program for supporting the foreign exchange value of the dollar and
to developing conditions in domestic financial markets. In the period
before the next regular meeting, System open market operations are to
be directed at maintaining the weekly average federal funds rate at about




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133

the current level, provided that over the February-March period the annual
rates of growth of M-l and M-2, given approximately equal weight, appear
to be within ranges of 3 to 7 percent and 5 to 9 percent, respectively.
If growth of M-1 and M-2 for the two-month period appears to be outside
the indicated limits, the Manager will promptly notify the Chairman, who
will then consult with the Committee to determine whether the situation
calls for supplementary instructions.
Votes for this action: Messrs. Miller, Volcker, Baughman,
Eastburn, Partee, Mrs. Teeters, Messrs. Wallich, Willes, and
Mayo. Vote against this action: Mr. Cold well. Absent: Mr.
Winn. (Mr. Mayo voted as alternate for Mr. Winn.)
Mr. Cold well dissented from this action because he preferred
to direct open market operations early in the coming period toward
a slight firming in money market conditions. He felt that the greatest
danger currently was an intensification of inflationary pressures and
that the longer-range prospects for inflation were unacceptable.
Subsequent to the meeting, at the beginning of March, projections suggested that over the February-March period M-l would
grow at an annual rate moderately below the lower limit of the
range of 3 to 7 percent that had been specified by the Committee
and M-2 would grow at a rate just below the lower limit of its range
of 5 to 9 percent. On March 2 the Committee held a telephone meeting
to determine whether the situation called for supplementary instructions. In light of contradictory evidence concerning underlying trends
in economic activity following the strong performance in the fourth
quarter of 1978, Chairman Miller recommended that the Manager be
instructed to continue to aim for a weekly average federal funds rate
of about 10 percent or slightly higher. The members concurred in
the Chairman's recommendation.
By unanimous vote, the Committee modified the domestic policy
directive adopted at its meeting on February 6, 1979, to call for continuance of open market operations directed toward maintaining the weekly
average federal funds rate at about 10 percent or slightly above.
Votes for this action: Messrs. Miller, Volcker, Black,
Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, Messrs.
Wallich, and Guffey. Absent: Mr. Balles. (Mr. GufTey voted
as alternate for Mr. Balles.)




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2. Authorization for Domestic Open Market Operations
At this meeting the Committee voted to set a limit of $5 billion on
changes between Committee meetings in holdings of U.S. Government
and federal agency securities specified in paragraph l(a) of the
authorization for domestic open market operations, effective for the
period ending with the close of business on March 20, 1979. During
the period since its meeting on December 19, 1978, the Committee
had temporarily increased the limit specified in paragraph l(a) in two
steps, from $3 billion to $5 billion and subsequently to $6 billion
until the close of business on February 6, 1979. The action to set
the limit at $5 billion for the coming period was taken to provide
flexibility for operations in view of the magnitude of float and other
factors that might affect reserves in the weeks ahead and in view of
the length of the interval until the next Committee meeting scheduled
for March 20, 1979.
Votes for this action: Messrs. Miller, Volcker, Baughman,
Cold well, Eastburn, Partee, Mrs. Teeters, Messrs. Wallich,
Willes, and Mayo. Votes against this action: None. Absent:
Mr. Winn. (Mr. Mayo voted as alternate for Mr. Winn.)




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135

MEETING HELD ON MARCH 20, 1979

1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services had moderated in the current quarter
after having accelerated to an annual rate of 6.9 percent in the fourth
quarter of 1978. The rise in average prices, as measured by the
fixed-weight price index for gross domestic business product, appeared
to have been faster than the annual rate of 8.0 percent recorded in
the third and fourth quarters of 1978.
Staff projections of growth in output over the four quarters of 1979
had been reduced somewhat from those prepared for the February
meeting, in large part because of a reduction in the expected rate
of expansion in the current quarter. The projections continued to
suggest sluggish growth during the second half of the year. The rise
in average prices was projected to remain rapid, and the rate of
unemployment was expected to increase somewhat from its current
level.
The dollar value of total retail sales rose slightly further in January
and February, following several months of sizable gains, but sales
in real terms apparently declined. Unit sales of new automobiles for
the two months were just above the pace in the second half of 1978.
The index of industrial production was unchanged in January and
increased 0.3 percent in February, following advances in the preceding
three months that averaged about 0.7 percent. The slowdown appeared
to be caused in part by adverse weather. Total nonfarm payroll
employment, and also its manufacturing component, expanded appreciably further in the two months, although the increases were somewhat
below the average monthly gains during the fourth quarter. The rate
of unemployment was 5.7 percent in February, little changed from
other recent months.
Total private housing starts fell sharply in January and declined
further in February to an annual rate of 1.4 million units. In January
total sales of new and existing single-family houses declined substantially.




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The latest survey by the Department of Commerce of business plans,
taken in late January and February, suggested that spending for plant
and equipment would expand 11.3 percent in 1979, virtually the same
as the gain that had been indicated by the December survey. The
increase in 1978 was estimated to have been 13.3 percent. Manufacturers' new orders for nondefense capital goods advanced sharply in
January after having risen considerably on balance during the fourth
quarter.
The index of average hourly earnings of private nonfarm production
workers rose at an annual rate of 4.3 percent in February, following
increases averaging about 8.5 percent in the preceding four months.
In some industries with relatively low wage rates, hourly earnings
had increased sharply in January, when increased minimum wages
became effective, and then changed little in February.
The trade-weighted value of the dollar against major foreign currencies had not changed on balance since the February 6 meeting of
the Committee. The U.S. merchandise trade deficit rose sharply in
January, but revised data suggested a smaller deficit for the fourth
quarter of 1978 than had been published earlier. Imports, especially
of oil, increased sharply in January, while exports declined slightly.
In January and February growth of total credit at U.S. commercial
banks accelerated considerably from its reduced pace during late 1978.
Expansion in business loans was unusually strong, and banks also
added substantially to their holdings of securities.
M-l declined in both January and February, M-2 changed little,
and M-3 grew at a relatively slow rate. With interest rates remaining
high, the behavior of all three monetary aggregates was affected by
unusually large shifts of funds from deposits to money market mutual
funds and other liquid assets. The weakness in M-l also reflected
the effects of continuing movements of funds from demand deposits
to savings deposits associated with the recently authorized automatic
transfer service (ATS) and negotiable orders of withdrawal (NOW)
accounts in New York State.
Banks and thrift institutions financed credit expansion mainly
through net additions to outstanding six-month money market certificates and large-denomination certificates of deposit, which are not
subject to fixed ceilings on interest rates. Inflows of time and savings
deposits subject to fixed rate ceilings continued to be inhibited by
the availability of higher-yielding investment alternatives. Overall,




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137

inflows of interest-bearing deposits included in M-2 and M-3 remained
at reduced levels. During the two-month period, banks obtained a
sizable volume of funds from nondeposit sources and from repayments
by foreign branches of advances from domestic head offices.
At its February meeting, the Commitee had decided that open market
operations should be directed at maintaining the weekly average federal
funds rate at its current level of about 10 percent or slightly higher,
provided that over the February-March period the annual rates of
growth of M-l and M-2, given approximately equal weight, appeared
to be within ranges of 3 to 7 percent and 5 to 9 percent, respectively.
If the two-month growth rates appeared to be outside the indicated
limits, the Manager of the System Open Market Account was to notify
the Chairman promptly, who would then consult with the Committee
to determine whether the situation called for supplementary instructions.
At the beginning of March, projections suggested that over the
February-March period M-l would grow at a rate moderately below
the lower limit of the range established by the Committee and M-2
would grow at a rate just below the lower limit of its range. In a
special telephone meeting on March 2, the Committee instructed the
Manager to continue aiming for a weekly average federal funds rate
of 10 percent or slightly higher.
Most market interest rates rose moderately on balance during the
intermeeting period, after having declined in January. Yields on
corporate bonds and on three-month Treasury bills moved up to their
highest levels of the current economic expansion. Yields on most
short-term instruments remained below levels reached around the turn
of the year, however, and primary market rates on home mortgage
loans were little changed from their year-end levels.
Effective March 15, 1979, regulations governing ceiling rates on
six-month money market certificates issued by financial institutions
were changed. The new rules prohibit the use of compounding in
calculating allowable returns and eliminate the lA point interest differential between commercial banks and thrift institutions when the
ceiling rate is 9 percent or higher. The full differential will be in
effect when the ceiling rate is S3A percent or less. When the six-month
bill rate is between 8% and 9 percent, thrift institutions may pay a
maximum 9 percent while commercial banks may pay up to the actual
discount rate for six-month bills. These changes were designed to




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reduce somewhat the cost of money market certificates and to moderate
the flow of funds into thrift institutions while permitting them to remain
competitive over the longer run in attracting funds for housing.
In the Committee's discussion of the current economic situation,
attention was drawn to the more rapid expansion in output of goods
and services in the fourth quarter of 1978 than had been anticipated.
The Commerce Department had just released a second upward revision
in its estimate of growth in real gross national product in that quarter,
and it was observed that the rate of resource utilization therefore was
higher than had been thought earlier, accounting in part for the recent
intensification of upward pressures on prices.
At the same time, it was noted, developments since the turn of
the year were apparently mixed, contributing to increased uncertainty.
Specifically, such indicators of business expenditures as new orders
for capital goods, inventory investment, and short-term borrowing had
been strong, and the demand for labor had remained bouyant. On
the other hand, growth in personal income had weakened, retail sales
had declined in real terms despite renewed strength in unit sales of
new automobiles, and both the drop in housing starts and the sluggish
performance of industrial output seemed to be attributable only in part
to adverse weather.
Many members of the Committee thought that the staff was overly
optimistic in projecting continued, if sluggish, growth in real GNP
throughout the second half of 1979; they believed that the chances
of a recession beginning before the end of the year or in early 1980
were fairly high. The recent increase in the price of oil, the acceleration
of the overall rise in prices, and the sluggish growth of the monetary
aggregates over the latest five months were cited among the factors
that increased the probability of recession. The observation also was
made that if a recession developed, it was likely to be moderate and
short-lived.
Some concern was expressed that, in part because of the uncertain
outlook for supplies and prices of some commodities, businesses might
now be trying to raise their investment in both inventories and plant
and equipment, thereby intensifying inflationary pressures currently
and increasing both the chances and the probable severity of recession
later. It was observed, however, that the current accumulation of
inventories, to the extent that it reflected rebuilding of stocks drawn
down in the fourth quarter and hedging against possible strikes,




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139

represented prudent business behavior and not a major shift away from
the cautious attitudes that had prevailed for some time. With respect
to plant and equipment, expenditures would be spread over a period
when overall activity was not expected to be expanding rapidly, and
subsequently the expenditures would yield additions to capacity and
gains in productivity.
The members expressed some differences of opinion concerning
prospects for prices. A significant easing from the rapid rise of recent
months was suggested, to the extent that recent increases in prices
represented temporary factors or were made in anticipation of possible
price and wage controls. Moreover, slackening of economic activity
later in the year could be expected to slow the rise in prices generally.
The view was also expressed, however, that inflation would remain
rapid even during a recession. In any case, it was observed, a long
lag could be expected in the response of prices to the additional
measures of restraint imposed toward the end of 1978.
At its meeting on February 6, 1979, the Committee had agreed
that from the fourth quarter of 1978 to the fourth quarter of 1979
average rates of growth in the monetary aggregates within the following ranges appeared to be consistent with broad economic aims: M-l,
1V6 to 4 & percent; M-2, 5 to 8 percent; and M-3, 6 to 9 percent.
V
The associated range for the rate of growth in commercial bank credit
was 7V2 to lOVi percent. It had also been agreed that the longer-run
ranges, as well as the particular aggregates for which such ranges
were specified, would be reconsidered in July or at any time that
conditions might warrant.
In contemplating policy for the period immediately ahead, the
Committee continued to face unusual uncertainties concerning the
forces affecting monetary growth. A staff analysis had suggested that
M-l was likely to expand in March, contributing to a pickup in growth
of M-2. Nevertheless, M-l was expected to register a decline in the
first quarter, on a quarterly average basis. It was estimated that shifts
of funds from demand deposits to savings accounts with automatic
transfer services and to the NOW accounts in New York had depressed
growth of M-l by about 3 percentage points in the quarter. Moreover,
it appeared that growth of both M-l and M-2 had been affected by
a downward shift in the public's demand for money in relation to
income, although the magnitude of that effect was uncertain.
In the Committee's discussion, several members stressed their




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concern about the shortfall in monetary growth relative to the longerrun ranges that the Committee had adopted at its meeting on February
6, 1979, especially in view of the risks that a recession might develop
in the period ahead. Supporting the goal of bringing growth of the
monetary aggregates up into those ranges over a number of months,
particularly because of the uncertainty about the outlook for economic
activity, they favored directing operations in the period just after the
meeting toward maintaining the money market conditions currently
prevailing—as indicated by a federal funds rate of 10 percent or slightly
higher—or toward a little less firmness in those conditions. The
objective of operations later in the period before the next regular
meeting of the Committee would be determined on the basis of the
incoming evidence on the behavior of the monetary aggregates, although it was suggested that the Committee consult again before any
change was made in the operational objective for the funds rate.
Other members of the Commitee emphasized the recent acceleration
of the rise in prices, and they believed that action should be taken
to demonstrate that inflation represented the greatest risk to economic
stability over a period of time. Accordingly, they advocated directing
initial operations in the period ahead toward a slight firming in money
market conditions, represented by an increase in the objective for the
federal funds rate to about 10JA percent. Their prescription for operations later in the period called for holding the objective for the funds
rate within a relatively narrow range.
At the conclusion of the discussion the Committee decided that
ranges of tolerance for the annual rates of growth in M-l and M-2
over the March-April period should be 4 to 8 percent and 3Vi to IVi
percent, respectively. The Manager was instructed to direct open
market operations initially toward maintaining the federal funds rate
at about the current level, represented by a rate of about 10 percent
or slightly higher. Subsequently, if the two-month growth rates of
M-l and M-2 appeared to be significantly above or below the midpoints
of the indicated ranges, the objective for the funds rate was to be
raised or lowered in an orderly fashion within a range of 93A to IOV2
percent. It was also agreed that in assessing the behavior of the
aggregates, the Manager should give approximately equal weight to
the behavior of M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instruc-




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141

tions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the current
quarter growth in real output of goods and services has moderated from
the rapid rate in the last quarter of 1978, while the rise in prices has
accelerated. In January and February the dollar value of total retail sales
rose slightly further. Nonfarm payroll employment continued to expand
over the two-month period, but in part because of severe weather,
industrial production increased little. The unemployment rate in February,
at 5.7 percent, was virtually unchanged from its level in January and
in late 1978. Over recent months, on balance, the index of average hourly
earnings has continued to rise rapidly.
The trade-weighted value of the dollar against major foreign currencies
has shown no net change since early February. The U.S. trade deficit
in January was larger than the monthly average in the fourth quarter of
1978, to some extent because of a bulge in imports of oil.
M-l declined in both January and February, in part because of the
continuing effects of the growth of the automatic transfer service. With
market interest rates continuing high, inflows of the interest-bearing
deposits included in M-2 and M-3 remained at reduced levels, despite
substantial flows into money market certificates at both commercial banks
and nonbank thrift institutions. Over the two months, consequently, M-2
changed little and M-3 grew at a relatively slow rate. The behavior of
all three monetary aggregates was affected by shifts of funds from deposits
to money market mutual funds and other liquid assets. Most market
interest rates have risen in recent weeks, after having declined in January.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal
Open Market Committee to foster monetary and financial conditions that
will resist inflationary pressures while encouraging moderate economic
expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered
by growth of M-l, M-2, and M-3 from the fourth quarter of 1978 to
the fourth quarter of 1979 within ranges of Vh to 4V6 percent, 5 to 8
percent, and 6 to 9 percent, respectively. The associated range for bank
credit is IV2 to 10V2 percent. These ranges will be reconsidered in July
or at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
the program for supporting the foreign exchange value of the dollar and
to developing conditions in domestic financial markets. Early in the period




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before the next regular meeting, System open market operations are to
be directed at maintaining the weekly average federal funds rate at about
the current level. Subsequently, operations shall be directed at maintaining
the weekly average federal funds rate within the range of 93A to lO1/^
percent. In deciding on the specific objective for the federal funds rate
the Manager shall be guided mainly by the relationship between the latest
estimates of annual rates of growth in the March-April period of M-l
and M-2 and the following ranges of tolerance: 4 to 8 percent for M-l
and 3Vi to IV2 percent for M-2. If, with approximately equal weight
given to M-l and M-2, their rates of growth appear to be significantly
above or below the midpoints of the indicated ranges, the objective for
the funds rate is to be raised or lowered in an orderly fashion within
its range.
If the rates of growth in the aggregates appear to be above the upper
limit or below the lower limit of the indicated ranges at a time when
the objective for the funds rate has already been moved to the corresponding limit of its range, the Manager will promptly notify the Chairman, who will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Balles, Black, Mayo,
Partee, and Mrs. Teeters. Votes against this action: Messrs.
Volcker, Coldwell, Kimbrel, and Wallich.
Messrs. Volcker, Coldwell, Kimbrel, and Wallich dissented from
this action because they favored a somewhat more restrictive policy
posture, in view of strong inflationary forces reinforced by pressure
on capacity in some industries and in view of the near-term potential
for excessive inventory demands. They believed that, despite uncertainty about prospects for economic activity later this year, some
additional firming in money market conditions at this time was appropriate to help in containing inflationary pressures and maintaining
renewed confidence in the dollar in foreign exchange markets.

2. Review of Continuing Authorizations
This being the first regular meeting of the Federal Open Market
Committee following the election of new members from the Federal
Reserve Banks to serve for the year beginning March 1, 1979, the
Committee followed its customary practice of reviewing all of its
continuing authorizations and directives. The Committee reaffirmed
the authorization for domestic open market operations, the authorization for foreign currency operations, and the special authorization




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143

relating to System obligations in Swiss francs in the forms in which
they were then outstanding.
Votes for these actions: Messrs. Miller, Volcker, Balles, Black,
Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Wallich.
Votes against these actions: None.
In reviewing the authorization for domestic open market operations,
the Committee took special note of paragraph 3, which authorizes
the Reserve Banks to engage in the lending of U.S. government
securities held in the System Open Market Account under such
instructions as the Committee might specify from time to time. That
paragraph had been added to the authorization on October 7, 1969,
on the basis of a judgment by the Committee that in the existing
circumstances such lending of securities was reasonably necessary to
the effective conduct of open market operations and to the implementation of open market policies, and on the understanding that the
authorization would be reviewed periodically. At this meeting the
Committee concurred in the judgment of the Manager that the lending
activity in question remained reasonably necessary and that, accordingly, the authorization should remain in effect subject to review in
six months.

3. Foreign Currency Directive
The Committee reaffirmed the foreign currency directive, with a
technical modification. In paragraphs 1 and4(c), the word "proposed"
was deleted preceding the references to International Monetary Fund
(IMF) Article IV in recognition that Article IV had been put in place
since the Committee had last conducted its annual review of all its
continuing authorizations and directives. As amended paragraphs 1
and 4(c) read as follows:
1. System operations in foreign currencies shall generally be directed
at countering disorderly market conditions, provided that market exchange
rates for the U.S. dollar reflect actions and behavior consistent with the
IMF Article IV, Section 1.
4. System foreign currency operations shall be conducted:
*
*
*
*
*
C. In a manner consistent with the obligations of the United States
in the International Monetary Fund regarding exchange arrangements
under the IMF Article IV.




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Votes for this action: Messrs. Miller, Volcker, Balles, Black,
Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Wallich.
Votes against this action: None.

4. Procedural Instructions with Respect to Foreign Currency
Operations
In December 1976 the Committee agreed upon procedural instructions
intended to clarify the respective roles of the Committee, the Foreign
Currency Subcommittee, and the Chairman in providing guidance to
the Manager of the System Open Market Account with respect to
proposed or ongoing foreign currency operations under the authorization for foreign currency operations and the foreign currency directive. Under paragraphs 1A and IB of the procedural instructions, the
Manager is required to obtain clearance from the Foreign Currency
Subcommittee (or from the Chairman, if consultation with the Subcommittee is not feasible in the time available) for operations in excess
of specified daily and intermeeting limits. Under paragraph 2A, the
Manager is required to obtain clearance from the Committee (or from
the Foreign Currency Subcommittee or from the Chairman, if consultation with the Committee is not feasible in the time available) for
operations in excess of a specified intermeeting limit. In order to
facilitate implementation of the broad Government program to
strengthen the dollar in foreign markets announced on November 1,
1978, the daily and intermeeting limits were suspended.
At this meeting, in light of experience gained in conducting operations under procedural instructions, the Committee decided to reinstate
limits under the procedural instructions and at the same time to modify
them in order to provide more leeway for operations without formal
consultations with the Foreign Currency Subcommittee or the Committee. In practice, the management of the System Open Market
Account consults with members of the Subcommittee on a continuing
basis.
The limit on daily changes in the System's overall open position
in foreign currencies specified in paragraph 1A was raised from $100
million to $300 million, and the intermeeting limit was raised from
$300 million to $600 million; the limit on daily changes in the System's
net position in a single foreign currency specified in paragraph IB
was raised from $100 million to $150 million, or to $300 million




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145

when the operation is associated with repayment of swap drawings,
and the intermeeting limit was eliminated. The Committee also raised
from $500 million to $1.5 billion the intermeeting limit on changes
in the System's overall open position in foreign currencies specified
in paragraph 2A. The procedural instructions as amended read as
follows:
In conducting operations pursuant to the authorization and direction
of the Federal Open Market Committee as set forth in the Authorization
for Foreign Currency Operations and the Foreign Currency Directive, the
Federal Reserve Bank of New York, through the Manager of the System
Open Market Account, shall be guided by the following procedural
understandings with respect to consultations and clearance with the Committee, the Foreign Currency Subcommittee, and the Chairman of the
Committee. All operations undertaken pursuant to such clearances shall
be reported promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee
is not feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $300 million on
any day or $600 million since the most recent regular meeting of the
Committee.
B. Any operation that would result in a change on any day in the
System's net position in a single foreign currency exceeding $150 million,
or $300 million when the operation is associated with repayment of swap
drawings.
C. Any operation that might generate a substantial volume of trading
in a particular currency by the System, even though the change in the
System's net position in that currency might be less than the limits
specified in IB.
D. Any swap drawing proposed by a foreign bank not exceeding
the larger of (i) $200 million, or (ii) 15 percent of the size of the swap
arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full
Committee is not feasible in the time available, or with the Chairman,
if the Chairman believes that consultation with the Subcommittee is not
feasible in the time available):
A. Any operation that would result in a change in the System's
overall open position in foreign currencies exceeding $1.5 billion since
the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding the
larger of (i) $200 million or (ii) 15 percent of the size of the swap
arrangement.




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3. The Manager shall also consult with the Subcommittee or the
Chairman about proposed swap drawings by the System, and about any
operations that are not of a routine character.
Votes for this action: Messrs. Miller, Volcker, Balles, Black,
Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Wallich. Vote
against this action: Mr. Cold well.
Mr. Cold well dissented from this action because he believed that
the new limit of $1.5 billion specified in paragraph 2 A was too high.
He preferred a limit of $1 billion.

5. Authorization for Domestic Open Market Operations
Paragraph 2 of the authorization for domestic open market operations
specified a limit of $2 billion on Federal Reserve Bank holdings of
special short-term certificates of indebtedness purchased directly from
the Treasury. On March 29, 1979, the Committee voted to raise the
limit to the statutory ceiling of $5 billion, effective immediately, for
the period ending with the close of business on April 17, 1979, the
date of the next scheduled meeting.
Votes for this action: Messrs. Miller, Volcker, Balles, Black,
Cold well, Mayo, Partee, Mrs. Teeters, Messrs. Wallich, and Roos.
Votes against this action: None. Absent: Mr. Kimbrel (Mr. Roos
voted as alternate for Mr. Kimbrel).
The temporary debt ceiling of $798 billion was scheduled to expire
at midnight on March 31, 1979, and the Congress was not expected
to act on debt ceiling legislation before April 2, 1979. The Treasury
had postponed several auctions of securities designed to raise funds
to repay maturing debt and to meet cash outlays in early April. The
Committee's action was taken on recommendation of Chairman Miller
to provide maximum operating flexibility for the Treasury.
On April 2, 1979, the Committee voted to modify paragraph 1C
of the authorization, effective immediately, for the period until the
close of business on April 6, 1979, to permit arrangement of one-day
repurchase agreements with dealers, in connection with special Treasury financings, at the rate at which the securities were auctioned. Under
paragraph 1C, rates on repurchase agreements with dealers must be
determined by competitive bidding, unless otherwise expressly authorized by the Committee.




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147

Votes for this action: Messrs. Miller, Volcker, Balles, Black,
Cold well, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Wallich.
Votes against this action: None.
This action was taken on the recommendation of the management
of the System Open Market Account. The management had advised
that delay in enactment of a new temporary debt ceiling had created
a severe cash problem for the Treasury, which might persist for some
days. The Treasury planned to deal with the problem through the sale
of sizable amounts of securities for payment on the day of the auction.
However, dealers might experience difficulty in bidding in the auction,
because awards of the securities might be made too late in the day
to allow the dealers to make normal financing arrangements. The
Committee's action provided assistance in marketing such securities
by assuring dealers that in the event financing proved to be difficult
to obtain for the first day on which the securities were issued, financing
could be made available for one day through repurchase agreements
at the same rate at which the securities were sold.




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MEETING HELD ON APRIL 17, 1979

1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth in
real output of goods and services had slowed substantially in the first
quarter of 1979 from the rapid annual rate of 6.9 percent in the fourth
quarter of 1978. Average prices, as measured by the fixed-weight
price index for gross domestic business product, appeared to have
increased considerably faster in the first quarter than in the prior two
quarters, when they rose at an annual rate of 8.0 percent.
The staff projection of growth in output over the four quarters of
1979 had been reduced slightly from the one prepared a month earlier.
The reduction reflected a revised estimate of much slower expansion
for the first quarter, when economic activity was adversely affected
by unusually severe weather; this slower growth was expected to be
offset only in part by some rebound in the second quarter. The
projection continued to suggest sluggish growth in the third and fourth
quarters. The rise in average prices was projected to remain rapid,
and the rate of unemployment was expected to move up moderately
as the year progressed.
The dollar value of total retail sales expanded considerably in March
after having changed little earlier in the year when the weather was
an adverse influence. For the first quarter as a whole, retail sales
declined in real terms, following a sharp advance in the fourth quarter
of 1978. Unit sales of new automobiles rose substantially in March,
reflecting large increases in sales of small domestic and foreign models;
the first-quarter pace of sales was somewhat above that in the previous
quarter.
The index of industrial production rose 0.8 percent in March
following two months of virtually no change; the rate of advance for
the first quarter was only about half that for the second half of 1978.




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In March total nonfarm payroll employment registered another large
gain, which included a further sizable increase in manufacturing. The
rate of unemployment remained at 5.7 percent, about the level prevailing since midsummer 1978.
Total private housing starts were expected to rebound in March,
after a sharp decline earlier in the year in part because of the weather;
but scattered market reports suggested that the rebound would be
limited. It appeared likely that the annual rate for the quarter as a
whole would be well below the totals for 1977 and 1978. In February
total sales of new and existing single-family houses fell for the fourth
consecutive month.
The index of average hourly earnings of private nonfarm production
workers, which had increased 8J/2 percent during 1978, rose at an
annual rate of about 8% percent during the first quarter. The recent
rise was affected by the January advance in the minimum wage.
Producer prices of finished goods and of materials increased sharply
further in March. Over the first quarter, prices of finished goods rose
at an annual rate of almost 14 percent, compared with a rate of about
9 percent over the preceding six months. Consumer prices advanced
at an annual rate of about 12 percent over the first two months of
the year, compared with a rate of 8V2 percent during the second half
of 1978. Particularly large increases in retail prices of food and energy
and in homeowner ship costs contributed to the acceleration.
In foreign exchange markets the trade-weighted value of the dollar
against major foreign currencies had risen about \lA percent since
the March 20 meeting of the Committee. The strength of the dollar
was especially pronounced against the yen and, to a lesser extent,
against the Swiss franc and the mark. The U.S. merchandise trade
deficit declined in February to about half the large deficit in January;
the average for the two months was somewhat above the monthly
average in the fourth quarter of 1978.
Total credit at U.S. commercial banks expanded at a much slower
pace in March than in January and February, as growth in real estate
and business loans moderated considerably and banks reduced their
holdings of securities. However, commercial paper issued by nonfinancial firms increased sharply, and the overall rate of short-term
business borrowing was maintained. For the first quarter as a whole,
nonfinancial businesses substantially increased their borrowing in
short- and intermediate-term markets. At the same time, they reduced




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their public offerings of bonds to the smallest quarterly total since
1973.
The narrowly defined money supply, M-l, grew somewhat in March
after having declined in both January and February. The broader
monetary aggregates, M-2 and M-3, expanded at relatively slow rates
during the month, although growth in both measures picked up
somewhat from the pace earlier in the year. The performance of M-l
reflected in part the continuing impact of movements of funds from
demand deposits to savings deposits associated with the growth of
the automatic transfer service (ATS) and of negotiable order of
withdrawal (NOW) accounts in New York State. With market interest
rates remaining at high levels, expansion in M-2 and M-3 was
restrained by relatively limited inflows of interest-bearing deposits,
despite further large flows into money market certificates at both
commercial banks and nonbank thrift institutions. The behavior of
all three monetary aggregates was still being influenced by shifts of
funds from deposits to money market mutual funds and other highyielding marke* instruments. From the fourth quarter of 1978 to the
first quarter of 1979, M-l declined at an annual rate of 2x/2 percent,
while M-2 and M-3 expanded at annual rates of about IV2 percent
and AVi percent respectively.
In March, banks increased sharply further their reliance on
nondeposit sources to supplement their loanable funds, including
Eurodollars and repurchase agreements. However, a substantial decline
in large-denomination time deposits outstanding during the month
partially offset the increase in nondeposit sources of funds.
At its meeting on March 20 the Committee had decided on ranges
of tolerance for the annual rates of growth in M-l and M-2 during
the March-April period of 4 to 8 percent and 2>l/i to ll/i percent
respectively. The Committee had agreed that early in the coming
intermeeting period operations should continue to be directed toward
maintaining the weekly average federal funds rate at around 10 percent
or slightly higher. Subsequently, if the two-month growth rates of
M-l and M-2, given approximately equal weight, appeared to be
significantly above or below the midpoints of the indicated ranges,
the objective for the funds rate was to be raised or lowered in an
orderly fashion within a range of 93A to 10V2 percent.
In late March and early April staff projections suggested that over
the March-April period M-l would grow at a rate close to the lower




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151

limit of the range established by the Committee and M-2 at a rate
just below the midpoint of its range. These projections were not viewed
as sufficiently weak in relation to the Committee's ranges to call for
a change in the federal funds rate objective of 10 percent or slightly
higher.
Short-term interest rates fluctuated over a fairly wide range during
the intermeeting period and generally rose a little on balance. Rates
on short-term Treasury bills were under particular pressure in late
March and early April from sales of bills by foreign official institutions.
Long-term interest rates and mortgage yields also edged up on balance
during the period.
In the Committee's discussion of the current economic situation
and outlook, attention was drawn to the indications of considerably
slower growth in real output of goods and services in the first quarter
of 1979 than had appeared likely earlier. It was noted that residential
construction and consumer spending for goods had weakened more
than had been anticipated, and that such expansion as had occurred
in the first quarter apparently reflected a substantial acceleration in
the growth of business inventories. With respect to inventories, the
observation was made that the overall rate of accumulation in ihe
first two months of the year was not as high as had been feared earlier
and that it seemed to be attributable largely to transitory influences.
The members in general anticipated relatively slow growth in
economic activity for the near term, and some believed that growth
could remain at a sluggish pace for an extended period. In view of
business-cycle history, however, a number of members expressed
doubt that growth could be sustained at a slow pace for many quarters.
Many continued to believe that the probabilities of a downturn in
activity before the end of 1979 were fairly high, especially in view
of the unusually long duration of the current business expansion. It
was also suggested by some that a pickup in activity, based in part
on a surge in business demands for equipment and for inventories,
might occur and persist for a time before an eventual downturn.
Various reasons were cited for thinking that economic activity might
be near a cyclical turning point. Foremost among them was the
dampening effect on expenditures for consumption and housing arising
from the recent slowing of growth in personal income, from the impact
of inflation on the purchasing power of personal income and on
consumer wealth, and from the high level of consumer debt. Continued




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weakness in consumer spending might result in an unwanted increase
in inventories. It was suggested that the relatively high rates of resource
utilization and the recent strong preference in the business community
to incur short-term rather than long-term debt were characteristic
features of the late stages of a business expansion. And it was observed
that over recent quarters the total of funds raised by nonfinancial sectors
of the economy was estimated to have fallen considerably in relation
to nominal gross national product, indicating a weakening in the overall
demand for credit.
As at other recent meetings, great concern was expressed about
inflation. It was observed that the rate of increase in prices had tended
to accelerate from year to year recently and that there were few if
any indications of a near-term reversal in that momentum. Forecasters
in general had failed to anticipate the degree of the rise in prices,
and some differences of opinion were expressed about the prospects
for abatement in the rate of inflation in the latter part of 1979.
At its meeting on February 6, 1979, the Committee had agreed
that from the fourth quarter of 1978 to the fourth quarter of 1979
average rates of growth in the monetary aggregates within the following ranges appeared to be consistent with broad economic aims: M-l,
IVi to 4V2 percent; M-2, 5 to 8 percent; and M-3, 6 to 9 percent.
The associated range for the rate of growth in commercial bank credit
was IV2 to 10V2 percent. It had also been agreed that the longer-run
ranges, as well as the particular aggregates for which such ranges
were specified, would be reconsidered in July or at any time that
conditions might warrant.
In contemplating policy for the period immediately ahead, the
Committee continued to face uncertainties concerning the forces affecting monetary growth. A staff analysis had suggested that M-l,
after having registered a decline in the first quarter, would expand
over the April-May period, reflecting in part rapid growth in nominal
GNP. It was anticipated that shifts of funds from demand deposits
to savings accounts with automatic transfer services and to NOW
accounts in New York State, which were estimated to have depressed
growth of M-l by about 3 percentage points from the fourth quarter
of 1978 to the first quarter of 1979, would have a somewhat less
dampening effect on growth of M-l in the period immediately ahead
than in the first quarter. Moreover, it was assumed that the public's
demand for money in relation to income would continue to shift




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downward, but at a sharply slower pace than in recent months. Thus,
the rise in the income velocity of M-l was expected to be relatively
rapid, but less than the unusually rapid rate of the two most recent
calendar quarters.
In the Committee's discussion at this meeting, as at the meeting
on March 20, 1979, several members stressed their concern about
the degree of the shortfall in monetary growth relative to the longer-run
ranges that the Committee had adopted at its meeting on February 6.
It was observed that restrictive policy actions taken in late 1978
had contributed to the recent slowing of monetary growth (after
allowance for the impact of special factors) and apparently also to
a moderation of the expansion in economic activity. Now, some easing
in money market conditions might be appropriate, with the objective
of raising growth of the monetary aggregates over a number of months
into the longer-run ranges and of helping to support economic activity
later in the year.
However, an easing in money market conditions was generally
regarded as premature in the current environment of rapidly rising
prices, although it was felt that monetary policy could have little if
any immediate effect on prices of food, energy, and housing items,
which had been largely responsible for the recent acceleration of the
overall rise. Given the staff expectation of a near-term strengthening
of monetary growth, most members advocated or found acceptable
a policy of directing operations early in the period immediately ahead
toward maintaining the money market conditions currently prevailing,
as represented by a federal funds rate of 10 percent or slightly higher,
and of having the objective for operations later in the period before
the next regular meeting determined on the basis of incoming evidence
on rates of growth of the monetary aggregates over the April-May
period in relation to the growth rates currently anticipated.
A few members advocated an immediate increase in the objective
for the federal funds rate to 10xA percent or 10V2 percent and a range
for subsequent operations providing for a further increase in the funds
rate if incoming evidence suggested relative strength in growth of the
monetary aggregates. They stressed the recent acceleration in the rise
in prices and high rates of resource use, and they continued to believe
that action should be taken to demonstrate that inflation represented
the greatest risk to economic stability over a period of time. In their
view, inflationary expectations had increased over recent months while




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interest rates on balance had changed little. In the current circumstances, moreover, they attached little significance to the behavior of
the monetary aggregates.
At the conclusion of the discussion the Commitiee decided that
ranges of tolerance for the annual rates of growth in M-l and M-2
over the April-May period should be 4 to 8 percent and 4 to SVi
percent respectively. The Manager was instructed to direct open market
operations initially toward maintaining the federal funds rate at about
the current level, represented by a rate of about 10 percent or slightly
higher. Subsequently, if the two-month growth rates of M-l and M-2
appeared to be close to or beyond the upper or lower limits of the
indicated ranges, the objective for the funds rate was to be raised
or lowered in an orderly fashion within a range of 93A to lO1/^ percent.
It was also agreed that in assessing the behavior of the aggregates,
the Manager should give approximately equal weight to M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the first
quarter of 1979 growth in real output of goods and services slowed
substantially from the rapid rate in the last quarter of 1978, while the
rise in prices accelerated. In March the dollar value of total retail sales,
industrial production, and nonfarm payroll employment expanded considerably, but part of the strength was attributable to recovery from the
effects of severe weather in the preceding two months. For the first quarter
as a whole, retail sales in real terms declined somewhat, following a
sharp increase in the fourth quarter of 1978, and the advance in industrial
output slowed appreciably. Growth in employment remained strong in
the quarter, however, and the unemployment rate in March, at 5.7 percent,
was virtually unchanged from its level in late 1978 and the first two
months of 1979. Over recent months, broad measures of prices have
increased at a faster pace than during 1978, and the index of average
hourly earnings has continued to rise rapidly.
The trade-weighted value of the dollar against major foreign currencies
has risen over the past four weeks, with the dollar showing particular
strength against the yen, the Swiss franc, and the mark. The U.S. trade
deficit in February was about half the size of the large deficit in January,
but the average for the two months was above the monthly average in
the fourth quarter of 1978.




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M-l increased slightly in March after having declined in both January
and February. With market interest rates continuing high, inflows of the
interest-bearing deposits included in M-2 and M-3 remained at reduced
levels, despite substantial flows into money market certificates at both
commercial banks and nonbank thrift institutions, and the broader monetary aggregates continued to grow at relatively slow rates. From the fourth
quarter of 1978 to the first quarter of 1979, M-l declined at an annual
rate of about 2xh percent, in part because of the effects of the growth
of the automatic transfer service, and M 2 and M-3 grew at rates of
about IV2 percent and 4V£ percent respectively. The behavior of all three
monetary aggregates was affected by shifts of funds from deposits to
money market mutual funds and other liquid assets. Since mid-March,
market interest rates generally have risen somewhat, on balance.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal
Open Market Committee to foster monetary and financial conditions that
will resist inflationary pressures while encouraging moderate economic
expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered
by growth of M-l, M-2, and M-3 from the fourth quarter of 1978 to
the fourth quarter of 1979 within ranges of Wi to 4Vi percent, 5 to 8
percent, and 6 to 9 percent respectively. The associated range for bank
credit is lxh to \Wi percent. These ranges will be reconsidered in July
or at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
the program for supporting the foreign exchange value of the dollar and
to developing conditions in domestic financial markets. Early in the period
before the next regular meeting, System open market operations are to
be directed at maintaining the weekly average federal funds rate at about
the current level. Subsequently, operations shall be directed at maintaining
the weekly average federal funds rate within the range of 93A to 10V2
percent. In deciding on the specific objective for the federal funds rate
the Manager shall be guided mainly by the relationship between the latest
estimates of annual rates of growth in the April-May period of M-l and
M-2 and the following ranges of tolerance: 4 to 8 percent for M-l and
4 to 8V2 percent for M-2. If, with approximately equal weight given to
M-l and M-2, their rates of growth appear to be close to or beyond
the upper or lower limits of the indicated ranges, the objective for the
funds rate is to be raised or lowered in an orderly fashion within its
range.
If the rates of growth in the aggregates appear to be above the upper
limit or below the lower limit of the indicated ranges at a time when
the objective for the funds rate has already been moved to the corresponding limit of its range, the Manager will promptly notify the Chair-




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man, who will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Balles, Black, Kimbrel, Mayo, Partee, and Mrs. Teeters. Votes against this
action: Messrs. Volcker, Cold well, and Wallich.
Messrs. Volcker, Coldwell, and Wallich dissented from this action
because they continued to favor a somewhat more restrictive policy
posture, in view of strong inflationary forces reinforced by pressure
on capacity in some industries. They believed that, despite uncertainty
about prospects for economic activity later this year, some additional
firming in money market conditions at this time would help in limiting
inflationary pressures by curbing inflationary expectations quickly.
On April 27 the Committee held a telephone conference to review
the situation and to consider whether supplementary instructions were
needed. However, no change was made in the domestic policy directive
adopted at the meeting on April 17.

2. Authorization for Foreign Currency Operations
On May 9 the Committee voted to amend paragraph 5 of the authorization for foreign currency operations, effective immediately, to authorize purchases of U.S. government securities from foreign central
banks under agreements for repurchase of such securities within 30
calendar days, when appropriate in connection with arrangements to
provide investment facilities for foreign currency holdings. Paragraph
5 as amended reads as follows:
5. Foreign currency holdings shall be invested insofar as practicable,
considering needs for minimum working balances. When appropriate in
connection with arrangements to provide investment facilities for foreign
currency holdings, U.S. Government securities may be purchased from
foreign central banks under agreements for repurchase of such securities
within 30 calendar days.
Votes for this action: Messrs. Miller, Volcker, Balles,
Black, Coldwell, Kimbrel, Mayo, Partee, Mrs. Teeters, and
Mr. Wallich. Votes against this action: None.
This action was taken on the recommendation of the Manager of
the System Open Market Account to provide an additional investment
mechanism fer System balances of foreign currencies. The mechanism




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157

involved (1) a transaction with a foreign central bank in which the
System would sell a foreign currency spot and buy it forward; and
(2) a repurchase agreement in which the System would acquire U.S.
Treasury securities from the foreign central bank for the same period
of time involved in the foreign currency transaction.




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FOMC Policy Actions

MEETING HELD ON MAY 22, 1979

Domestic Policy Directive
The information reviewed at this meeting suggested a moderate pickup
in growth of real output of goods and services in the current quarter
from the sharply reduced pace in the first quarter; then, the annual
rate of expansion had slowed to only 0.4 percent, from 6.9 percent
in the preceding quarter, in part because unusually severe weather
adversely affected private and public construction activity. Average
prices, as measured by the fixed-weight price index for gross domestic
business product, appeared to be rising as rapidly as they did in the
first quarter, when the annual rate was about 10 percent, and well
above the rate in the third and fourth quarters of 1978.
Staff projections continued to suggest sluggish growth in real output
during the year ahead. The rise in average prices during the year was
projected to remain rapid, but not so rapid as it was estimated to
be over the first half of 1979. The rate of unemployment was expected
to move up gradually.
In April the index of industrial production fell 1 percent and growth
in nonfarm payroll employment slowed substantially from the rapid
pace in the previous six months, in large part owing to effects of
a work stoppage in the trucking industry early in the month. The
unemployment rate in April was 5.8 percent, about the level prevailing
since midsummer 1978.
The dollar value of total retail sales increased somewhat further
in April, but apparently average prices rose at a faster pace and in
real terms retail sales extended their first-quarter decline. Unit sales
of new automobiles declined appreciably in April, to about the average
rate in the first quarter, although sales of small domestic and foreign
models remained strong.
Total private housing starts edged down in April to an annual rate
of 1% million units, following the partial recovery in March from
the sharp, weather-related decline earlier in the year. In both 1977




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159

and 1978, housing starts had totaled about 2 million units. In mortgage
markets, interest rates generally had risen further in recent weeks,
and available information suggested that mortgage commitments outstanding at savings and loan associations continued to decline in April.
The value of manufacturers' new orders for durable goods fell
sharply in April, and declines were widespread among industry and
product groupings. The decrease in orders for nondefense capital goods
was especially large, following three months of sizable advances.
The index of average hourly earnings of private nonfarm production
workers increased at an annual rate of about 8*A percent during the
first four months of 1979, the same rate as during 1978. Hourly
compensation in the nonf arm business sector, including the effects
of increases in social security taxes at the beginning of 1979, rose
at an annual rate of 10^ percent in the first quarter, up marginally
from the average rate in 1978. In the first quarter, however, the rise
in unit labor costs accelerated to an annual rate of 15 percent from
9 percent during 1978, as productivity declined.
Indexes for producer prices of finished goods and of materials
continued to rise sharply in April, despite declines in average prices
of both consumer foods and crude foods. During the first four months
of the year, producer prices of finished goods rose at an annual rate
of about 13 percent, compared with about 9XA percent during 1978.
Increases in prices in the four-month period were widespread.
During the first quarter, the consumer price index also rose at an
annual rate of 13 percent, compared with 9 percent in 1978. The
acceleration was attributable largely to energy items and foods.
In foreign exchange markets demand for the dollar remained strong
in the five-week period after the April meeting of the Committee,
partly in response to announcement of a further reduction in the U.S.
merchandise trade deficit in March and to indications of persistence
of increased rates of inflation abroad. The strength was reflected in
a further rise of about 1 lA percent in the trade-weighted value of the
dollar against major foreign currencies and in substantial sales of
dollars by central banks. The trade deficit in the first quarter as a
whole was slightly lower than in the preceding quarter and considerably
lower than in earlier quarters of 1978.
Total credit outstanding at U.S. commercial banks grew rapidly
in April, as it had on balance during the first quarter of the year.
The April growth was led by a rebound in expansion of business loans,




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FOMC Policy Actions

which had slackened in March from rapid rates in January and
February. Commercial paper issued by nonfinancial firms increased
sharply in April for the second consecutive month.
The narrowly defined money supply, M-l, expanded sharply in
April, after having declined on the average in the first quarter. A
substantial part of the April increase was attributable to delays in the
Treasury's processing of checks in payment of federal income taxes
and to a bunching of tax refunds. Reflecting in part the behavior of
M-l, growth of M-2 and M-3 accelerated to rapid rates in April from
relatively slow rates in the first quarter. Inflows to commercial banks
of the interest-bearing deposits included in M-2 rose substantially in
April, following several months of considerably reduced growth, as
net flows into money market certificates increased while outflows of
savings deposits slowed. At nonbank thrift institutions, on the other
hand, net flows into money market certificates moderated in April,
and overall inflows of funds to these institutions receded from an
already reduced pace in the first quarter.
At its meeting on April 17 the Committee had decided on ranges
of tolerance for the annual rates of growth in M-l and M-2 during
the April-May period of 4 to 8 percent and 4 to 8V2 percent respectively. The Committee had agreed that early in the coming intermeeting
period operations should continue to be directed toward maintaining
the weekly average federal funds rate at around 10 percent or slightly
higher. Subsequently, if the two-month growth rates of M-l and M-2,
given approximately equal weight, appeared to be close to or beyond
the upper or lower limits of the indicated ranges, the objective for
the funds rate was to be raised or lowered in an orderly fashion within
a range of 9% to 10^2 percent.
In late April projections suggested th^t over the April-May period
M-l and M-2 would grow at rates that were close to or above the
upper limits of their respective ranges. In accordance with the directive
issued at the meeting on April 17, operations were directed toward
an increase in the federal funds rate to a level of about 10*A percent.
Subsequently, in early May, the two-month rates of growth projected
for M-l and M-2 were somewhat stronger. However, financial markets
appeared to be in a sensitive state, and recent developments affecting
supplies and distribution of energy were adding to uncertainties about
economic prospects. Moveover, it appeared that the rapid pace of
monetary growth was attributable in part to transitory forces. In the




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161

circumstances, and in view of the directive's instruction to give due
regard to developing conditions in domestic financial markets, the
objective for the federal funds rate was maintained at 10xA percent.
Short-term interest rates in general changed little on balance during
the intermeeting period. Declines following the April meeting were
subsequently reversed in reaction to the rise in the federal funds rate
and to large sales of Treasury bills by foreign monetary authorities
in association with their sales of dollars in foreign exchange markets.
Yields on longer-term obligations rose somewhat during the period,
apparently because of worsening expectations with regard to inflation.
Mortgage yields were also influenced by the further slowdown of
inflows of funds to thrift institutions.
In the Committee's discussion of the economic situation and outlook, the members in general agreed that the pace of expansion in
economic activity had slowed significantly, apart from the effects of
severe weather in the first quarter and of the work stoppage in the
trucking industry early in the current quarter. Much of the latest
information on developments in April—particularly manufacturers'
new orders for durable goods, housing starts, industrial production,
personal income, and retail sales—pointed to a weakening in demands
and activity. Moreover, uncertainties concerning supplies of gasoline,
as well as the overall price effects of the sharp increases in costs
of energy, could be expected to dampen demands. A number of
members now thought that a cyclical peak in activity might well be
registered in the current quarter.
Despite the current risks of recession in activity, the slowing of
the expansion from the excessively rapid pace in late 1978 was
regarded as a desirable development, in view of the inflationary
pressures that had been accumulating. It was noted that some reduction
in growth of nominal GNP had been an objective of the restrictive
policy actions taken last autumn, although the reduction had so far
been reflected in growth of real GNP rather than in the rate of inflation.
Members continued to express great concern about inflation. Comments were made to the effect that inflationary expectations may have
increased in recent months and that a risk of some acceleration of
the rise in prices existed, along with the risk of recession, as the
recent increases in the cost of oil worked their way through the price
structure over a number of months. There was evidence that over
time the rate of inflation had been less variable in the United States




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FOMC Policy Actions

than in other industrial countries, suggesting that it would be more
difficult to reduce the rate here. According to a number of economic
projections, moreover, deceleration of inflation would be a slow and
lengthy process. The observation was made that if the rate of inflation
was not sharply reduced in the months immediately ahead, renewed
expansion in business activity would begin with prices rising at a
relatively fast pace.
At its meeting on February 6, 1979, the Committee had agreed
that from the fourth quarter of 1978 to the fourth quarter of 1979
average rates of growth in the monetary aggregates within the following ranges appeared to be consistent with broad economic aims: M-l,
V/i to 4Vi percent; M-2, 5 to 8 percent; and M-3, 6 to 9 percent.
The associated range for the rate of growth in commercial bank credit
was IV2 to 10V2 percent. It had also been agreed that the longer-run
ranges, as well as the particular aggregates for which such ranges
were specified, would be reconsidered in July or at any time that
conditions might warrant.
In contemplating policy for the period immediately ahead, the
Committee took note of a staff analysis suggesting that over the
May-June period growth of M-l would be quite slow, in part because
of the unwinding of the transitory effects of federal income tax
payments and refunds that had contributed to its exceptionally rapid
growth in April. It was expected that growth of M-2 over the twomonth period would be retarded by the slow growth of M-l but that
growth of the interest-bearing component would remain relatively
strong. The analysis pointed out that if M-l and M-2 grew at annual
rates of about 3*/2 percent and 8 percent respectively over the six
months from April to October, growth of the two monetary aggregates
over the whole period from the fourth quarter of 1978 to October
would be at the center of the longer-run ranges adopted by the
Committee at its meeting in early February.
Most members of the Committee believed that, despite increasing
signs of weakening in economic activity and the risks of recession,
a general easing in monetary restraint at this time would be premature
in view of the continuance of strong inflationary pressures. Given the
staff expectations of slow growth in M-l and M-2 over the May-June
period, they favored a policy of directing open market operations early
in the period immediately ahead toward maintaining the money market
conditions currently prevailing, as represented by a federal fynds rate




FOMC Policy Actions

163

of about 10% percent, and of having the objective for operations later
in the period before the next meeting determined on the basis of
incoming evidence on the behavior of the monetary aggregates in
relation to that currently anticipated. In view of uncertainties concerning interpretation of credit conditions and monetary growth in the
current environment, they also favored specifying unusually wide
ranges for growth of M-l and M-2 over the May-June period and
giving greater weight than usual to money market conditions in the
conduct of operations until the next meeting.
Two members of the Committee, stressing the signs of growing
weakness in economic activity, favored easing policy and placing
greater weight on the behavior of the monetary aggregates. Specifically, they advocated an immediate reduction in the objective for the
federal funds rate to 10 percent in an effort to guard against a
cumulative shortfall in monetary growth. On the other hand, one
member advocated a more restrictive policy, represented initially by
an increase in the objective for the funds rate to 10V^ percent, believing
that such a policy would have a beneficial impact on inflationary
expectations and only a slight effect on the course of real economic
activity.
At the conclusion of the discussion the Committee decided that
ranges of tolerance for the annual rates of growth in M-l and M-2
over the May-June period should be 0 to 5 percent and 4 to SVz
percent respectively. The Manager was instructed to direct open market
operations initially toward maintaining the weekly average federal
funds rate at about the current level, represented by a rate of 10%
percent. Subsequently, if the two-month growth rates of M-l and M-2
appeared to be close to or beyond the upper or lower limits of the
indicated ranges, the objective for the funds rate was to be raised
or lowered in an orderly fashion within a range of 93A to 10V2 percent,
although it was understood that a reduction in the rate below 10 percent
would not be sought until the Committee had an opportunity for further
consultation. It was also agreed that in assessing the behavior of the
aggregates, the Manager should give approximately equal weight to
M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.




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FOMC Policy Actions

The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests a moderate pickup
in growth of real output of goods and services in the current quarter
from the sharply reduced pace in the first quarter, when public and private
construction activity was adversely affected by unusually severe weather.
In April, however, industrial production declined and growth in nonfarm
payroll employment slowed, in large part owing to effects of a work
stoppage in the trucking industry early in the month. The unemployment
rate, at 5.8 percent, remained at about the level prevailing earlier in the
year. The dollar value of total retail sales rose somewhat in April, although
apparently by less than the increase in average prices. Over recent months,
broad measures of prices have increased at a faster pace than during 1978,
and the index of average hourly earnings has continued to rise rapidly.
Demand for the dollar has continued strong in exchange markets over
the past five weeks, and the trade-weighted value of the dollar against
major foreign currencies has risen further. The U.S. trade deficit declined
further in March and was slightly lower in the first quarter as a whole
than in the fourth quarter of 1978.
M-l expanded sharply in April, after having declined in the first quarter,
and M-2 and M-3 grew rapidly. The interest-bearing component of M-2
also grew rapidly, following several months of slow growth, as net flows
into money market certificates at commercial banks increased while
outflows of savings deposits slowed. At nonbank thrift institutions, net
flows into money market certificates moderated, and overall inflows of
funds receded from the already reduced pace of the first quarter. Since
mid-April, short-term market interest rates have changed little, on balance;
most longer-term rates have increased.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal
Open Market Committee to foster monetary and financial conditions that
will resist inflationary pressures while encouraging moderate economic
expansion and contributing to a sustainable pattern of international transactions. At its meeting on February 6, 1979, the Committee agreed that
these objectives would be furthered by growth of M-l, M-2, and M-3
from the fourth quarter of 1978 to the fourth quarter of 1979 within ranges
of IV2 to 4J/2 percent, 5 to 8 percent, and 6 to 9 percent respectively.
The associated range for bank credit is lxh to IOV2 percent. These ranges
will be reconsidered in July or at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
the program for supporting the foreign exchange value of the dollar and
to developing conditions in domestic financial markets. Early in the period




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165

before the next regular meeting, System open market operations are to
be directed at maintaining the weekly average federal funds rate at about
the current level. Subsequently, operations shall be directed at maintaining
the weekly average federal funds rate within the range of 9% to IOV2
percent. In deciding on the specific objective for the federal funds rate
the Manager shall be guided mainly by the relationship between the latest
estimates of annual rates of growth in the May-June period of M-l and
M-2 and the following ranges of tolerance: 0 to 5 percent for M-l and
4 to 8V2 percent for M-2. If, with approximately equal weight given to
M-l and M-2, their rates of growth appear to be close to or beyond
the upper or lower limits of the indicated ranges, the objective for the
funds rate is to be raised or lowered in an orderly fashion within its
range.
If the rates of growth in the aggregates appear to be above the upper
limit or below the lower limit of the indicated ranges at a time when
the objective for the funds rate has already been moved to the corresponding limit of its range, the Manager will promptly notify the Chairman, who will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker, Black,
Cold well, Kimbrel, Mayo, and Mrs. Teeters. Votes against
this action: Messrs. Balles, Partee, and Wallich.
Messrs. Balles and Partee dissented from this action in view of
indications that a cyclical peak might be near at hand. Thus, they
favored a less restrictive policy posture, especially in view of the
delayed impact of policy changes on the economy. In the present
uncertain environment, they believed that some prompt easing in
money market conditions, along with a greater emphasis on the
behavior of the monetary aggregates in guiding the conduct of operations, would reduce the risk of a continuing shortfall in monetary
growth and would tend to provide needed support to the economy
later in the year.
Mr. Wallich dissented from this action because, in view of the strong
inflationary pressures in the economy, he continued to favor a more
restrictive policy posture. Believing that inflationary expectations had
increased in recent months while interest rates had changed little, he
thought that additional firming in money market conditions would have
a favorable effect on such expectations and would have little effect
on the course of real output.
Subsequent to the meeting, on June 15, incoming data indicated
that M-1 and M-2 were growing at exceptionally rapid rates in early
June, and projections suggested that for the May-June period both




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FOMC Policy Actions

monetary aggregates would grow at annual rates above the upper limits
of the ranges that had been specified by the Committee. Since the
meeting on May 22 the Manager had been aiming for a weekly average
federal funds rate of 10^ percent. The behavior of the aggregates
would have called for an increase in the objective for the funds rate
toward the 10V2 percent upper limit of its specified range. However,
in view of many indications of weakening in economic activity, the
difficulties of interpreting the behavior of the aggregates in the light
of these circumstances, the condition of financial markets, and the
general uncertainty about the economic outlook, Chairman Miller
recommended that the Manager be instructed to continue to aim for
a federal funds rate of about 10V4 percent.
On June 15, the Committee modified the domestic policy directive
adopted at its meeting on May 22, 1979, to call for open market operations
directed at maintaining the weekly average federal funds rate at about
0 percent.
Votes for this action: Messrs. Miller, Balles, Black, Kimbrel, Mayo, Partee, Mrs. Teeters, and Mr. Timlen. Vote
against this action: Mr. Cold well. Absent: Messrs. Volcker
and Wallich. (Mr. Timlen voted as alternate for Mr. Volcker.)




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167

MEETING HELD ON JULY 11, 1979

Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services had declined somewhat in the second quarter
when a slackening in demands was intensified by reduced supplies
of motor fuels and higher energy prices; in the first quarter the
expansion in economic activity had slowed sharply, to an annual rate
of 0.8 percent. The rise in average prices, as measured by the
fixed-weight price index for gross domestic business product, appeared
to have accelerated somewhat further in the second quarter, from an
annual rate of about 10 percent in the first quarter and around S3A
percent during 1978.
Staff projections suggested a further contraction in economic activity
over the next few quarters and an upturn beginning in 1980. Over
the year ahead the increase in average prices was projected to be
moderately below its pace in the first half of 1979. The rate of
unemployment was expected to rise substantially.
In June the dollar value of retail sales fell for the third consecutive
month, and in real terms such sales were estimated to be about 6V£
percent below their December 1978 peak. Unit sales of new automobiles declined further in June despite continued strength in sales of
small domestic and foreign models.
In April and May total private housing starts were at an average
annual rate of about \3A million units, up somewhat from the first
quarter, when starts were depressed by unusually adverse weather
conditions, but well below total starts in both 1977 and 1978. Combined sales of new and existing single-family homes in April and May
were also above their first-quarter pace, but substantially below the
peak rate in the fourth quarter of 1978.
The expansion in total nonfarm payroll employment slowed considerably during the second quarter to a pace well below that in the
previous six months. Payroll employment in manufacturing declined
in each month of the quarter, and the length of the average workweek




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FOMC Policy Actions

fell appreciably from its relatively high first-quarter level. Nevertheless, the unemployment rate edged down in June to 5.6 percent,
its lowest level since August 1974.
The index of industrial production rose 1.3 percent in May. The
increase about offset a drop in April that was induced largely by a
work stoppage in the trucking industry. The expansion in industrial
production over the first five months of the year was less than 1 percent,
compared with an increase of about 4 percent in the second half of
1978.
The latest survey of business plans taken by the Department of
Commerce in late April and May suggested that spending for plant
and equipment would expand 12.7 percent in 1979 as a whole; the
survey taken three months earlier had suggested an increase of 11.3
percent. The new survey, like the earlier one, implied considerably
more growth in the second half of the year than in the first half.
Manufacturers' new orders for nondefense capital goods picked up
somewhat in May after having declined substantially in April. The
machinery component of such orders—generally a good indicator of
underlying trends in demand for business equipment—was up only
slightly in May following a very large drop in April. Contract awards
for commercial and industrial buildings—measured in terms of floor
space—declined in May for the third consecutive month to a level
well below the February peak.
Producer prices of finished goods and of materials rose much more
rapidly in the first half of 1979 than during 1978. The increase in
these indexes moderated in the second quarter, however, when prices
of food products declined after having advanced at exceptional rates
earlier in the year. Increases in prices of energy items were very rapid,
especially in the second quarter.
The rise in the consumer price index accelerated to an annual rate
of \3lA percent over the first five months of 1979 compared with a
rise of 9 percent in 1978. Price increases were widespread but were
especially pronounced among energy-related items. Homeownership
costs and food prices also increased sharply, although the rise in foods
moderated in May.
The index of average hourly earnings of private nonfarm production
workers rose at an annual rate of about 5!/2 percent during the second
quarter, down from increases averaging about 8V2 percent during the
prior two quarters. The moderation was concentrated in the trade and




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169

service sectors. Recent collective bargaining agreements in two major
industries provided for large increases in worker compensation.
In foreign exchange markets the dollar came under downward
pressure in mid-June following several months of relative strength;
since then its value against major foreign currencies had fallen about
3 percent and central banks had made large purchases of dollars. The
dollar's weakness appeared to have been related to expectations of
easier monetary conditions in the United States at a time when money
market conditions were being tightened in key foreign countries and
to concerns about the effects of sharply rising oil prices. The U.S.
trade deficit for April and May had widened somewhat from the
first-quarter rate, reflecting a sizable increase in the value of oil and
other imports and little change in the value of exports.
Total credit outstanding at U.S. commercial banks continued to
expand rapidly in May and June, but the rate of growth for the two
months combined was down somewhat from the average pace in earlier
months of the year. Increases in bank loans during May and June
were concentrated in the business and real estate categories. Commercial paper issued by nonfinancial firms rose considerably further over
the two months.
The narrowly defined money supply, M-l, increased sharply in June
and the broader measures of money, M-2 and M-3, also grew rapidly;
expansion in all three measures, especially M-l, had slowed markedly
in May following a surge in April. In June, inflows to commercial
banks of interest-bearing deposits included in M-2 were large, as
money market certificates expanded rapidly for the third consecutive
month and savings deposits increased for the first time since September
1978. At nonbank thrift institutions, net inflows of funds were estimated to have picked up somewhat in June from a sharply reduced
pace in May, even though net issuance of money market certificates
by these institutions weakened further.
On a quarterly average basis, M-l grew at an annual rate of about
7!/2 percent in the second quarter after a decline at a rate of about
2 percent in the first quarter; M-2 and M-3 grew at rates of about
SV2 percent and 13A percent respectively in the second quarter, compared with rates of about \3A percent and 4% percent in the previous
quarter. In the second quarter, banks increased considerably further
their reliance on nondeposit sources such as repurchase agreements
and Eurodollars to supplement their loanable funds. At the same time,




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FOMC Policy Actions

they reduced the outstanding volume of large-denomination time
deposits by more than the increase in funds from nondeposit sources.
At its meeting on May 22 the Committee had decided on ranges
of tolerance for the annual rates of growth in M-l and M-2 during
the May-June period of 0 to 5 percent and 4 to 8V2 percent respectively.
The Committee had agreed that early in the coming intermeeting
period, the Manager of the System Open Market Account should
continue to direct operations toward maintaining the weekly average
federal funds rate at around 10V^ percent. Subsequently, if the twomonth growth rates of M-l and M-2, given approximately equal
weight, appeared to be close to or beyond the upper or lower limits
of the indicated ranges, the objective for the funds rate was to be
raised or lowered in an orderly fashion within a range of 93A to 10%
percent.
Subsequent to the meeting, incoming data on the monetary aggregates led to progressively higher projections of growth in M-l and
M-2 over the May-June period. By mid-June the projections suggested
growth rates that were above the ranges specified by the Committee.
The behavior of the aggregates would have called for an increase in
the objective for the federal funds rate toward the 10% percent upper
limit of its specified range. However, on June 15 the Committee
modified the domestic policy directive adopted on May 22 and called
for open market operations directed at maintaining the weekly average
federal funds rate at about \0VA percent. Federal funds traded somewhat
above the Committee's objective in late June and early July, in
response to pressures associated with unusual churning in the money
market around the midyear bank statement date and the July 4 holiday.
Most interest rates other than the federal funds rate fell substantially
on balance during the intermeeting period. The declines appeared to
be in response to the growing evidence that economic activity had
been weakening. Declines in Treasury bill rates were accentuated by
large cash redemptions of maturing bills and by the resumption of
sizable net purchases by foreign central banks as the dollar came under
pressure in foreign exchange markets. During June most banks reduced
their loan rate to prime business borrowers from 1 \3A to 11% percent.
Despite relatively sizable declines in most interest rates, including bond
yields, rates on conventional home mortgages in the primary market
rose further during the intermeeting period. Thrift and other institutions
continued to tighten their lending terms on residential mortgages in




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171

apparent response to relatively strong demands for credit and to
uncertainty about prospective inflows of savings.
At this meeting, in conjunction with its discussion of the economic
situation and outlook, the Committee reviewed its longer-run ranges
for growth of the monetary aggregates. The Full Employment and
Balanced Growth Act of 1978 (the Humphrey-Hawkins Act) requires
the Board of Governors to transmit to the Congress by February 20
and July 20 of each year written reports concerning the objectives
and plans of the Board and the Committee with respect to the ranges
of growth or diminution of the monetary and credit aggregates for
the calendar year during which the report is transmitted and, in the
case of the July report, the objectives and plans with respect to ranges
for the following calendar year as well. Accordingly, the Committee
reviewed the ranges for the period from the fourth quarter of 1978
to the fourth quarter of 1979 that it had established at its meeting
on February 6, 1979, and for the first time considered preliminary
ranges for the period from the fourth quarter of 1979 to the fourth
quarter of 1980.*
At its meeting on February 6 the Committee had specified ranges
of Vh to 4Vi percent for M-l, 5 to 8 percent for M-2, and 6 to
9 percent for M-3. The associated range for commercial bank credit
was 7V2 to IOV2 percent. The range for M-l had been established
on the assumption that shifts in funds from demand deposits to savings
accounts with automatic transfer facilities and to NOW accounts would
dampen growth of measured M-l by about 3 percentage points.
With respect to the economic situation and outlook, no member
of the Committee expressed disagreement with the staff appraisal that
real gross national product had declined somewhat in the second
quarter and that further declines were likely for the remaining two
quarters of the year. The suggestion was made that the recession was
most likely to be mild and short-lived. However, it could prove to
be more severe than currently expected because the recent increases
in prices of energy items and inflation generally were reducing disposable income and eroding the financial position of the household sector.
1. The act also requires that the written reports set forth a review and analysis
of recent developments affecting economic trends in the nation and the relationship
of the plans and objectives for the aggregates to the short-term goals set forth
in the most recent Economic Report of the President and to any short-term goals
approved by the Congress. The Board's second report under the act was transmitted
to the Congress on July 17, 1979.




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Another reason advanced for thinking that the recession could be more
severe was the possibility that the downturn in economic activity would
become widespread among industrial countries.
Members continued to express great concern about inflation. It was
suggested that the unexpectedly large increases in OPEC oil prices
in late June had seriously harmed the government's anti-inflation
efforts. Thus, winding down the rate of increase in prices might well
take considerably longer than had been thought earlier and would be
more costly in terms of its impact on output, employment, and real
income. In that connection it was noted that time would be required
to implement the new policies with respect to energy that the President
was expected to announce within a few days. On the other hand,
the public's perception of the urgency of the problem had increased,
leading to a growing awareness that in the short run some loss of
real income would have to be accepted for the sake of reestablishing
growth in real income over the longer term.
In reviewing ranges for the monetary aggregates for the current
year and contemplating ranges for 1980, the Committee continued
to face unusual uncertainties concerning the forces affecting monetary
growth. A staff analysis had suggested that shifts in funds from demand
deposits to savings accounts with automatic transfer services and to
NOW accounts had retarded the annual rate of growth of M-l by
the assumed amount of about 3 percentage points in the first quarter
of 1979 but by only about \l/i percentage points in the second quarter;
thus, from the fourth quarter of 1978 to the second quarter of 1979,
the dampening effects of ATS and NOW accounts on growth of M-1
averaged about 2lA percentage points. The outlook for the effects of
these accounts on growth of M-l was clouded, moreover, by a federal
court decision handed down in April barring ATS and certain other
payments services as of January 1, 1980, and by the possibility of
further judicial review and of legislation concerning such services.
The demand for M-l was unusually weak in the first quarter of
1979, even after allowance for the effects of the growth of ATS and
NOW accounts, but money demand appeared to strengthen in the
second quarter. Still, at an annual rate of about 23A percent from the
fourth quarter of 1978 to the second quarter of 1979, growth of M-l
was just below the midpoint of the longer-run range established by
the Committee in February, as the high level of interest rates reached
in late 1978 and the continued tautness of markets in 1979 prompted




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the public to economize on non-interest-earning holdings of cash. The
high level of market interest rates also induced the public to divert
funds from deposits subject to fixed ceiling rates into market instruments, thereby further retarding growth of M-2 and M-3 over the
first two quarters of 1979; their annual rates of growth, at 5lA percent
and 6lA percent respectively, were just above the lower limits of their
ranges. As a result of these developments, growth of all three monetary
aggregates, which had moderated over the four quarters of 1978 from
the pace of the preceding four quarters, slowed appreciably further
in the first half of 1979. However, growth of commercial bank credit
in the first half of 1979, at a rate of WVi percent, was slightly above
its range and little different from the year before.
In the Committee's discussion, most members favored ranges for
both 1979 and 1980 that would represent essentially a continuation
of the policy posture adopted in early February. One member advocated a more restrictive policy for the balance of the current year.
Some sentiment was expressed for narrowing the ranges for the period
from the fourth quarter of 1978 to the fourth quarter of 1979, because
passage of half of the year had reduced uncertainty about rates of
growth over the whole period.
It was suggested that the ranges for 1980 might well be slightly
lower than those for 1979, in recognition of the Committee's longstanding objective to move gradually toward rates of monetary expansion consistent with general price stability. The suggestion also was
made to adopt slightly higher ranges for 1980 than for 1979, in view
of the decline in activity that had just begun. It was observed, however,
that any increase in the ranges for 1980 would not now be timely
and that the Committee would reconsider the 1980 ranges next February in the light of the information then available about economic
conditions. In any event, it was recognized that the current reexamination of the definitions of the monetary aggregates, which was being
undertaken in light of the major institutional changes in the payments
system, might in the near future lead to a new and improved set of
money stock measures.
At the conclusion of the discussion, the Committee decided to retain
the ranges for 1979 that it had established in February. Thus, for
the period from the fourth quarter of 1978 to the fourth quarter of
1979, the Committee reaffirmed ranges of V/i to AVi percent for M-l,
5 to 8 percent for M-2, and 6 to 9 percent for M-3. The associated




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range for commercial bank credit remained IV2 to XOVi percent. Having
established the range for M-l in February on the assumption that
expansion of ATS and NOW accounts would dampen growth by about
3 percentage points over the year, the Committee also agreed that
actual growth in M-l might vary in relation to its range to the extent
of any deviation from that estimate. The Committee anticipated that
for the period from the fourth quarter of 1979 to the fourth quarter
of 1980, growth might be within the same ranges, depending upon
emerging economic conditions and appropriate adjustments that might
be required by legislation or judicial developments affecting interestbearing transactions accounts.
It was understood that the longer-run ranges, as well as the particular
aggregates for which ranges were specified, would be reconsidered
at any time that conditions might warrant. It was also understood that
short-run factors might cause growth rates from one month to the
next to fall outside the ranges anticipated for the year.
The Committee adopted the following ranges for rates of growth in
monetary aggregates for the period from the fourth quarter of 1978 to
the fourth quarter of 1979: M-l, V/i to AV2 percent; M-2, 5 to 8 percent;
and M-3, 6 to 9 percent. Actual growth in M-l might vary in relation
to its range to the extent that the dampening effect of expansion in ATS
and NOW accounts deviates from an estimate of about 3 percentage points.
The associated range for bank credit is IV2 to 10*/2 percent.
Votes for this action: Messrs. Miller, Volcker, Balles,
Black, Coldwell, Kimbrel, Mayo, Partee, Rice, and Mrs.
Teeters. Vote against this action: Mr. Wallich.
Mr. Wallich dissented from this action because, with the Committee's objective of slowing the rate of inflation in mind, he believed
that the range adopted for M-l, after allowance for the effects of ATS
and NOW accounts, was too high. In his opinion, growth of the money
stock, after allowance for the expansion in repurchase agreements and
Eurodollars as well as for the effects of ATS and NOW accounts,
had been considerably more rapid than indicated by the behavior of
M-l.
The Committee agreed that for the period from the fourth quarter of
1979 to the fourth quarter of 1980, growth of M-l, M-2, and M-3, and
of commercial bank credit, might be within the ranges adopted for 1979,
depending upon emerging economic conditions and appropriate adjustments that may be required by legislation or judicial developments
affecting interest-bearing transactions accounts.




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175

Votes for this action: Messrs. Miller, Volcker, Balles,
Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Mrs. Teeters,
and Mr. Wallich. Votes against this action: None.
In the discussion of policy for the period immediately ahead,
members of the Committee in general favored directing open market
operations initially toward maintaining the money market conditions
currently prevailing, as indicated by a federal funds rate of about 10V4
percent, on the expectation that over the July-August period growth
of M-l and M-2 would be both moderate and consistent with their
longer-run ranges. Some sentiment was expressed for a near-term
reduction in the federal funds rate because of the downturn in economic
activity, but it was agreed that current conditions in foreign exchange
markets militated against a prompt reduction.
With respect to operations later in the period before the next regular
meeting, most members thought that the objective for the federal funds
rate should be moved up or down within its specified range only if
growth of M-1 and M-2 appeared to be close to or beyond the upper
or lower limits of their ranges. Most members favored specification
of an intermeeting range of 93A to 10 !£ percent for the federal funds
rate, the same range that had been specified at the three preceding
meetings. A range of 10 to 10% percent was also suggested, coupled
with an instruction to the Manager to move the objective for the funds
rate up within that range should the dollar come under severe downward pressure in foreign exchange markets. It was recognized, however, that the Committee could consult during the intermeeting period
to consider giving additional instructions to the Desk in response to
any new developments, including reactions to the President's forthcoming address on energy policy as well as to the behavior of the
foreign exchange markets.
The suggestion was made that, in assessing the implications of the
behavior of the aggregates for the Desk's objective for the federal
funds rate, the Manager be instructed to give more weight to M-2,
rather than approximately equal weight to M-l and M-2, because of
uncertainties about the interpretation of M-l. It was noted, however,
that the course of M-2 was subject to considerable uncertainty because
the six-month Treasury bill rate was hovering around the 9 percent
trigger point that affects the relationship between the maximum rates
that commercial banks and savings and loan associations may pay
on money market certificates.




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At the conclusion of the discussion the Committee decided that
ranges of tolerance for the annual rates of growth in M-l and M-2
over the July-August period should be 2xh to 6V2 percent and 6V2
to IOV2 percent respectively. The Manager was instructed to direct
open market operations initially toward maintaining the weekly average
federal funds rate at about the current level, represented by a rate
of lO1/^ percent. Subsequently, if the two-month growth rates of M-l
and M-2 appeared to be close to or beyond the upper or lower limits
of the indicated ranges, the objective for the funds rate was to be
raised or lowered in an orderly fashion within a range of 93A to 10!/2
percent. It was also agreed that in assessing the behavior of the
aggregates, the Manager should give approximately equal weight to
M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output of
goods and services declined somewhat in the second quarter, as slackening
in demands was intensified by reduced supplies and sharply higher prices
of motor fuels. During the quarter, the dollar value of retail sales declined,
and in real terms, sales in June were substantially below those of last
December. Growth in nonfarm payroll employment slowed during the
quarter to a pace considerably below that in the preceding six months,
but the unemployment rate in June, at 5.6 percent, was somewhat lower
than earlier in the year. Industrial production recovered in May, after
having declined in April in large part because of a work stoppage. Over
the first half of this year, broad measures of prices increased at a much
faster pace than during 1978, although producer prices of foods declined
in the second quarter. The rise in the index of average hourly earnings
has slowed in recent months.
Downward pressure on the dollar in foreign exchange markets emerged
in mid-June after several months of strength, and since then the tradeweighted value of the dollar against major foreign currencies has declined
about 3 percent. The U.S. trade deficit for April and May combined
widened somewhat from the first-quarter rate.
M-l expanded sharply in June, after having increased little in May,
and M-2 and M-3 also grew rapidly. Inflows of interest-bearing deposits
included in M-2 grew rapidly in June, as net flows into money market
certificates at commercial banks expanded further and savings deposits




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177

increased for the first time since last September. At nonbank thrift
institutions, inflows of deposits picked up from the sharply reduced pace
in May. On a quarterly average basis, M-l grew at an annual rate of
about lxh percent in the second quarter, compared with a decline at a
rate of about 2 percent in the first quarter; M-2 and M-3 grew at rates
of about 8!/2 percent and 13A percent respectively in the second quarter,
compared with rates of about 1% percent and 4% percent in the first
quarter. Market interest rates in general have declined substantially over
the past several weeks, but mortgage interest rates have risen further.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, it is the policy of the Federal
Open Market Committee to foster monetary and financial conditions that
will resist inflationary pressures while encouraging moderate economic
expansion and contributing to a sustainable pattern of international transactions. The Committee agreed that these objectives would be furthered
by growth of M-l, M-2, and M-3 from the fourth quarter of 1978 to
the fourth quarter of 1979 within ranges of Wi to Al/i percent, 5 to 8
percent, and 6 to 9 percent respectively, the same ranges that had been
established in February. Having established the range for M-l in February
on the assumption that expansion of ATS and NOW accounts would
dampen growth by about 3 percentage points over the year, the Committee
also agreed that actual growth in M-l might vary in relation to its range
to the extent of any deviation from that estimate. The associated range
for bank credit is 11A to lO1^ percent. The Committee anticipates that
for the period from the fourth quarter of 1979 to the fourth quarter of
1980, growth may be within the same ranges, depending upon emerging
economic conditions and appropriate adjustments that may be required
by legislation or judicial developments affecting interest-bearing transactions accounts. These ranges will be reconsidered at any time as conditions
warrant.
In the short run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
the program for supporting the foreign exchange value of the dollar and
to developing conditions in domestic financial markets. Early in the period
before the next regular meeting, System open market operations are to
be directed at maintaining the weekly average federal funds rate at about
the current level. Subsequently, operations shall be directed at maintaining
the weekly average federal funds rate within the range of 93A to I M2
C /
percent. In deciding on the specific objective for the federal funds rate
the Manager shall be guided mainly by the relationship between the latest
estimates of annual rates of growth in the July-August period of M-l
and M-2 and the following ranges of tolerance: 2!/2 to 6J/2 percent for
M-l and 6V2 to IOV2 percent for M-2. If, with approximately equal weight
given to M-l and M-2, their rates of growth appear to be close to or
beyond the upper or lower limits of the indicated ranges, the objective




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for the funds rate is to be raised or lowered in an orderly fashion within
its range.
If the rates of growth in the aggregates appear to be above the upper
limit or below the lower limit of the indicated ranges at a time when
the objective for the funds rate has already been moved to the corresponding limit of its range, the Manager will promptly notify the Chairman, who will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker, Balles,
Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Mrs. Teeters,
and Mr. Wallich. Votes against this action: None.
About a week after the meeting, on July 19, projections suggested
that over the July-August period M-l would grow at an annual rate
moderately above the upper limit of the range of 2xh to 616 percent
that had been specified by the Committee and that M-2 would grow
at a rate about equal to the upper limit of its range of 6V2 to IOV2
percent; in those circumstances, the Manager began to aim for a weekly
average federal funds rate at about the 10!/2 percent upper limit of
its range. On July 27, with the projections suggesting that growth
of both M-1 and M-2 over the July-August period would exceed the
upper limits of their ranges and with the objective for the federal
funds rate at the upper limit of its range, the Committee voted to
modify the directive adopted at the meeting on July 11. Specifically,
the Committee raised the upper limit of the intermeeting range for
the federal funds rate to 10% percent and instructed the Manager to
aim for a rate within a range of IOV2 to 10% percent, depending on
subsequent behavior of the monetary aggregates, on conditions in
foreign exchange markets, and on the current Treasury financing.
On July 27, the Committee modified the domestic policy directive
adopted at its meeting on July 11, 1979, by raising the upper limit of
the intermeeting range for the federal funds rate to 10% percent and by
instructing the Manager to aim for a weekly average rate within a range
of IOI/2 to 10% percent, depending on subsequent projections of growth
of M-l and M-2 over the July-August period, on conditions in foreign
exchange markets, and on the current Treasury financing.
Votes for this action: Messrs. Miller, Volcker, Black,
Coldwell, Partee, Rice, Wallich, Guffey, Roos, and Winn.
Vote against this action: Mrs. Teeters. Absent: Messrs. Balles,
Kimbrel, and Mayo. (Messrs. Guffey, Roos, and Winn voted
as alternates for Messrs. Balles, Kimbrel, and Mayo respectively.)




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MEETING HELD ON AUGUST 14, 1979

1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services was continuing to decline in the current quarter;
according to preliminary estimates of the Commerce Department, real
output had fallen at an annual rate of 3.3 percent in the second quarter.
Average prices, as measured by the fixed-weight price index for gross
domestic business product, appeared to be rising at an annual rate
close to the 10!/2 percent that had been estimated for the second quarter.
Staff projections suggested some further contraction in economic
activity and then an upturn beginning in 1980. Over the year ahead
the rise in average prices was projected to moderate a little. The rate
of unemployment was expected to increase substantially.
The dollar value of retail sales edged up in July, but in real terms
such sales were estimated to be about 5Vi percent below their December 1978 peak. A sizable decline in sales of new automobiles
contributed substantially to the recent weakness in retail sales. At the
end of July, dealers' stocks of unsold cars, particularly of the less
fuel-efficient models, were exceptionally large.
Growth in nonfarm payroll employment slowed considerably further
in July after having expanded at a much reduced pace during the second
quarter. In manufacturing, employment declined for the fourth month
in a row and the average workweek remained at the reduced level
of May and June. However, the unemployment rate, at 5.7 percent,
stayed within the narrow range that has prevailed since the beginning
of the year.
The index of industrial production declined 0.3 percent in June,
and available data suggested a further small decline in July to a level
close to that of December 1978. The weakness in June and July was
dominated by reduced output of consumer durable goods, especially
motor vehicles.
Manufacturers' new orders for nondefense capital goods rose moderately in June but remained below their March peak. Contract awards




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for commercial and industrial buildings—measured in terms of floor
space—declined for the fourth consecutive month.
Housing starts rose further in June but, at an annual rate of about
1.9 million, were still moderately lower than in 1977 and 1978. Sales
of both new and existing single-family homes fell substantially in June.
Producer prices of finished goods and of materials rose sharply
further in July, after a much more rapid rate of increase over the
first half of 1979 than during 1978. In July the increases continued
to be especially pronounced in energy-related items. Prices of consumer finished foods were unchanged, after having declined in the
previous three months. However, producer prices of crude foods and
animal feeds, which had also declined during the second quarter, rose
substantially.
In June consumer prices continued to increase rapidly. The rise
in energy prices accelerated further and increases in homeownership
costs remained large. The rise in food prices moderated further,
however, following especially sharp increases during the early months
of the year. Over the first half of 1979, consumer prices rose at an
annual rate of about 13V4 percent, compared with 9 percent in 1978.
In July the rise in the index of average hourly earnings of private
nonfarm production workers picked up to an annual rate of about SVi
percent, following a marked slowing in the advance during May and
June. Over the first seven months of the year the rise was at an annual
rate of 7!/2 percent compared with 8V2 percent during 1978. In the
nonfarm business sector, the advance in total compensation per manhour moderated in the second quarter from the very rapid pace in
the first quarter, which had been affected by increases in social security
taxes at the beginning of the year. The rise in unit labor costs was
as rapid as in the first quarter, however, as output per manhour declined
significantly further.
In foreign exchange markets the trade-weighted value of the dollar
against major foreign currencies declined somewhat further in the
second half of July, and central banks made additional net purchases
of dollars. The dollar recovered subsequently, but it was still about
V/i percent below its level in early June. The U.S. trade deficit widened
between the first and second quarters. A sizable increase in the value
of oil and other imports exceeded the rise in nonagricultural exports.
Expansion of total credit outstanding at U.S. commercial banks,
which had picked up in June, moderated in July to about the April-May




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181

pace. Growth in loans also moderated in July after an acceleration
in June. Banks continued to add sizable amounts to their holdings
of securities, especially U.S. government obligations. Growth in
commercial paper issued by nonfinancial firms exceeded the strong
second-quarter pace, owing in part to large sales by foreign issuers.
The monetary aggregates—M-l, M-2, and M-3—continued to expand rapidly in July. Growth in M-l, at an annual rate of about 10
percent, was moderately lower than in June but close to the average
pace during the second quarter. Inflows to commercial banks of
interest-bearing deposits included in M-2 increased slightly in July.
Net inflows of funds to nonbank thrift institutions moderated somewhat, despite a pickup in net issuance of money market certificates
by these institutions.
At its meeting on July 11, the Committee had decided on ranges
of tolerance for the annual rates of growth in M-l and M-2 during
the July-August period of Vh to 6 & percent and 6V2 to 10*/2 percent
V
respectively. The Committee had agreed that early in the intermeeting
period the Manager of the System Open Market Account should
continue to direct operations toward maintaining the weekly average
federal funds rate at around 10V4 percent. Subsequently, if the twomonth growth rates of M-l and M-2, given approximately equal
weight, appeared to be close to or beyond the upper or lower limits
of the indicated ranges, the objective for the funds rate was to be
raised or lowered in an orderly fashion within a range of 93A to 10!/2
percent.
About a week after the meeting, on July 19, projections suggested
that over the July-August period growth in M-l would be above the
upper limit of the range specified by the Committee and that growth
in M-2 would about equal the upper limit of its range. In those
circumstances, the Manager began to aim for a weekly average federal
funds rate at about the IOV2 percent upper limit of its range. On July
20 the Board of Governors announced an increase in Federal Reserve
Bank discount rates from 9!/2 to 10 percent.
On July 27, with projections suggesting that over the two-month
period growth of both M-l and M-2 would exceed the upper limits
of their ranges and with the objective for the federal funds rate at
the upper limit of its range, the Committee voted to raise the upper
limit of the range for the funds rate to 103A percent and instructed
the Manager to aim for a rate within a range of 10J/2 to 10% percent.




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Over the remainder of the intermeeting period the funds rate averaged
just under 10% percent.
Short-term market rates in general rose during the intermeeting
period. In late July most banks raised their loan rate to prime business
borrowers from IP/2 to 11% percent. In long-term debt markets,
however, interest rates changed little during the period, reflecting a
relatively light schedule of new corporate and municipal bond offerings
and also reactions to further evidence of a weakening economy. In
home mortgage markets, yields on new mortgage commitments declined slightly.
In the Committee's discussion of the economic situation and outlook, none of the members expressed disagreement with the staff
appraisal that real gross national product was continuing to decline
in the current quarter. However, members expressed considerable
uncertainty about the duration and extent of the decline in activity.
On the one hand, it was suggested that a substantial decline in
consumer spending—generated by high consumer debt and low consumer confidence as well as by energy problems and inflation—could
have a major effect on business spending for plant and equipment.
Concurrent weakness in those two sectors could quickly produce an
unwanted accumulation of business inventories, a cumulative curtailment in output, and a sharp rise in unemployment.
On the other hand, it was observed, certain elements in the current
situation suggested that the curtailment in output could be limited to
modest proportions. For example, prices of common stocks on the
average had been rising, in contrast with the more usual decline
associated with the onset of recession, and various measures of risk
premiums in markets for debt instruments had remained low by
historical standards. Moreover, growth of the monetary aggregates had
strengthened in recent months after a period of weakness, whereas
generally in recession growth had weakened and then remained weak.
Members continued to express great concern about inflation. It was
observed that for a long period elements in the economic situation
had seemed to justify expectations of a reduction in the rise in prices.
Such expectations had been disappointed. Moreover, little reduction
could be expected in the short run because recent increases in energy
prices had not yet fully worked through the price structure. It was
noted that the decline in the rate of inflation projected for the quarters
immediately ahead was small, and much smaller than that associated




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183

with the previous recession. Thus, inflation might still be at a high
rate when economic activity turned up again. Inflationary expectations
appeared to have worsened in the sense that, more than ever before,
consumers and businessmen seemed to take the inflationary environment into account in making spending and investing decisions.
In considering policy for the period immediately ahead, Committee
members focused on the problems posed by emerging recession and
its potential for substantial increases in unemployment, concurrent with
strong monetary growth, high actual and expected rates of inflation,
and an exposed position of the dollar in foreign exchange markets
pending anticipated improvement in the U.S. foreign trade and current
accounts. Any policy course in these circumstances necessarily involved unusual risks: prompt pursuit of a policy aimed at moderating
the effects of the curtailment in output could be perceived as exacerbating inflation and thus could have perverse effects on economic
activity and employment; a policy directed toward moderating inflation
and lending support to the dollar in the foreign exchange markets
could risk intensifying the recession.
There was little disagreement with the proposition that for the near
term modest measures should be taken to direct policy toward slowing
growth of the monetary aggregates. Control of monetary growth was
regarded as essential to restore expectations of a decline in the rate
of inflation over a period of time. It was suggested that public
confidence in the determination to direct monetary policy toward
reducing inflation would have a constructive influence on the course
of long-term interest rates and on sentiment in foreign exchange
markets, and it might also be an element in wage and price determinations. Should developments over the months ahead suggest the
desirability of policy measures aimed at reversing the decline in output,
moreover, such measures would be more effective in an environment
of confidence in the government's adherence to the fundamental
objective of reducing inflation.
In support of modest measures directed toward restraint, it was
suggested that monetary policy recently had not been so restrictive
as it might have appeared. Monetary growth since the beginning of
the year had been considerably greater than that indicated by M-l,
owing to rapid expansion in close substitutes for demand deposits and
currency. In addition, the increase in interest rates had been less than
that in expected rates of inflation.




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On the other hand, it was noted that interest rates were close to
historic highs. Some doubt was expressed, moreover, that further
restraint could have a significant effect on inflation, particularly in
view of the role of energy in the rapid rate of increase in prices
recently. In the face of clear evidence of weakening in economic
activity, it was observed, the need to balance the objective of containing the recession with the goal of moderating inflation called for a
steady policy for the time being.
In considering policy specifications for the period immediately
ahead, the Committee took note of a staff analysis suggesting that
the current growth rate of nominal GNP and other influences, including
possibly a temporary accumulation of precautionary balances by the
public in response to unusual uncertainties, were tending to support
the demand for money. On the assumption of continuance of prevailing
money market conditions, therefore, growth of both M-l and M-2
over the August-September period most likely would be high relative
to the Committee's longer-run ranges, although growth could be
expected to slow substantially from the rapid rates of recent months.
At the conclusion of its discussion of policy, the Committee decided
to instruct the Manager for Domestic Operations to direct open market
operations initially toward an increase in the weekly average federal
funds rate to about 11 percent. Subsequently, the objective for the
funds rate was to be raised or lowered in an orderly fashion within
a range of \03A to 11V4 percent, if M-1 and M-2 appeared to be growing
over the August-September period at rates close to or beyond the
upper or lower limits of the ranges specified for those monetary
aggregates. The members decided that the two-month ranges of tolerance for the annual rates of growth in M-l and M-2 should be 4
to 8 percent and 7 to 11 percent respectively. They also agreed that
in assessing the behavior of the aggregates, the Manager should give
approximately equal weight to M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output of
goods and services is continuing to decline in the current quarter, while




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185

prices on the average are continuing to rise rapidly. In July the dollar
value of retail sales edged up; in real terms, sales were still substantially
below those of last December. Growth in nonfarm payroll employment
slowed considerably further, but the unemployment rate, at 5.7 percent,
remained within the narrow range prevailing since the beginning of the
year. Industrial production declined in June, and it apparently slackened
further in July to about the level of last December. So far this year,
broad measures of prices have increased at a much faster pace than during
1978, although producer prices of foods have declined since March. The
rise in the index of average hourly earnings, which had slowed in May
and June, picked up in July.
The trade-weighted value of the dollar against major foreign currencies
declined somewhat further in the second half of July, and although it
subsequently recovered, it remained below its level of early June. The
U.S. trade deficit in the second quarter was larger than in the previous
quarter, reflecting largely the significant rise in the price and value of
oil imports.
Growth of M-l, M-2, and M-3 remained rapid in July. Inflows of
interest-bearing deposits included in M-2 were slightly stronger than in
June. At nonbank thrift institutions, inflows of deposits declined somewhat. Short-term market interest rates have risen over recent weeks, while
long-term rates have changed little on balance. An increase in Federal
Reserve discount rates from 9V2 to 10 percent was announced on July
20.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, the Federal Open Market Committee seeks to foster monetary and financial conditions that will resist
inflationary pressures while encouraging moderate economic expansion
and contributing to a sustainable pattern of international transactions. At
its meeting on July 11, 1979, the Committee agreed that these objectives
would be furthered by growth of M-l, M-2, and M-3 from the fourth
quarter of 1978 to the fourth quarter of 1979 within ranges of Wi to
4'/2 percent, 5 to 8 percent, and 6 to 9 percent respectively, the same
ranges that had been established in February. Having established the range
for M-1 in February on the assumption that expansion of ATS and NOW
accounts would dampen growth by about 3 percentage points over the
year, the Committee also agreed that actual growth in M-l might vary
in relation to its range to the extent of any deviation from that estimate.
The associated range for bank credit is lxh to IOI/2 percent. The Committee
anticipates that for the period from the fourth quarter of 1979 to the
fourth quarter of 1980, growth may be within the same ranges, depending
upon emerging economic conditions and appropriate adjustments that may
be required by legislation or judicial developments affecting interest-bearing transactions accounts. These ranges will be reconsidered at any time
as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve and




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money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
developing conditions in foreign exchange and domestic financial markets.
Early in the period before the next regular meeting, System open market
operations are to be directed at attaining a weekly average federal funds
rate slightly above the current level. Subsequently, operations shall be
directed at maintaining the weekly average federal funds rate within the
range of \03A to IP/4 percent. In deciding on the specific objective for
the federal funds rate the Manager for Domestic Operations shall be guided
mainly by the relationship between the latest estimates of annual rates
of growth in the August-September period of M-l and M-2 and the
following ranges of tolerance: 4 to 8 percent for M-l and 7 to 11 percent
for M-2. If rates of growth of M-l and M-2, given approximately equal
weight, appear to be close to or beyond the upper or lower limits of
the indicated ranges, the objective for the funds rate is to be raised or
lowered in an orderly fashion within its range.
If the rates of growth in the aggregates appear to be beyond the upper
or lower limits of the indicated ranges at a time when the objective for
the funds rate has already been moved to the corresponding limit of its
range, the Manager shall promptly notify the Chairman, who will then
decide whether the situation calls for supplementary instructions from
the Committee.
Votes for this action: Messrs. Volcker, Balles, Coldwell,
Kimbrel, Mayo, Partee, Schultz, Mrs. Teeters, Messrs. Wallich, and Timlen. Votes against this action: Messrs. Black
and Rice. (Mr. Timlen voted as an alternate member.)
Mr. Black dissented from this action because, in view of the rapid
monetary growth in recent months, he preferred to specify lower ranges
for growth of M-l and M-2 over the August-September period in
order to increase the probability of holding growth within the Committee's longer-run ranges. While he agreed that open market operations should be directed toward attaining a slight increase in the federal
funds rate initially in the coming intermeeting period, he believed
that the directive adopted by the Committee allowed for too rapid
monetary growth before a further increase in the funds rate would
be triggered.
Mr. Rice dissented from this action because he believed that an
additional firming in money market conditions at this time, to restrict
growth of money and credit, in the face of the evidence of weakening
in economic activity would risk deepening the recession. In his view,
the effort to balance the goal of reducing the rate of inflation with
the objective of minimizing the impact of the recession called for




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187

a policy directed toward the maintenance of prevailing money market
conditions unless growth of the monetary aggregates over the August-September period appeared to be substantially faster or slower
than the rates currently expected.
Subsequent to the meeting, in late August, incoming data indicated
that M-l and M-2 were growing at rapid rates in August. On August
30, projections for the August-September period suggested that growth
of M-l would be at an annual rate well above the upper limit of
the range that had been specified by the Committee and that growth
of M-2 would be at about the upper limit of its range. Over the
preceding week, the Manager for Domestic Operations had been
aiming for a weekly average federal funds rate approaching the 11 xk
percent upper limit of its specified range, and in the statement week
ending August 29, the rate averaged 11.16 percent. In these circumstances, Chairman Volcker recommended that the upper limit of the
range for the funds rate be raised to Wh percent, but with the
understanding that not all of the additional leeway would be used
immediately; use of the leeway would depend on subsequent behavior
of the monetary aggregates and on developments in foreign exchange
markets. The Committee voted to amend the domestic policy directive
in accordance with the Chairman's recommendation.
On August 30, 1979, the Committee modified the domestic policy
directive adopted at its meeting on August 14 by raising the upper limit
of the intermeeting range for the federal funds rate to 11 xh percent and
by instructing the Manager for Domestic Operations not to raise the
objective for the weekly average funds rate to the new upper limit
immediately but to be guided by the subsequent behavior of the monetary
aggregates and by developments in foreign exchange markets.
Votes for this action: Messrs. Volcker, Balles, Black,
Coldwell, Kimbrel, Mayo, Partee, Schultz, Mrs. Teeters,
Messrs. Wallich, and Timlen. Vote against this action: Mr.
Rice. (Mr. Timlen voted as an alternate member.)

2. Authorization for Foreign Currency Operations
The Committee approved an increase from $360 million to $700
million in the System's swap arrangement with the Bank of Mexico
and the corresponding amendment to paragraph 2 of the authorization
for foreign currency operations, effective August 17, 1979. With this
change paragraph 2 read as follows:




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FOMC Policy Actions

The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for the System Open Market Account for periods up to
a maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Committee to renew
such arrangements on maturity:
Foreign bank

Amount of arrangement
(millions of dollars equivalent)

Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
300
4,000
600
1,250

Votes for this action: Messrs. Volcker, Balles, Black,
Coldwell, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs.
Teeters, Messrs. Wallich, and Timlen. Votes against this
action: None. (Mr. Timlen voted as an alternate member.)
This action was taken in light of the increase in recent years in
the scale of economic and financial* transactions between the United
States and Mexico.

3. Authorization for Domestic Open Market Operations
At this meeting the Committee amended paragraph 2 of the authorization for domestic open market operations, effective immediately,
to take account of amendments to the Federal Reserve Act enacted
in June 1979. The amendments extended for two years the authority




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189

for lending to the Treasury through direct purchases of securities, under
more restrictive conditions than formerly, and for the first time provided for an alternative means of assisting the Treasury in meeting
short-term cash needs in more routine circumstances.
Specifically, the legislation provided authority for the System to
purchase securities directly from the Treasury in unusual and exigent
circumstances, for renewable periods not to exceed thirty days, when
authorized by the Board of Governors pursuant to an affirmative vote
of not less than five members. The legislation also provided authority
for the System, subject to the approval and rules and regulations of
the Federal Open Market Committee, to lend securities to the Treasury
for sale in the open market. The Treasury would be required to
repurchase the securities and return them to the System not later than
six months after the date of sale. The total amount of securities loaned
to and purchased directly from the Treasury at any one time may
not exceed $5 billion.
As amended, paragraph 2 read as follows:
The Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York (or, under special circumstances, such as
when the New York Reserve Bank is closed, any other Federal Reserve
Bank) (a) to lend to the Treasury such amounts of securities held in the
System Open Market Account as may be necessary from time to time
for the temporary accommodation of the Treasury, under such conditions
as the Committee may specify; and (b) to purchase directly from the
Treasury for renewable periods not to exceed thirty days, when authorized
by the Board of Governors of the Federal Reserve System pursuant to
an affirmative vote of not less than five members, for its own account
(with discretion, in cases where it seems desirable, to issue participations
to one or more Federal Reserve Banks) such amounts of special short-term
certificates of indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury, provided that the rate
charged on such certificates shall be a rate of 1/4 of 1 percent below the
discount rate of the Federal Reserve Bank of New York at the time of
such purchases and provided that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed
$2 billion.
Votes for this action: Messrs. Volcker, Balles, Black,
Cold well, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs.
Teeters, Messrs. Wallich, and Timlen. Votes against this
action: None. (Mr. Timlen voted as an alternate member.)




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FOMC Policy Actions

MEETING HELD ON SEPTEMBER 18, 1979

1. Domestic Policy Directive
The information reviewed at this meeting suggested that economic
activity in the current quarter was near its level in the second quarter
when, according to revised estimates of the Commerce Department,
real output of goods and services had declined at an annual rate of
2.4 percent. Average prices, as measured by the fixed-weight price
index for gross domestic business product, appeared to be rising at
a pace close to the annual rate of 10 percent estimated for the second
quarter.
Staff projections suggested some further contraction in economic
activity and then an upturn beginning in 1980. Over the year ahead,
the rise in average prices was projected to moderate a little from the
rapid rate of recent quarters, and the rate of unemployment was
expected to increase substantially.
The dollar value of retail sales expanded moderately in July and
August, but in real terms such sales changed little and were estimated
to be about 4 percent below their December 1978 peak. Sales of new
automobiles rebounded in July and August from relatively depressed
levels in the previous month, and by the end of August dealers'
inventories of unsold cars had been reduced from an unusually high
level.
The index of industrial production fell 1.1 percent in August after
changing little on balance from the peak reached in March. Output
of consumer durable goods, especially auto assemblies, declined
sharply further in August, and production of business equipment and
materials, including automotive parts, also fell.
In August nonfarm payroll employment was virtually unchanged
following several months of slowing growth. In manufacturing, employment declined for the fifth consecutive month and the average
workweek fell somewhat from an already reduced level. The unemployment rate rose from 5.7 to 6.0 percent after having fluctuated
in a range of 5.6 to 5.8 percent since the beginning of the year.




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191

Private housing starts declined somewhat in July to an annual rate
of 1.8 million units, close to the rate for the second quarter but well
below the average for 1978. Sales of new and existing single-family
homes increased in July but were still about 3 percent below their
record pace in 1978.
The latest survey of business plans taken by the Department of
Commerce in late July and August suggested that spending for plant
and equipment would expand 13.2 percent in 1979 as a whole; the
survey taken three months earlier had suggested an increase of 12.7
percent. The new survey implied substantially less growth in the
second half of the year than in the first half. Manufacturers' new
orders for nondefense capital goods declined considerably in July
to a level about 15 percent below their March peak.
Producer prices of finished goods continued to rise rapidly in
August. The advance was led by a further sharp increase in prices
of energy items and by a substantial rise in prices of consumer foods,
which had declined considerably over the previous four months. Prices
of intermediate goods also continued to move up rapidly in August,
but prices of crude goods changed little after having advanced substantially in most earlier months of the year.
In July consumer prices increased considerably further. As in other
recent months a large portion of the rise was accounted for by sharp
advances in energy prices and homeownership costs. Food prices were
little changed for the second straight month. Over the first seven
months of the year consumer prices rose at an annual rate of about
13 percent.
In August the rise in the index of average hourly earnings of private
nonfarm production workers moderated appreciably, to an annual rate
of about 23A percent. Over the first eight months of the year the increase
was at an annual rate of just over 7 percent, compared with a rise
of 8!/2 percent during 1978. However, the increase in total hourly
compensation in the nonfarm business sector was about as rapid in
the first half of 1979 as it had been during 1978 and, with productivity
declining, the rise in unit labor costs accelerated substantially.
In foreign exchange markets the dollar came under downward
pressure in the last few days of August and the first few days of
September, but its trade-weighted value against major foreign currencies had changed little on balance since the Committee's meeting in
mid-August. The U.S. trade deficit narrowed sharply in July from




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FOMC Policy Actions

its average level earlier in the year. Exports, especially of agricultural
products, continued to rise strongly in July, while non-oil imports
fell substantially.
Total credit outstanding at U.S. commercial banks grew more slowly
in August than in most earlier months of the year. Banks' holdings
of Treasury obligations declined and growth in their total loans
moderated. However, business loans continued to expand rapidly in
August and commercial paper issued by nonfinancial firms again
increased sharply.
The monetary aggregates—M-l, M-2, and M-3—continued to expand at relatively rapid rates in August and early September, although
somewhat less rapidly than in June and July. Growth in demand
deposits slowed considerably in August but the slowdown was partly
offset by an acceleration in growth of currency. Expansion in time
and savings deposits included in M-2 moderated slightly in August
and net inflows of funds to nonbank thrift institutions also slowed
somewhat. Growth in money market mutual funds and other short-term
nondeposit investments had remained rapid in recent weeks.
At its meeting on August 14, the Committee had decided on ranges
of tolerance for the annual rates of growth in M-l and M-2 during
the August-September period of 4 to 8 percent and 7 to 11 percent
respectively. The Committee had agreed that in the coming intermeeting period the Manager for Domestic Operations of the System Open
Market Account should direct open market operations initially toward
an increase in the weekly average federal funds rate to a level of
about 11 percent. Subsequently, if the two-month growth rates of M-l
and M-2, given approximately equal weight, appeared to be close
to or beyond the upper or lower limits of the indicated ranges, the
objective for the funds rate was to be raised or lowered in an orderly
fashion within a range of 10% to 11!4 percent.
Soon after the meeting, incoming data indicated that M-l and M-2
were growing at rapid rates in August. On August 30, projections
for the August-September period suggested that growth of M-1 would
be well above the upper limit of the range that had been specified
by the Committee and that growth of M-2 would be at about the
upper limit of its range. Over the preceding week, the Manager for
Domestic Operations had been aiming for a weekly average federal
funds rate approaching the 11 lk percent upper limit of the intermeeting
range, and in the statement week ending August 29, the rate averaged




FOMC Policy Actions

193

11.16 percent. In these circumstances, the Committee voted on August
30 to amend the domestic policy directive by raising the upper limit
of the range for the funds rate to IVA percent, but with the understanding that not all of the additional leeway would be used immediately; use of the leeway would depend on subsequent behavior of
the monetary aggregates and on developments in foreign exchange
markets. In the week preceding today's meeting, the funds rate
averaged about 11% percent.
Short-term interest rates rose substantially during the intermeeting
period, in response to strong business demands for credit as well as
to the System's actions firming money market conditions and to
expectations of further monetary restraint. Bond yields also increased
somewhat. During the period, banks raised their loan rate to prime
business borrowers in steps from 11% percent to a new record of
13 percent. On August 16, the Board of Governors announced an
increase in Federal Reserve Bank discount rates from 10 to 10!/2
percent.
In home mortgage markets, yields on new mortgage commitments
rose to new highs in early September and, according to field reports,
nonrate lending terms were tightened further by numerous lenders.
However, the volume of mortgage lending appeared to be well maintained.
In the Committee's discussion of the economic situation and outlook, none of the members expressed disagreement with the staff
appraisal of some further contraction in real gross national product
after the current quarter's interruption of the decline. However, members continued to express uncertainty about the duration and extent
of the contraction in activity.
In one view, recent domestic developments were consistent with
no more than a mild contraction. While several months had elapsed
since the first signs of economic weakness and the automobile industry
in particular was in recession, activity and demand for labor in certain
industries and regions of the country remained strong. The unemployment rate had increased little from a level that, under prevailing market
conditions, some observers associated with full employment; retail
sales in real terms had leveled out in the summer, after a decline
over the first half of the year; and business inventories appeared to
be undergoing a moderate correction. Moreover, a new labor contract
in the automobile industry had been negotiated without a work stop-




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FOMC Policy Actions

page, eliminating one potential disturbance. Abroad, growth of industrial activity appeared sufficiently robust to contribute to improvement
in this country's net exports and thereby to lend support to domestic
activity.
In an alternative view, the contraction in activity could become
more severe. Recent indicators of demands suggested mounting
weakness, and business inventories—up sharply in July, according
to the latest available data—were unlikely to be worked down easily.
Industrial activity abroad—as in the United States, adversely affected
by the petroleum situation, by inflation, and by instability in foreign
exchange markets—might not contribute so much to improvement in
U.S. net exports.
A major problem in the current situation, it was observed, was
the tendency of inflation to raise effective income tax rates and thereby
to reduce real disposable income and consumption expenditures. The
sharp increase in oil prices, moreover, had similar effects.
Members continued to express great concern about the rapid rise
in prices. It was observed that inflation was more persistent now than
it had been in earlier periods of some weakening in demands and
that there was still a tendency to underestimate its strength. Furthermore, the current and foreseeable rate of inflation could itself lead
to additional shocks to the economy.
At its meeting on July 11, 1979, the Committee reaffirmed the ranges
for monetary growth in 1979 that it had established in February. Thus,
the Committee agreed that from the fourth quarter of 1978 to the
fourth quarter of 1979 average rates of growth in the monetary
aggregates within the following ranges appeared to be consistent with
broad economic aims: M-l, IV2 to 4!/2 percent; M-2, 5 to 8 percent;
and M-3, 6 to 9 percent. The associated range for commercial bank
credit was IV2 to 10!/2 percent. Having established the range for M-l
in February on the assumption that expansion of ATS and NOW
accounts would dampen growth by about 3 percentage points over
the year, the Committee also agreed that actual growth of M-l might
vary in relation to its range to the extent of any deviation from that
estimate. It now appeared that expansion of such accounts would
reduce measured growth of M-l over the year by about 1V2 percentage
points.
In contemplating policy for the period immediately ahead, Committee members took note of a staff analysis suggesting that growth of




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195

M-l was likely to taper off during the September-October period in
response to the lagged effects of the substantial increase in interest
rates during the summer and the prospective weakening of expansion
in nominal GNP. However, growth over the two months would still
be relatively high. Growth of M-2 was also expected to moderate,
mainly as a result of the behavior of M-l but also because of a
reduction in growth of savings and small time deposits at commercial
banks in response to the increased level of interest rates.
In the Committee's discussion, most members favored a policy of
directing open market operations toward a slight additional firming
in money market conditions early in the period before the next regular
meeting and of having subsequent operations guided by incoming
evidence on the behavior of the monetary aggregates. Because of the
rapid monetary expansion of recent months, these members in general
favored specification of ranges for growth of M-l and M-2 over the
September-October period that were indicative of less tolerance for
relatively high than for relatively low growth. Sentiment was also
expressed for directing open market operations toward maintaining
the money market conditions currently prevailing, unless incoming
evidence suggested that growth of the monetary aggregates over the
September-October period would deviate significantly from the rates
currently expected. No member advocated an easing in money market
conditions in the period immediately ahead.
Members who favored policy measures directed toward some additional firming in money market conditions stressed the importance of
achieving a significant reduction in the pace of monetary expansion
over the months ahead. Such a reduction was necessary if growth
over the year ending in the fourth quarter of 1979 was to be held
well within the longer-run ranges that had been reaffirmed by the
Committee in July. Additional measures to restrain monetary growth,
moreover, would tend to lower expected rates of inflation and, consequently, would have a constructive influence on a range of decisions
affecting prices and wages as well as the value of the dollar in foreign
exchange markets.
It was suggested, in addition, that monetary policy had not been
as restrictive as it might have appeared. Despite the level of interest
rates, credit demands and credit expansion remained strong. Interest
rates after allowance for expected rates of inflation were not high.
Furthermore, monetary growth this year had been greater than indi-




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FOMC Policy Actions

cated by M-l alone, owing to rapid expansion in close substitutes
for demand deposits and currency.
In support of a policy directed toward maintenance for the time
being of prevailing money market conditions, members emphasized
the substantial rise in interest rates over the past two months and the
tendency of changes in rates to affect monetary growth and economic
activity only after a considerable lag. In this connection, it was
observed that growth of demand deposits had slowed markedly in July
and August, while expansion of M-l had been supported by an
unexplained pickup in growth of currency in circulation. Growth of
the monetary aggregates was likely to taper off in coming months,
and additional firming in money market conditions might slow growth
to an unwanted degree. In the current circumstances, the Committee
should avoid policy actions that might intensify the developing
weakness in economic activity.
At the conclusion of its discussion of policy, the Committee decided
to instruct the Manager for Domestic Operations to direct open market
operations initially toward a slight increase in the weekly average
federal funds rate to about llJ/2 percent. Subsequently, the objective
for the funds rate was to be raised or lowered in an orderly fashion
within a range of 11V4 to \\3A percent if the monetary aggregates
appeared to be growing over the September-October period at annual
rates close to or beyond the upper or lower limits of the following
ranges: M-l, 3 to 8 percent; and M-2, 6!6 to 10'/2 percent. They
also agreed that in assessing the behavior of the aggregates, the
Manager should give approximately equal weight to M-l and M-2.
As is customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the third
quarter real output of goods and services remained near the reduced level
of the preceding quarter and that prices on the average continued to rise
rapidly. In August, as in July, the dollar value of retail sales expanded
moderately, but sales in real terms changed little and were substantially
below those of last December. Industrial production dropped from the
May-July level, largely because of sharp curtailments in output of motor
vehicles and parts. Nonfarm payroll employment was unchanged; the




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197

unemployment rate rose from 5.7 percent to 6.0 percent, thus moving
above the narrow range in which it had fluctuated since the beginning
of the year. Producer prices of finished goods continued to rise rapidly
in August, led by further large increases in energy items and a substantial
advance in consumer foods following a significant decline over the
preceding four months. The rise in the index of average hourly earnings
over the first eight months of this year was moderately below the pace
during 1978, but the increase in total hourly compensation in the nonfarm
business sector has been about as rapid this year as last.
The dollar came under downward pressure in foreign exchange markets
in the last days of August and the early days of September, but its
trade-weighted value against major foreign currencies has changed little
on balance since mid-August. The U.S. trade deficit in July was sharply
reduced from the average in the first half of the year.
Growth of M-l, M-2, and M-3 was relatively rapid in August and
early September, although not so rapid as in June and July. Market interest
rates have risen appreciably over recent weeks. An increase in Federal
Reserve discount rates from 10 to IOI/2 percent was announced on August 16.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, the Federal Open Market Committee seeks to foster monetary and financial conditions that will resist
inflationary pressures while encouraging moderate economic expansion
and contributing to a sustainable pattern of international transactions. At
its meeting on July 1 1, 1979, the Committee agreed that these objectives
would be furthered by growth of M-l, M-2, and M-3 from the fourth
quarter of 1978 to the fourth quarter of 1979 within ranges of W2 to
4Vi percent, 5 to 8 percent, and 6 to 9 percent respectively, the same
ranges that had been established in February. Having established the range
for M-l in February on the assumption that expansion of ATS and NOW
accounts would dampen growth by about 3 percentage points over the
year, the Committee also agreed that actual growth in M-l might vary
in relation to its range to the extent of any deviation from that estimate.
The associated range for bank credit is IV2 to IOI/2 percent. The Committee
anticipates that for the period from the fourth quarter of 1979 to the
fourth quarter of 1980, growth may be within the same ranges, depending
upon emerging economic conditions and appropriate adjustments that may
be required by legislation or judicial developments affecting interest-bearing transactions accounts. These ranges will be reconsidered at any time
as conditions warrant.
In the short-run, the Committee seeks to achieve bank reserve and
money market conditions that are broadly consistent with the longer-run
ranges for monetary aggregates cited above, while giving due regard to
developing conditions in foreign exchange and domestic financial markets.
Early in the period before the next regular meeting, System open market
operations are to be directed at attaining a weekly average federal funds




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rate slightly above the current level. Subsequently, operations shall be
directed at maintaining the weekly average federal funds rate within the
range of 1114 to 11% percent. In deciding on the specific objective for
the federal funds rate the Manager for Domestic Operations shall be guided
mainly by the relationship between the latest estimates of annual rates
of growth in the September-October period of M-l and M-2 and the
following ranges of tolerance: 3 to 8 percent for M-l and 6l/i to 10J/2
percent for M-2. If rates of growth of M-l and M-2, given approximately
equal weight, appear to be close to or beyond the upper or lower limits
of the indicated ranges, the objective for the funds rate is to be raised
or lowered in an orderly fashion within its range.
If the rates of growth in the aggregates appear to be beyond the upper
or lower limits of the indicated ranges at a time when the objective for
the funds rate has already been moved to the corresponding limit of its
range, the Manager shall promptly notify the Chairman, who will then
decide whether the situation calls for supplementary instructions from
the Committee.
Votes for this action: Messrs. Volcker, Kimbrel, Mayo,
Partee, Schultz, Mrs. Teeters, Messrs. Wallich, and Timlen.
Votes against this action: Messrs. Balles, Black, Coldwell,
and Rice. (Mr. Timlen voted as an alternate member.)
Messrs. Balles, Black, and Coldwell agreed with the majority that
open market operations should be directed toward attaining a slight
increase in the federal funds rate initially in the coming intermeeting
period, but they dissented because they believed that, given the
excessive monetary growth in recent months relative to the Committee's longer-run ranges, the directive adopted by the Committee would
allow for too rapid monetary growth before an additional increase
in the objective for the funds rate would be triggered. To enhance
the prospects for achieving the Committee's objective of restraining
monetary growth they preferred, moreover, to provide leeway for a
rise in the funds rate to an upper limit of 12 percent.
Mr. Rice dissented from this action because he believed that an
additional firming in money market conditions would intensify the
developing weakness in economic activity and was unlikely to affect
the rate of inflation favorably within six to nine months. In his
judgment, monetary growth most likely would slow in the months
immediately ahead even if current money market conditions were
maintained, and growth of the monetary aggregates over the year
ending in the fourth quarter of 1979 probably would fall within the
Committee's longer-run ranges.




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199

2. Authorization for Domestic Open Market Operations
The Committee took note of paragraph 3 of the authorization for
domestic open market operations, which authorizes the Reserve Banks
to engage in the lending of U.S. government securities held in the
System Open Market Account under such instructions as the Committee might specify from time to time. That paragraph had been added
to the authorization on October 7, 1969, on the basis of a judgment
by the Committee that such lending of securities was reasonably
necessary to the effective conduct of open market operations and to
the implementation of open market policies, and on the understanding
that the authorization would be reviewed periodically. At this meeting
the Committee concurred in the judgment of the Manager for Domestic
Operations that the lending activity in question remained reasonably
necessary and that, accordingly, the authorization should remain
in effect subject to review in six months.
Votes for this action: Messrs. Volcker, Balles, Black,
Cold well, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs.
Teeters, Messrs. Wallich, and Timlen. Votes against this
action: None. (Mr. Timlen voted as an alternate member.)




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MEETING HELD ON OCTOBER 6, 1979

Domestic Policy Directive
This meeting of the Committee was called by the Chairman to consider
actions that might be taken, in conjunction with actions being contemplated by the Board of Governors, to improve control over the
expansion of money and bank credit in the light of developing
speculative excesses in financial and commodity markets and additional
evidence of strong inflationary forces in the economy. Special attention
was given to the conduct of open market operations in order to contain
growth in the monetary aggregates within the ranges previously
adopted by the Committee for the year ending in the fourth quarter
of 1979.
The information available at the time of the meeting suggested
somewhat stronger economic activity in the third quarter than had
been indicated at the time of the Committee's meeting on September
18, and real output of goods and services was estimated to have
recovered a significant part of the second-quarter decline. According
to staff projections, however, a decline in activity in the fourth quarter
still appeared probable. Prices on the average were continuing to rise
somewhat more rapidly than anticipated earlier, in part because of
additional large increases in energy items and renewed upward pressures on foods. Moreover, developments in spot and futures markets
for a number of commodities were indicative of an intensification of
speculative activity and of the possibility of a further surge in prices.
In foreign exchange markets the weighted-average value of the dollar
against major foreign currencies had declined substantially since the
Committee's meeting in mid-September, and monetary authorities had
purchased, net, a large amount of dollars. Over the last few days
dollar exchange rates had strengthened somewhat and gold prices had
fallen considerably from record highs, apparently in anticipation of
official actions to support the dollar. However, the atmosphere in the
exchange markets remained sensitive and unsettled.




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201

In accordance with the Committee's decision at its meeting on
September 18, open market operations initially were directed toward
a slight increase in the federal funds rate to about IIV2 percent. On
September 18, moreover, the Board of Governors announced an
increase in Federal Reserve Bank discount rates from 10V2 to 11
percent. Subsequently, open market operations were aimed at maintaining the funds rate at about 1 lJ/2 percent, although the rate generally
was somewhat higher during the week preceding this meeting. Interest
rates had remained under considerable upward pressure since midSeptember, and most yields had risen to new highs for the year.
The monetary aggregates—M-l and M-2—continued to expand at
rapid rates in September, and growth in bank credit appeared to have
accelerated appreciably from its pace in the prior two months. Banks
were reported to have financed a substantial portion of their loan growth
through sizable increases in the outstanding volume of large-denomination certificates of deposit and through continued large borrowings
in the Eurodollar market.
At its meeting on July 11, 1979, the Committee reaffirmed the ranges
for monetary growth in 1979 that it had established in February. Thus
the Committee agreed that from the fourth quarter of 1978 to the
fourth quarter of 1979, average rates of growth in the monetary
aggregates within the following ranges appeared to be consistent with
broad economic aims: M-l, IV2 to 4Vi percent; M-2, 5 to 8 percent;
and M-3, 6 to 9 percent. The associated range for commercial bank
credit was IV2 to 10V2 percent. Having established the range for M-l
in February on the assumption that expansion of ATS and NOW
accounts would dampen growth by about 3 percentage points over
the year, the Committee also agreed that actual growth of M-l might
vary in relation to its range to the extent of any deviation from that
estimate. It now appeared that expansion of such accounts would
reduce measured growth of M-l over the year by about 114 percentage
points. After allowance for the deviation from the earlier estimate,
the equivalent range for M-l was 3 to 6 percent.
Over the first three quarters of the year, growth in M-l, M-2, and
M-3 was within the ranges for 1979 set by the Committee. However,
growth in all three monetary aggregates became increasingly rapid
after the first quarter. Thus M-l grew at annual rates of about IVi
and 9V4 percent in the second and third quarters respectively, after
a decline at a rate of about 2 percent in the first quarter. Growth




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in M-2 and M-3 accelerated to annual rates of about 12 percent and
10*4 percent respectively in the third quarter. For bank credit, growth
exceeded its 1979 range in each of the first three quarters. In order
that growth of the monetary aggregates fall within the Committee's
ranges for the whole of 1979, expansion during the final quarter of
the year would have to slow substantially from the rapid rates of recent
months.
In the Committee's discussion of policy for the period immediately
ahead, the members agreed that the current situation called for additional measures to restrain growth of the monetary aggregates over
the months ahead. The members felt that growth of the aggregates
at rates within the ranges previously established for 1979 remained
a reasonable and feasible objective in the light of the available
information and the business outlook. Given that objective, most
members strongly supported a shift in the conduct of open market
operations to an approach placing emphasis on supplying the volume
of bank reserves estimated to be consistent with the desired rates of
growth in monetary aggregates, while permitting much greater fluctuations in the federal funds rate than heretofore. A few members, while
urging strong action to restrain monetary growth, expressed some
preference for continuing to direct daily open market operations toward
maintenance of levels of the federal funds rate and other short-term
interest rates that appeared to be consistent with the Committee's
objectives for growth in the monetary aggregates. The advantages and
disadvantages of the different approaches were discussed.
The principal reason advanced for shifting to an operating procedure
aimed at controlling the supply of bank reserves more directly was
that it would provide greater assurance that the Committee's objectives
for monetary growth could be achieved. In the present environment
of rapid inflation, estimates of the relationship among interest rates,
monetary growth, and economic activity had become less reliable than
before, and monetary growth since the first quarter of 1979 had
exceeded the rates expected despite substantial increases in short-term
interest rates. Committee members recognized that for a number of
reasons the relationship between growth of various reserve measures
and growth of the monetary aggregates was not precise; thus the shift
in emphasis to controlling reserves improved prospects for achievement
of the Committee's objectives for monetary growth over the next few
months but did not assure it.




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203

Committee members suggested that the shift in operating techniques,
along with the other actions being contemplated by the Board of
Governors, would tend to increase confidence at home and abroad
in the System's determination to achieve its objectives for monetary
growth and to avoid further deterioration in the inflationary outlook.
Partly because it would increase uncertainty about the near-term course
of interest rates, the new operating technique should induce banks
to exercise greater caution in extending credit and might dampen
speculative behavior by increasing its risks and costs. Altogether, the
System's action would tend to moderate inflationary expectations,
thereby exerting a constructive influence over time on decisions
affecting wages and prices in domestic markets and on the value of
the dollar in foreign exchange markets.
The observation was made that the new emphasis in open market
operations might be accompanied by larger increases in interest rates
in the immediate future than would otherwise occur. On the other
hand, the emphasis on reserves also could be expected to produce
a shift toward easier conditions in money markets more promptly
whenever the demand for money and credit abated significantly in
response to a weakening in economic activity. The point was made
that an easing in money market conditions under circumstances in
which growth of monetary aggregates was restrained, economic activity was weakening, and the rise in prices was moderating should not
adversely affect inflationary expectations and the value of the dollar
in foreign exchange markets.
At the conclusion of the discussion and after full consideration of
the advantages and disadvantages of alternative courses of action, the
Committee agreed that in the conduct of open market operations over
the remainder of 1979 the Manager for Domestic Operations should
place primary emphasis on restraining expansion of bank reserves in
pursuit of the Committee's objective of decelerating growth of M-l,
M-2, and M-3 to rates that would hold growth of these monetary
aggregates over the year from the fourth quarter of 1978 to the fourth
quarter of 1979 within the Committee's ranges for that period. Specifically, the Committee instructed the Manager to restrain expansion
of bank reserves to a pace consistent with growth from September
to December at an annual rate on the order of 4J/2 percent in M-l
and about IVi percent in M-2 and M-3, provided that in the period
before the next regular meeting the federal funds rate remained




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FOMC Policy Actions

generally within a range of IVA to 15J/2 percent. Because such rates
of expansion would result in growth of the monetary aggregates in
the upper part of their ranges for the year, the Committee also agreed
that over the three-month period somewhat slower growth would be
acceptable.
The Committee anticipated that the shift to an operating approach
that placed primary emphasis on the volume of reserves would result
in both a prompt increase and greater fluctuations in the federal funds
rate. It was Tecognized that on particular days, or for several days,
the federal funds rate might rise above or fall below the general limits
established, and those limits were interpreted to apply to weekly
averages. The Committee also agreed that it would consider whether
supplementary instructions were needed if it appeared that operations
to achieve the necessary restraint in expansion of reserves would tend
to maintain the federal funds rate within 1 percentage point of the
upper limit of its range of IVA to 15!/2 percent. It was understood,
moreover, that the Committee's decisions with respect to open market
operations in the period immediately ahead had implications for
Federal Reserve Bank discount rates.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, the Federal Open Market Committee seeks to foster monetary and financial conditions that will resist
inflationary pressures while encouraging moderate economic expansion
and contributing to a sustainable pattern of international transactions. At
its meeting on July 11, 1979, the Committee agreed that these objectives
would be furthered by growth of M-l, M-2, and M-3 from the fourth
quarter of 1978 to the fourth quarter of 1979 within ranges of IV2 to
AVi percent, 5 to 8 percent, and 6 to 9 percent respectively, the same
ranges that had been established in February. The range for M-l had
been established on the basis of an assumption that expansion of ATS
and NOW accounts would dampen growth by about 3 percentage points
over the year. It now appears that expansion of such accounts will dampen
growth by about \xh percentage points over the year; thus, the equivalent
range for M-l is now 3 to 6 percent. The associated range for bank
credit is IVi to IOV2 percent. The Committee anticipates that for the period
from the fourth quarter of 1979 to the fourth quarter of 1980, growth
may be within the same ranges, depending upon emerging economic
conditions and appropriate adjustments that may be required by legislation




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205

or judicial developments affecting interest-bearing transactions accounts.
These ranges will be reconsidered at any time as conditions warrant.
In the short run, the Committee seeks to restrain expansion of reserve
aggregates to a pace consistent with deceleration in growth of M-l, M-2,
and M-3 in the fourth quarter of 1979 to rates that would hold growth
of these monetary aggregates over the whole period from the fourth quarter
of 1978 to the fourth quarter of 1979 within the Committee's longer-run
ranges, provided that in the period before the next regular meeting the
weekly average federal funds rate remains within a range of IIV2 to 15!/2
percent. The Committee will consider the need for supplementary instructions if it appears that operations to restrain expansion of reserve aggregates would maintain the federal funds rate near the upper limit of its
range.
Votes for this action: Messrs. Volcker, Balles, Black,
Cold well, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs.
Teeters, Messrs. Wallich, and Timlen. Votes against this
action: None. (Mr. Timlen voted as an alternate member.)
On October 6, after the meeting of the Committee, the Board of
Governors unanimously approved complementary actions also directed
toward assuring better control over the expansion of money and bank
credit and toward curbing speculative excesses in financial and commodity markets. Specifically, the Board approved an increase in
Federal Reserve Bank discount rates from 11 percent to 12 percent
and established a marginal reserve requirement of 8 percent on increases in the total of managed liabilities of member banks, Edge
corporations, and U.S. agencies and branches of foreign banks.
(Managed liabilities include large-denomination time deposits with
maturities of less than one year, Eurodollar borrowings, repurchase
agreements against U.S. government and federal agency securities,
and borrowings of federal funds from institutions other than members
of the Federal Reserve System.)
Subsequently, on October 22, 1979, the Committee held a telephone
conference to review the situation and to consider whether supplementary instructions to the Manager were needed. Since October 6,
expansion of total reserves had exceeded the pace consistent with the
Committee's objective for growth of the monetary aggregates during
the fourth quarter. At the same time, the federal funds rate had begun
fluctuating close to the upper limit of the IP/2 to 15V4 percent range
established by the Committee. It was recognized that the desired
restraint in the expansion of total reserves might involve continued




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FOMC Policy Actions

pressure on money market conditions, including higher levels of
member bank borrowings from the Federal Reserve than had been
anticipated, as banks made orderly adjustments that would in time
slow monetary growth. It was not clear, however, that retention of
the 15!/2 percent upper limit of the range for the federal funds rate
would be inconsistent with the desired restraint on monetary growth.
Moreover, unsettled conditions in financial markets also suggested no
change in the upper limit of the range for the federal funds rate.
Consequently, no change was proposed in the domestic policy directive
issued at the meeting on October 6.




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207

MEETING HELD ON NOVEMBER 20, 1979

1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services was falling in the current quarter following a
stronger rebound in the third quarter than had been anticipated at
the time of the Committee's meeting on October 6. Average prices,
as measured by the fixed-weight price index for gross domestic business product, appeared to be rising at a pace close to the annual rate
of 10 percent in the first three quarters of the year.
Staff projections suggested a further contraction in economic activity during the first half of 1980 and an upturn later in the year. The
rise in average prices was projected to moderate slightly as the year
progressed, and the rate of unemployment was expected to increase
substantially.
Retail sales fell considerably in October, after having expanded
rapidly during the third quarter in both constant and current dollars.
Sales of new automobiles fell sharply in October and weakened further in early November.
The index of industrial production changed little in October and
remained near its midyear level. Nonfarm payroll employment rose
substantially after three months of limited gains, but the rate of
unemployment edged up to 6.0 percent.
Private housing starts declined in October to an annual rate of 1.76
million units, compared with an average rate of 1.83 million units in
both the second and third quarters, and building permits for new
housing units fell appreciably. Sales of new and existing single-family homes were at a relatively high level in September, but available
information suggested lower combined sales in October.
Producer prices continued to rise at a rapid rate in October, reflecting further sharp advances in energy items and the spreading
impact on costs of earlier increases in energy prices. In September
consumer prices also continued to move up rapidly, with the most




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FOMC Policy Actions

pronounced increases concentrated in the energy, food, homeownership, and apparel components.
In October the rise in the index of average hourly earnings of private nonfarm production workers moderated to an annual rate of
about 3 V2 percent, but over the first 10 months of the year the advance was close to the rapid pace of 1978. Labor cost pressures in
the nonfarm business sector had remained intense in the third quarter, reflecting a sharp increase in total hourly compensation and
virtually no improvement in productivity.
On October 6 the Federal Reserve announced a series of complementary actions directed toward assuring better control over the
expansion of money and bank credit and toward curbing speculative
excesses in commodity and financial markets, including foreign exchange markets. The actions included an increase in Federal Reserve Bank discount rates from 11 percent to 12 percent; establishment of a marginal reserve requirement of 8 percent on increases
in certain managed liabilities of member banks, Edge corporations,
and U.S. agencies and branches of foreign banks; and a shift in the
conduct of open market operations to an approach placing greater
emphasis in day-to-day operations on the supply of bank reserves
and less emphasis on confining short-term fluctuations in the federal
funds rate.
At its meeting on October 6, the Committee had decided that over
the remainder of 1979 the Manager for Domestic Operations should
place primary emphasis on restraining expansion of bank reserves in
pursuit of the objective of decelerating growth of M-l, M-2, and M-3
to rates that would hold growth of these monetary aggregates from
the fourth quarter of 1978 to the fourth quarter of 1979 within the
Committee's ranges for that period. Specifically, the Committee instructed the Manager to restrain expansion of bank reserves to a
pace consistent with growth from September to December at an annual rate on the order of 4V2 percent in M-l and Vli percent in M-2
and M-3, provided that in the period before the next regular meeting
the weekly average federal funds rate remained generally within a
range of IIV2 to 15V2 percent. Because such rates of expansion
would result in growth of the monetary aggregates in the upper part
of their ranges for the year, the Committee also had agreed that over
the three-month period somewhat slower growth would be acceptable. The Committee had anticipated that the shift to an operating




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209

approach that placed primary emphasis on the volume of reserves
would result in both a prompt increase and greater fluctuations in the
federal funds rate.
Over the first half of October, measures of bank reserves in general grew faster than had been anticipated at the time of the meeting on
October 6, both because demands for reserves were unexpectedly
strong and because System operations provided more reserves than
had been expected. Subsequently, System operations were directed
more firmly at restraining growth of reserves. As such operations
limited growth of nonborrowed reserves while demands for reserves
remained strong, member bank borrowings rose to a daily average of
about $3 billion in the last two statement weeks of October and the
federal funds rate rose to an average a little above 1572 percent in
the final week. In the first half of November, demands for reserves
eased, and member bank borrowings subsided to a daily average of
about $2 billion and the federal funds rate declined to an average of
about 1372 percent.
From September to the first half of November, total member bank
reserves expanded at an annual rate of about IIV2 percent, slightly
faster than over the three months from June to September. However, expansion of the monetary base and of nonborrowed reserves
slowed sharply over the period from September to the first half of
November, to annual rates of about 8 percent and 274 percent respectively.
Growth of M-l, which had accelerated in September and had been
exceptionally rapid in the third quarter as a whole, slowed to an
annual rate of 272 percent in October. Growth of M-2 slowed less
than that of M-l, to a rate of about 872 percent in October, as overall
expansion in the interest-bearing components remained strong. A
marked rise of net flows into money market certificates and other
time deposits at commercial banks, fostered by substantially higher
deposit yields, offset a sharp reduction in savings deposits.
At nonbank thrift institutions, inflows into money market certificates and large-denomination time deposits also accelerated in October, but total net inflows slowed somewhat. High interest returns
attracted near-record inflows into shares of money market mutual
funds.
Growth in loans and investments at commercial banks moderated
appreciably in October. With demand deposits and savings deposits




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FOMC Policy Actions

weak or declining, however, banks increased their reliance on money market certificates and on the managed liabilities that became
subject to marginal reserve requirements in the statement week beginning October 11.
Since early October interest rates had risen sharply in both shortand long-term markets and had been unusually volatile. In this period, banks had raised their loan rate to prime business borrowers
from BV2 percent to a new high of 153/4 percent. Since the latter
part of October, however, short-term market rates had declined
from their peaks in apparent reaction to evidence of reduced monetary growth and to some easing of pressure in the federal funds market as bank demands for reserves moderated.
In foreign exchange markets the downward pressure on the dollar
that had developed in September was reversed in early October, and
by the end of the month, the trade-weighted value of the dollar
against major foreign currencies had risen about VI2 percent.
Around mid-November, however, the dollar came under renewed
downward pressure and lost a portion of its October gain, in part
reflecting developments relating to Iran. The U.S. trade deficit increased in September, as the cost of oil imports rose considerably
further. For the third quarter as a whole the deficit was somewhat
lower than that for the second quarter, however, as strong gains in
agricultural and other exports more than offset the large rise in the
value of petroleum imports.
In the Committee's discussion of the economic situation and outlook, the members in general agreed with the staff appraisal that the
unexpectedly strong rebound in real gross national product in the
third quarter would be followed by some contraction in activity and
by a rise in unemployment, although uncertainty was expressed
about the depth and duration of the anticipated downturn as well as
about its precise timing. Some members cited the onset of the heating season with energy prices so much higher than a year earlier, the
overall rate of inflation, the recent sharp rise in interest rates, and
the developing stringency in some financial markets as influences
that might cause the contraction to be relatively severe.
Continuation of the rapid rise in prices of goods and services remained a major concern of Committee members, some of whom
thought that the risks were on the side of a rise greater than that
currently anticipated. The prospects for supplies and prices of oil,




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211

which would have a substantial effect on the economy, were regarded as especially uncertain, in view of the political situation in
Iran and of the meeting of petroleum-exporting countries scheduled
to begin on December 17.
At its meeting on July 11, 1979, the Committee reaffirmed the
ranges for monetary growth in 1979 that it had established in February. Thus the Committee agreed that from the fourth quarter of 1978
to the fourth quarter of 1979, average rates of growth in the monetary aggregates within the following ranges appeared to be consistent with broad economic aims: M-l, IV2 to 4V2 percent; M-2, 5 to 8
percent; and M-3, 6 to 9 percent. Having established the range for
M-l in February on the assumption that expansion of ATS and
NOW accounts would dampen growth by about 3 percentage points
over the year, the Committee also agreed that actual growth of M-l
might vary in relation to its range to the extent of any deviation from
that estimate. More recently, it appeared that expansion of such accounts would reduce measured growth of M-l over the year by
about IV2 percentage points. After allowance for the deviation from
the earlier estimate, the equivalent range for M-l was 3 to 6 percent.
In contemplating policy for the period immediately ahead, the
Committee took note of a staff analysis indicating that the behavior
of the monetary aggregates since September had been reasonably
consistent with the policy adopted on October 6, when the Committee had instructed the Manager to restrain expansion of bank reserves to a pace consistent with annual rates of growth from September to December on the order of 4V2 percent in M-l and 7V2
percent in M-2 and M-3 but had also stated that somewhat slower
growth over the three-month period would be acceptable. The staff
analysis noted that growth in M-l at an average annual rate of 5V2
percent in November and December would be consistent with
growth at an annual rate of 4V2 percent from September to December, although the pattern of change in recent weeks suggested that
growth would be below the two-month average in November and
above it in December. Growth of M-l at those rates or even somewhat slower ones would probably be associated with more rapid
growth of M-2 over the September-December period than the 7V2
percent rate specified in October, because time deposits at banks
were continuing to grow faster in relation to demand deposits than
had been expected.




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FOMC Policy Actions

In the Committee's discussion of policy for the period immediately ahead, the members indicated that in the present circumstances
pursuit of the goal of restraining growth of the monetary aggregates
from the fourth quarter of 1978 to the fourth quarter of 1979 within
the ranges previously established for that period remained feasible
and desirable; they agreed that in pursuit of that underlying goal, the
broad objectives for monetary growth during the current quarter
adopted at the meeting on October 6 were still appropriate. In contemplating objectives for rates of monetary growth over the weeks
through the end of 1979 and into January 1980, the members differed
somewhat in their views concerning the extent to which operations
should be directed toward promoting acceleration in growth of M-l
from the recently reduced rates. A few members favored operations
consistent with the October 6 decision to seek a 4lh percent annual
rate of growth in M-l over the September-December period. A few
members favored acceptance of a significantly slower rate of growth
for the quarter. Most members, however, advocated a compromise
between those two prescriptions. It was recognized that, while the
decision affecting such a short period would have quite minor implications for monetary growth over the year ending in the fourth quarter of 1979, it would affect credit and money market conditions in the
weeks ahead and the path of monetary growth entering the new
year.
Views with respect to an acceptable range of fluctuation for the
federal funds rate did not vary greatly. It was agreed that the range
should continue to be relatively wide, and most members indicated a
preference for retaining the range of 11 xli to 1572 percent adopted at
the October 6 meeting. Some sentiment was also expressed for reducing the lower limit and some for both reducing the lower limit
and raising the upper limit.
At the conclusion of the discussion, the Committee agreed that in
the conduct of open market operations over the remainder of 1979,
the Manager for Domestic Operations should continue to restrain
expansion of bank reserves in pursuit of the Committee's objective of
decelerating growth of M-l, M-2, and M-3 over the fourth quarter of
1979 to rates that would hold growth of these monetary aggregates
from the fourth quarter of 1978 to the fourth quarter of 1979 within
the Committee's ranges for that period; it was recognized that persistence of recent relationships might result in growth of M-2 at




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213

about the upper limit of its range. Specifically, the Committee instructed the Manager to restrain expansion of bank reserves to a
pace thought to be consistent with growth on the average in November and December at an annual rate of about 5 percent in M-l and 8V2
percent in M-2, provided that in the period before the next regular
meeting the federal funds rate remained generally within a range of
1172 to 15V2 percent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output of
goods and services is declining in the current quarter, after the third-quarter
rebound, and that prices on the average are continuing to rise rapidly. Retail
sales, which had expanded sharply during the third quarter in both constant
and current dollars, dropped in October. Industrial production remained
near its midyear level. Nonfarm payroll employment rose considerably, after three months of little growth, but the unemployment rate increased from
5.8 to 6.0 percent. Producer prices offinishedgoods continued to rise rapidly in October, in part because of further sharp increases in energy costs. The
rise in the index of average hourly earnings during the first 10 months
of the year was close to the rapid pace during 1978.
On October 6 the Federal Reserve announced a series of complementary
actions directed toward assuring control over the expansion of money and
bank credit and toward curbing speculative excesses in commodity and financial markets, including foreign exchange markets. The actions included
an increase in Federal Reserve Bank discount rates from 11 percent to 12
percent; establishment of a marginal reserve requirement on increases in the
total of managed liabilities of member banks, Edge corporations, and U.S.
agencies and branches of foreign banks; and a shift in the conduct of open
market operations to an approach placing greater emphasis in day-to-day
operations on the supply of bank reserves and less emphasis on confining
short-term fluctuations in the federal funds rate.
Following the announcement on October 6, the downward pressure on
the dollar in the exchange markets that had developed in September was
reversed, and by the end of October the trade-weighted value of the dollar
against major foreign currencies had risen about VI2 percent. In mid-November, however, the value of the dollar declined, reflecting in part developments concerning Iran. The U.S. foreign trade deficit increased in September as the cost of oil imports rose, but the deficit was somewhat lower
for the third quarter as a whole than for the second quarter.
Growth of M-l, which had accelerated in September and was exceptionally rapid in the third quarter as a whole, slowed sharply in October
to an annual rate of 2V2 percent. Expansion of interest-bearing deposits
included in M-2 remained strong, as a rise in net flows into time deposits at
commercial banks in response to increased yields offset a contraction in




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FOMC Policy Actions

savings deposits. Inflows of deposits at nonbank thrift institutions slowed
somewhat. Flows into money market mutual funds accelerated. Growth of
commercial bank credit moderated in October; nevertheless, banks increased their reliance on the negotiable, large-denomination CD's and other
managed liabilities that became subject to the marginal reserve requirement
in the statement week beginning October 11. Both short- and long-term market interest rates have risen sharply on balance since the early October announcement of the System's policy actions, although most recently rates
have declined; mortgage interest rates have increased substantially further.
Taking account of past and prospective developments in employment,
unemployment, production, investment, real income, productivity, international trade and payments, and prices, the Federal Open Market Committee seeks to foster monetary and financial conditions that will resist inflationary pressures while encouraging moderate economic expansion and
contributing to a sustainable pattern of international transactions. At its
meeting on July 11, 1979, the Committee agreed that these objectives would
be furthered by growth of M-1, M-2, and M-3 from the fourth quarter of 1978
to the fourth quarter of 1979 within ranges of IV2 to 4V2 percent, 5 to 8
percent, and 6 to 9 percent respectively, the same ranges that had been
established in February. The range for M-l had been established originally
on the basis of an assumption that expansion of ATS and NOW accounts
would dampen growth by about 3 percentage points over the year. It now appears that expansion of such accounts will dampen growth by about IV2 percentage points over the year; thus after allowance for the deviation from the
earlier estimate, the equivalent range for M-l is now 3 to 6 percent. The
associated range for bank credit is lxli to IOV2 percent. The Committee
anticipates that for the period from the fourth quarter of 1979 to the fourth
quarter of 1980, growth may be within the same ranges, depending upon
emerging economic conditions and appropriate adjustments that may be required by legislation or judicial developments affecting interest-bearing
transactions accounts. These ranges will be reconsidered at any time as
conditions warrant.
In the short run, the Committee seeks to restrain expansion of reserve
aggregates to a pace consistent with deceleration in growth of M-l, M-2, and
M-3 in the fourth quarter of 1979 to rates that would hold growth of these
monetary aggregates over the whole period from the fourth quarter of 1978
to the fourth quarter of 1979 within the Committee's longer-run ranges, provided that in the period before the next regular meeting the weekly average
federal funds rate remains within a range of IIV2 to 1572 percent.
If it appears during the period before the next meeting that the constraint
on the federal funds rate is inconsistent with the objective for the expansion
of reserves, the Manager for Domestic Operations is promptly to notify the
Chairman who will then decide whether the situation calls for supplementary instructions from the Committee.
Votes for this action: Messrs. Volcker, Balles, Black, Coldwell, Kimbrel, Mayo, Partee, Rice, Schultz, Mrs. Teeters,




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215

Messrs. Wallich, and Timlen. Votes against this action: None.
(Mr. Timlen voted as an alternate member.)

2. Authorization for Domestic Open Market Operations
On December 20, 1979, the Committee voted to increase from $3
billion to $4 billion the limit on changes between Committee meetings in System Account holdings of U.S. government and federal
agency securities specified in paragraph l(a) of the authorization for
domestic open market operations, effective immediately, for the period ending with the close of business on January 9, 1980.
Votes for this action: Messrs. Balles, Black, Coldwell, Kimbrel,
Mayo, Partee, Rice, Schultz, Mrs. Teeters, Messrs. Wallich, and
Timlen. Votes against this action: None. Absent and not voting: Mr.
Volcker. (Mr. Timlen voted as an alternate member.)

This action was taken on recommendation of the Manager for Domestic Operations, System Open Market Account. The Manager
had advised that since the November meeting large-scale purchases
of securities primarily to counter the effects of seasonal increases in
currency in circulation had reduced the leeway for further purchases
to about $500 million. It appeared likely that additional purchases
would be required because projections indicated a need for further
reserve-providing operations over the coming weeks.




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Consumer Affairs
INTRODUCTION
The Board of Governors reorganized and strengthened its Division of
Consumer and Community Affairs in 1979 to deal effectively with the new
responsibilities assigned to it by the Congress for protecting consumer
credit needs at the community as well as at the individual level. Also in the
year just past, the Board expanded and improved its programs for enforcing laws on consumer credit protection and encouraging compliance with
them, extended its regulations to implement consumer-protection features
of the new Electronic Fund Transfer Act, and continued work on simplification of its rules under the Truth in Lending Act.
The division collaborated with the public affairs units of the Board and
the Reserve Banks in a nationwide effort to expand consumer understanding of the public's rights under the consumer credit protection laws.
The organizational changes were designed to permit the Board's division
dealing with consumer credit legislation to meet the responsibilities the
Congress has assigned to the Board under the Community Reinvestment
Act and other federal programs for community development. Under the
reorganization an associate director of the division was to be responsible
for coordinating the Board's community affairs activities.
The division will assist other Board divisions in administering the
Board's Regulation BB (Community Reinvestment Act), which implements the Community Reinvestment Act, as well as Board activities under
the National Neighborhood Reinvestment Corporation, the Commercial
Reinvestment Task Force, and the Interagency Staff Task Force on
Urban Credit.
The division also assumed responsibility for maintaining liaison with,
and assisting, CRA officers at the Reserve Banks, who have been designated as contacts for community organizations and banks for community
development and revitalization matters.
The division will continue to administer the Board's responsibilities
under 10 consumer credit protection laws, including those on truth in
lending, fair credit billing, consumer leasing, equal credit opportunity,
home mortgage disclosure, fair housing, fair credit reporting, fair debt
collection practices, and electronic fund transfer, and section 18(f) of the




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217

Federal Trade Commission Improvement Act, which deals with unfair or
deceptive banking practices.

Community Reinvestment Act
The CRA requires the Federal Reserve and other federal supervisors of
financial institutions to encourage banks and other lenders to help meet the
credit needs of the local communities in which they are chartered, within
the bounds of safe and sound banking. The federal regulators are required
by the act to assess the record of institutions they supervise in this respect
when considering an application from a lender to expand, merge, or take
other actions requiring federal approval. The act is aimed at encouraging
financial institutions to give attention to the credit needs of low- and
moderate-income areas of their communities.
Late in 1979 the Board approved issuance of an information statement
to guide those affected by the CRA. The statement was forwarded to the
Federal Financial Institutions Examination Council for the consideration of
the other federal regulators of financial institutions. The Board's statement, published in full later in this section, was addressed to state member banks and to bank holding companies. In it the Board states its
policy of encouraging meetings between applicants and protesting parties
to help solve problems. It announces its intention to develop a procedural guide for the public, subject to change as more experience accumulates, and to coordinate this effort with other federal agencies charged
with supervision of financial institutions.
The Board's statement noted that some protests alleged that certain
lenders have a poor CRA record because the institution did not lend as
much in a community as that community deposited with it. In this connection, the Board noted that
Although CRA is directed at the problem of meeting sound community credit
needs, it was not intended to establish a regulatory influence on the allocation of
credit. . . .
The Board believes that there are many reasons why a particular neighborhood may generate more deposits than loan requests, or more requests than
deposits, and that" disparity in a particular local area between credit granted and
deposit totals is not prima facie evidence of discrimination. . . .
However, the Board views as a serious matter disparities in lending to different areas that do not appear to be fully attributable to safety and soundness
considerations or to factors beyond a bank's control.
The Board's statement included these other principal points:
• When faced with evidence of such disparities the Board will inquire




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Consumer Affairs

closely into the bank's efforts to ascertain credit needs and to make the
community aware of its credit services and into any policies or practices
that may discourage credit applications from, or discriminate against, parts
of the bank's community.
• The Board expects banks to offer throughout their communities the
types of loans it lists in its CRA statements.
• The Board will give weight to conceited efforts by lenders to improve
low- and moderate-income areas of their communities.
• In some cases the Board may take into account commitments for future
action, as it has long done in assessing the effect of approval or disapproval
of an application on the banking convenience and needs of a community.
• When it does give favorable weight to such commitments, the Board
will review the results closely in considering future applications.
• Just as the Board expects that a bank will communicate responsibly
with all segments of its community, it also expects that community organizations filing protests will investigate complaints and document them.
• In its policy of fostering communication between lending institutions
and their communities by bringing them together to consider protests, the
Board has taken these positions: (1) even if a protest is withdrawn, the
Board is obligated to consider the applicant's CRA record; (2) any decision
to negotiate rests with the parties involved; and (3) the Board will not
necessarily approve an agreement between the parties.
• The Board does not endorse agreements to allocate credit.
Consumer Education
The Board's "Consumer Handbook to Credit Protection Laws," first
issued late in 1978, was reprinted in 1979 and has become the Board's
most popular publication on consumer credit protection. Through the
end of 1979, 3 million copies of the 46-page booklet had been produced. It was distributed through the Federal Consumer Information
Center, credit bureaus, and other bank regulatory agencies. Some
35,000 teachers in junior high and high schools and in colleges received
copies for classroom use. The handbook explains consumer rights under
the major consumer credit protection laws and the ways borrowers can
shop for credit, apply for it, keep up their credit standing, and complain
about abuses. The handbook also includes a glossary of terms used in
credit transactions and in laws and regulations on credit protection.
In other actions in 1979 to increase understanding of the laws on consumer credit protection, the Federal Reserve released a film ('To Your




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219

Credit") designed for school and television use and produced by the Federal Reserve Bank of Philadelphia. Furthermore, the Board and several
Reserve Banks, in collaboration with educational authorities, developed
workshops and lectures to educate teachers about the laws on consumer
credit protection and to inform them of materials available from the Federal
Reserve.

Compliance
Early in 1979 the Board strengthened and made permanent an experimental
program in operation since 1977 for improving the enforcement of consumer and civil rights laws applicable to state member banks. The program
included special training of bank examiners to detect credit discrimination,
detailed in a Compliance Handbook for examiners; closer monitoring of
banks with poor performance records; strengthened procedures for investigating complaints; appointment of civil rights specialists in each Reserve
Bank; designation of attorneys at the Board as civil rights specialists; and
development of career ladders to attract and hold examiners specializing in
consumer credit protection and civil rights. The System continued to offer
to all state member banks educational and advisory services on consumer
credit protection and civil rights laws.
Truth in Lending and Electronic Fund Transfer
The Truth in Lending Simplification and Reform Act, Title V of the
Depository Institutions Deregulation Act of 1979, continues under active
consideration by the Congress. The Board of Governors favors reform
of Truth in Lending through legislation. If the bill is not enacted, the
Board will attempt to simplify Truth in Lending through revision of
Regulation Z. Staff drafts of a revised Regulation Z dealing with installment credit and open-end credit were distributed to the Consumer
Advisory Council and made available to the public in the summer of
1979.
During 1979 the Board wrote a new regulation, Regulation E (Electronic
Fund Transfers), as directed by the Congress, to implement the consumer
credit protection aspects of the Electronic Fund Transfer Act. Some provisions of the act became law in March 1979, while others were not to be
effective until May 1980.
Working to this schedule of effective dates, the Board in 1979 adopted a
number of rules to implement the EFT act:




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Consumer Affairs

• Limiting consumer liability for the unauthorized use of EFT cards
(plastic cards that can be used to withdraw funds from an automated teller
or to debit a consumer's checking account, for purchases of goods or
services),
• Dealing with the circumstances under which EFT cards may be used.
• Making written notice of loss or theft of an EFT card effective when
the consumer mails or otherwise transmits the notice.
• Setting forth disclosures that must be made to consumers using. EFT
cards.
• Establishing requirements for retention of records by companies offering EFT services to the public.
At the close of the year, the Board had proposed rules relating to the
requirements of the EFT act that were to become effective in May 1980.

Consumer Advisory Council
The Board met three times in 1979 with its Consumer Advisory Council.
The Council, whose members include both consumer and creditor representatives, was established in 1976 to advise the Board on consumerrelated matters.
At its meetings in 1979 the Council focused on reconciling the differences between the Electronic Fund Transfer Act and the Truth in Lending
Act, on the proposed revision of Regulation Z (Truth in Lending) designed
to increase its effectiveness and facilitate creditor compliance, on the costs
and benefits of consumer credit regulations, and on Regulation Z enforcement guidelines.
William D. Warren, Dean of the School of Law of the University of
California at Los Angeles, was elected chairman, and Marcia A. Hakala,
Assistant to the Vice Chancellor, University of Nebraska Medical Center,
was elected vice chairman.
Other Activity
During the year the Board recommended to the Congress simplification
and standardization of the varying requirements under the Electronic Fund
Transfer, Truth in Lending, and Fair Credit Billing Acts, concerning error
correction and the rights, duties, and liabilities of consumers. These legislative recommendations are discussed in detail in the Board's Annual
Report on Truth in Lending for 1979, included at a later point in this
section. Other aspects of the Board's activities in the consumer credit




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221

protection and civil rights fields in 1979 are discussed in more detail in
the Truth in Lending Annual Report, in the Board's Annual Report on
Equal Credit Opportunity, and in other parts of this section.
7k> m IN LHNDING
This 11th Annual Report on the Truth in Lending Act (dated January 3,
1980) discusses Truth in Lending simplification, the uniform enforcement guidelines, the extent to which compliance with the act is being
achieved, the Consumer Advisory Council, the rulemaking functions of the
Board of Governors of the Federal Reserve System under the act, and the
efforts of the Board and other regulator agencies to educate consumers and
creditors about their rights and responsibilities under the act. Recommendations concerning amendments to the act are discussed under "Legislative
Recommendations.''

Simplification of Truth in Lending
The Truth in Lending Simplification and Reform Act, Title V of the
"Depository Institutions Deregulation Act of 1979," continues to be
under active consideration by the Congress. The Board favors reform of
Truth in Lending through legislation. If the bill is not enacted, the
Board is prepared to attempt to simplify Truth in Lending through revision of Regulation Z. Staff drafts of a revised Regulation Z dealing with
installment credit and open-end credit were distributed to the Consumer
Advisory Council and made available to the public in the summer of
1979. Although comments have been reviewed by the staff, the Board
has taken no further action in the hope that the Truth in Lending reform
legislation will be enacted.
Guidelines for Uniform Enforcement of Truth in Lending
On December 28, 1978, the Board, the Office of the Comptroller of the
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the
Federal Home Loan Bank Board (FHLBB), and the National Credit
Union Administration (NCUA) announced adoption of uniform enforcement guidelines for the Truth in Lending Act and Regulation Z. These
guidelines, which became effective in January 1979, set standard criteria
for compliance and application of enforcement measures, including
reimbursement, when violations of Regulation Z are discovered.




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As the five agencies began to administer the enforcement guidelines,
a number of significant difficulties were encountered. As a result, the
agencies issued a joint statement in October 1979 proposing three
amendments and putting forth for public comment three questions about
the guidelines. The proposed amendments should provide the flexibility
necessary for implementation of the reimbursement policy.
The first proposed amendment would increase the tolerance permitted
for disclosure of the annual percentage rate from V$ to 14 of 1 percentage
point. The second amendment would change the provisions regarding
retroactive application so that they relate more closely to the date the
creditor was informed of the violation through an examination report or
was informed of the potential for reimbursement through publication of the
guidelines. The third amendment would add a phrase to the guidelines to
make clear that the agencies retain flexibility to respond to unique circumstances or significant problems. This step toward simplification would avoid
the costs and administrative burdens of interagency coordination and action
in situations that apply to very few institutions.
The joint statement asked about (1) the direct and indirect costs associated with implementation, and opinions on possible amendments to the
guidelines to reduce administrative burdens on financial institutions
while assuring benefits to consumers; (2) whether mortgage lending
should be treated differently for reimbursement purposes because it has
unique characteristics; and (3) whether the five states granted exemptions from most of the federal Truth in Lending requirements should be
required to adopt an enforcement program with reimbursement rules
similar to those in the guidelines.
The comment period expired on December 21, 1979, and summaries
of comments are expected to be available in early 1980.

Compliance
Many of the federal enforcement agencies reported significant new efforts to promote compliance with the Truth in Lending Act and Regulation Z. In February 1979 the Board announced an expanded and
strengthened program to improve compliance of state member banks
with consumer regulations. Elements of the program relevant to enforcement of Regulation Z are expansion of the Board's examiner training program; continuation of educational/advisory services to state member




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223

banks; establishment of distinct career ladders for consumer affairs and
civil rights examiners; changes in frequency of examinations, providing
more time for follow-up examination of problem banks; and dissemination of the Federal Reserve System Compliance Handbook to System
examiners and all state member banks. The Board also held several
conferences in 1979 for Federal Reserve District consumer supervisors
and senior examiners to explore ways of strengthening examination
techniques and reporting procedures.
The Board issued cease-and-desist orders against two state member
banks that had engaged in practices that violated federal consumer credit
protection laws, including Regulation Z. The first bank had repeatedly
failed to correct practices that violated Regulations Z and B and the Fair
Credit Reporting Act, among others. The second bank, in violation of
Regulation B, had a standard policy of requiring spouses of married
borrowers to sign debt instruments on mortgage loan transactions. Also,
by failing to make certain required disclosures of adverse actions, the
bank had violated the Fair Credit Reporting Act. These cease-and-desist
orders were settled on a consent basis.
In April 1979 the OCC established a consumer examiner career path
and a position of Regional Director for Customer and Community Programs in each of its regional offices. The OCC has reported that the
examiner training program devoted to Regulation Z was improved and
was made available in 1979 to more examiners.
Throughout 1979 the Federal Trade Commission (FTC) conducted an
industrywide investigation to determine whether creditors disclosed the
cost of credit correctly to consumers and otherwise complied with the
law. The FTC has reported that it is also preparing a manual to help
advertisers comply with the act's provisions on credit and lease advertising.
The NCUA reported that it printed and distributed a series of letters
designed to keep federal credit unions informed about Regulation Z enforcement guidelines. The series was supplemented in 1979 by 20 educational seminars conducted for officers and staff of federal and state
credit unions.
The FDIC reported that it approved a plan in April 1979 to provide
for examiners specializing in the administration of consumer protection
and civil rights laws and regulations, including Regulation Z. Between
October 1, 1978, and September 30, 1979, the FDIC initiated six cease-




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Consumer Affairs

and-desist orders dealing in part with continuing violations of Regulation Z. Five other cease-and-desist orders became final during this period, and five existing orders were terminated.
Each enforcement agency and exempt state has estimated the annual
cost of its compliance effort in connection with the Truth in Lending
Act. While these figures are not strictly comparable, the total estimated
expenditures for the nine federal enforcement agencies exceeded $9.8
million in 1979, with the largest expenditures reported by the FDIC, the
Comptroller of the Currency, the Federal Reserve Board, and the
NCUA. The five exempt states reported expenditures slightly over $1
million.
The agencies and exempt states responsible for enforcing the Truth in
Lending Act have reported varying assessments of the extent to which
creditors are complying with the act. Several federal agencies, including
the FHLBB, and all of the exempt states, have reported a fairly close
compliance with the substantive provisions of the act.
According to the OCC, creditor compliance with the act improved
significantly during 1979. There was a reduction in the number of banks
with reimbursable violations; greater national bank interest in compliance, as expressed through more numerous requests for information;
growing public awareness of the law, indicated by more consumer complaints; and the increased use of various manuals that the OCC has
helped trade associations develop.
The OCC and the FTC both have found evidence from consumer complaints of noncompliance with the Fair Credit Billing Act. The FTC has
commented that, due to the number of technical problems, it may be
impossible to determine the extent of noncompliance with the act in case of
creditors that preserve evidence of compliance on computers. Other persistent violations of the Truth in Lending Act, according to the FTC, include
failure to make any disclosures of the optional nature of credit insurance,
and to make other disclosures before consummation of the transaction.
The FTC has cited significant enforcement activities in 1979. In one
instance, a consent order prohibits a large oil company from collecting
from a credit cardholder for purchases made by a second person after
the company has been notified that that use of the card is not authorized. Such billing violates the Truth in Lending Act, which limits a
cardholder's liability for unauthorized use of a credit card to $50.
The FTC attributes the widespread compliance with the disclosure
requirements of the Consumer Leasing Act to the Board's issuance of




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225

sample lease disclosure statements. Compliance with advertising provisions of the Consumer Leasing Act, however, is substantially lower,
according to the FTC.
The NCUA has reported a continued greater discovery of noncompliance with the Truth in Lending Act and Regulation Z, and believes
that it results from improved examination techniques and tools, staff
training, and a general concentration on enforcement. The NCUA expects 1979 levels of compliance to remain stable on a month-to-month
basis until all federal credit unions have been examined under revised
procedures.
The FDIC has reported little change since 1978 in either the compliance rate or types of violations most frequently cited.
Reported violations increased slightly in 1979, but the Board does not
attribute this development to deteriorating compliance with consumer
law. Rather, improved training has made examiners increasingly sophisticated and therefore better equipped to detect the less obivous violations.
The Board's records and summaries of examination findings compiled
by the FDIC, FHLBB, and the NCUA indicate that the most frequently
cited violations of the act are (1) failure to disclose either the correct
finance charge or the annual percentage rate; (2) failure to furnish the
notice of the right to rescind; (3) failure to identify the sum of periodic
payments as "total of payments"; (4) inappropriate mixing of 360- and
365-day factors in calculations of the annual percentage rate; (5) failure
to include all elements of a finance charge; (6) improper rounding of the
annual percentage rate; (7) failure to obtain separately signed and dated
credit life insurance authorizations; and (8) failure to disclose the cost of
property insurance and the fact that it can be obtained through any insurer of the consumer's choice.

Consumer Advisory Council
Established in 1976 to advise the Board on consumer-related matters,
the Consumer Advisory Council includes both consumer and creditor
representatives. At its three meetings in 1979, the Council focused on
reconciling the differences between the Electronic Fund Transfer and
Truth in Lending Acts, the proposed revisions of Regulation Z designed
to increase effectiveness and facilitate creditor compliance, the costs and
benefits of consumer credit regulations, and the Regulation Z enforcement guidelines.




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Rulemaking Functions
The Board of Governors of the Federal Reserve System is responsible
under the Truth in Lending Act for writing and amending rules implementing the act, issuing interpretations of the rules, and granting state exemptions from certain parts of the act.
Amendments and Interpretations of Regulation Z
In 1979 the Board of Governors issued one amendment and revoked one
amendment and a related interpretation of Regulation Z.
Extension of prohibition against surcharges. Effective March 5,
1979, the Board of Governors amended its Regulation Z to extend to
February 27, 1981, the prohibition against surcharges. This amendment
followed enactment of the Financial Institutions Regulatory and Interest
Rate Control Act, which extended the prohibition against surcharges.
Revocation of amendment exempting open-end credit arrangements
from rescission requirements. On September 27, 1979, the Board revoked an amendment to Regulation Z, effective March 31, 1980. In its
original form, Regulation Z had required creditors to give a customer a
three-day ' 'cooling o f f period in which to cancel each separate advance under an open-end credit plan (such as a credit card or overdraft
checking account) when the credit was secured by the customer's principal residence. The revoked amendment provided an alternative to that
requirement.
When the amendment was adopted by the Board in July 1978, Consumers Union questioned the Board's authority under the Truth in Lending Act to take the action (see the "Significant Litigation" section). Others
also urged the Board to reconsider the amendment on grounds that interested parties might not have been aware of the proposal. The Board
solicited public comment on the issue; and it acted after having considered
about 160 comments.
At the same time that the amendment was revoked, the Board also
revoked a related Board interpretation that sets forth model disclosures
that creditors may use to comply with notice requirements of the amendment. The result of the revocations will be to require that a notice of the
right of rescission be given with each credit advance after March 31,
1980, pursuant to any open-end credit plan secured by a customer's
principal residence.




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Proposed Amendments to Regulation Z
In developing enforcement guidelines for Regulation Z, the need for
broader tolerances in computing the annual percentage rate and finance
charges became apparent. Also, piecemeal Board and staff interpretations have authorized several methods of computing the annual percentage rate that produce different results. Because it is necessary to have a
single, theoretically perfect annual percentage rate from which to measure tolerances, the Board requested comment on the appropriate tolerances, the proper method of computing the annual percentage rate, and
related matters. The Board published a series of proposals for comment
and is expected to act late in 1979.
State Exemptions
No new exemptions from the requirements of chapter 2 of the Truth in
Lending Act were granted in 1979.

Significant Litigation
In a suit entitled American Bankers Association v. Board of Governors
of the Federal Reserve System, the Comptroller of the Currency, and
the Federal Deposit Insurance Corporation, which was filed with the
federal Court of Appeals in Washington, D.C., on August 7, 1979 (No.
79-2006), the American Bankers Association (ABA) requested the court
to declare illegal the ' 'uniform guidelines" {Federal Register, volume
44, 1979, page 1222) to enforce the Truth in Lending Act. The ABA
argues that the agencies adopting and enforcing the guidelines have
acted without reasonable basis in law or fact. The case is pending.
In Consumers Union of the United States, Inc. v. Miller, which was
filed with the Federal District Court for the District of Columbia on
December 5, 1978 (No. 78-2188), Consumers Union asked the court to
declare that the Board had overstepped its statutory authority when it
amended Regulation Z {Federal Register, volume 43, 1978, page 3411).
The amendment, effective August 3, 1978, provided alternative means
for complying with the requirements about the right of rescission as
applied to open-end credit transactions. On September 27, 1979, the
Board revoked that amendment {Federal Register, volume 44, 1979,
page 5553), and on October 12, 1979, a voluntary dismissal of the
action was filed with the court.




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In Ford Motor Credit Company et al. v. Milhollin et al., Ford appealed to the Supreme Court (No. 78-1487) about a decision by the
United States Court of Appeals for the Ninth Circuit concerning the
disclosures required under the Truth in Lending Act and Regulation Z
with respect to a creditor's contractual right of acceleration. As requested by the Supreme Court, the Board, through the Department of
Justice, filed a brief amicus curiae, arguing that official staff interpretations should be given substantial weight in construing the law. Oral
argument, in which the Justice Department participated, was held on
December 11, 1979, and the case is awaiting a decision by the Court.

Education
In 1979 the Federal Reserve System provided a variety of educational
materials and activities in support of consumer and creditor education.
The Consumer Handbook to Credit Protection Laws, first printed at the
end of 1978, was reprinted in 1979; 3 million copies of the 46-page
booklet have been produced. Dissemination of the handbook was expanded through distribution by the federal Consumer Information Center, credit bureaus, and other bank regulatory agencies. The Consumer
Handbook, probably the most popular Board publication for consumers,
summarizes the main provisions of seven major laws on consumer credit
protection: Truth in Lending, Consumer Leasing, Real Estate Settlement
Procedures, Equal Credit Opportunity, Home Mortgage Disclosure, Fair
Credit Reporting, and Fair Credit Billing. It also contains a glossary of
technical terms used in credit transactions and in laws and regulations
on credit protection.
The Federal Reserve released a color film, "To Your Credit," in
1979. Designed for school and television use, the film illustrates the
consumer credit protection afforded by Regulations B and Z. So far, in
showings by all of the Federal Reserve Banks to consumer and student
groups, the film has had an audience of about Wi million.
In April 1979 the Board joined with the White House and other federal, state, and private agencies to exchange ideas related to the promotion of consumer education.
The Federal Reserve System sponsored workshops and lectures
throughout the country to encourage consumer education in high
schools. The Board and the Federal Reserve Banks of Minneapolis, San
Francisco, Philadelphia, New York, and St. Louis offered workshops




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229

for teachers to learn about consumer credit protection laws and educational materials available from the Board and other sources.
The Federal Reserve Bank of San Francisco used television spot announcements to publicize consumer pamphlets. The Federal Reserve
Bank of New York has produced and distributed a variety of materials
for consumers, including several pamphlets on creditworthiness and the
use of credit; bookmarks with information on Truth in Lending, annual
percentage rates, and finance charges; and a pocketsize "credit dictionary" promoted through radio and television. About 250,000 copies of
the Consumer Credit Terminology Handbook were distributed nationwide in 1979. Virtually all of the Federal Reserve Banks reported an
increase in 1979 in speaking engagements related to consumer education.
Federal enforcement agencies and the exempt states are continuing
their efforts to inform consumers and creditors about their rights and
responsibilities under the Truth in Lending Act.
Working closely with both the Consumer Bankers Association and the
American Bankers Association, the Comptroller of the Currency has
played an important role in developing and updating educational manuals for bankers, including The Most Common Violations Found in Consumer Compliance Examinations and How to Correct Them, The OCC's
Computational Procedures for Verifying Annual Percentage Rates, and
A Planning Guide for Consumer Compliance.
The Federal Trade Commission published a pocketsize booklet, Credit Shopping Guide, modeled after material developed by Maine's Bureau of Consumer Protection, and consumer fact sheets on the Truth in
Lending Act, Fair Credit Billing Act, and Consumer Leasing Act. The
Federal Trade Commission participates in seminars to educate lawyers
representing clients concerned about compliance with federal credit statutes.
The Federal Home Loan Bank Board has established a committee to
plan forms, charts, and other guides to aid the industry in complying
with Regulation Z.
The Federal Deposit Insurance Corporation provides information to
bankers largely through the examination process. Consumers get information primarily in response to complaints and inquiries processed by
regional offices and through consumer pamphlets.
In 1979 Oklahoma's Department of Consumer Credit presented more
than 150 lectures on Truth in Lending; requests for speakers came from
colleges, high schools, low-income groups, civic and senior citizen clubs,




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and vocational schools. Connecticut operated a toll-free service on consumer credit information. Wyoming distributed a substantial number of
copies of their handbook, Consumer Credit and the Code, to secondary
school superintendents; as hoped, the superintendents ordered the handbook for teacher use. Maine initiated the Consumer Credit Newsletter to
keep creditors informed of regulatory activity, and a consumer credit guide
program to encourage comparative shopping for credit; the Maine Bureau
of Consumer Protection also reprinted the Down Easter's Pocket Credit
Guide with expanded interest rate tables. The Office of the Bank Commissioner of Massachusetts has reported educational activities, including
newspaper and magazine articles, speaking engagements, and visits to
credit grantors by field examiners.

EQUAL CREDIT OPPORTUNITY
The fourth Annual Report on the Equal Credit Opportunity Act (ECOA)
discusses the enforcement of the act and Regulation B by the Federal
Reserve System and assesses the compliance of state member banks
with the act. It also examines the enforcement activities of other federal
agencies and their assessments of the compliance of creditors that they
supervise. The report then describes the Consumer Advisory Council
and its activities relating to the act and regulation and gives an account
of the uniform guidelines for enforcement of the Equal Credit Opportunity Act, Regulation B, and the Fair Housing Act. Finally, it reviews
the Board's rulemaking activities under the act, the legislative recommendations for amending the act submitted to the Board by other agencies, and the educational efforts by the Board and other enforcement
agencies.
This report does not contain recommendations of the Board for statutory amendments. Such recommendations, if any, will be made in the
66th Annual Report of the Board of Governors to the Congress.
Enforcement and Compliance
The Federal Reserve System and other agencies have been charged by
the Congress to enforce compliance with the ECOA of the institutions
they supervise.




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Federal Reserve System
The Federal Reserve exercises its enforcement functions under the
ECOA principally through examinations of member banks and investigation and resolution of complaints.
In February 1979 the Board announced an expanded program to improve the compliance of state member banks with the consumer protection laws, particularly the ECOA and other civil rights statutes. The
program provided Federal Reserve Banks with a variety of resources to
strengthen procedures for detecting unlawful credit discrimination. Allocations for hiring consumer affairs and civil rights examiners were
doubled, regional seminars were conducted, examiner training was intensified, census data were distributed to give examiners a demographic
picture of the communities that state member banks serve, and the Federal Reserve Compliance Handbook was published and distributed. The
Handbook outlines new examination procedures and provides tools, such
as those for a standardized comparison of credit applicants, to help
examiners detect credit discrimination. The Handbook, which includes a
substantial section on the history of civil rights legislation in this country, also details a new procedure that requires consideration of on-site
investigations of serious consumer complaints, such as those alleging
credit discrimination. Other features of the program include the continuation of an educational-advisory service for member banks provided by
the Federal Reserve Banks, and an adjustment of the frequency of special consumer affairs and civil rights examinations so that banks with
lower ratings receive examinations more frequently than heretofore.
Examinations. The Federal Reserve System enforces the act and
Regulation B through its examination of state member banks and investigation of consumer complaints. Specially trained consumer affairs and
civil rights examiners from the Federal Reserve Banks conduct the
examinations, and the Board's Division of Consumer and Community
Affairs reviews selected examination reports to determine the compliance of individual banks and to evaluate and improve the examination
program.
To ensure that its examiners are thoroughly familiar with Regulation
B and other consumer and civil rights laws, the Board conducted two
schools lasting two and one-half weeks in 1979, which were attended by
58 System examiners and representatives of other regulatory agencies.
Instructors included examiners from the Reserve Banks, review exam-




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iners and attorneys from the Board's staff, and staff members from
other agencies, such as the Department of Justice. The instruction included a thorough history of civil rights laws and an analysis of court
cases and their effect on civil rights legislation.
After adoption of the new enforcement program, the Board's staff
conducted three regional seminars at the Reserve Banks to inform the
field staff of the new procedures. To aid examiners' further education,
the Board also rotates examiners from the Reserve Banks to work with
the Board staff. In addition, the Board's staff frequently communicates
with System examiners about current developments.
In 1979 about 77 percent of the state member banks examined were
reported as not being in full compliance with Regulation B, not a significant improvement over 1978, when 78 percent of the banks examined
were reported as having violations of the regulation. Since improved
examination techniques are likely to lead to more discoveries of violations, the Board believes that actual compliance may have improved
more than is indicated by the figures. Examples of the kinds of violations that were found are failures to send notification of adverse action
within 30 days; to comply with signature rules; to disclose specific reasons for a denial of credit; to establish a procedure to collect monitoring
information; and to explain that "other income, 7 ' such as alimony, need
not be revealed unless the applicant wants that income considered in
determining creditworthiness.
During examinations, Reserve Bank examiners explain the nature of
any violations found and outline the corrective action necessary for
compliance. At the conclusion of the examination, state member banks
are either in compliance or have agreed to take specific actions to prevent the recurrence of violations.
In 1979 the Board entered into two cease-and-desist orders with state
member banks that had failed to correct practices in violation of Regulation B and other consumer credit laws. The first bank had repeatedly
failed to disclose the optional nature of requests for information regarding other sources of income and to correct its prohibited use of terms
regarding marital status on forms used in determining the creditworthiness for individual unsecured credit. The second bank had a standard
policy of requiring spouses of married borrowers to sign debt instruments on mortgage loan transactions, and it violated other provisions of
Regulation B as well. Both cease-and-desist orders were settled on a
consent basis, and both settlements required, among other things, ap-




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233

pointment of a compliance officer and the training of bank employees in
consumer protection and civil rights laws.
Consumer complaints. The Federal Reserve System replies to complaints and inquiries in many areas of consumer activity. Responses
range from providing consumers with information or explanations of
laws to investigations that may reveal errors by state member banks. If
bank errors are found, the bank is required to take corrective action. In
keeping with the Board's special efforts on civil rights enforcement,
separate procedures have been developed that require consideration of
the on-site investigation of complaints alleging illegal credit discrimination.
From January 1, 1979, to November 30, 1979, the Board received 51
complaints alleging violations of Regulation B by state member banks.
About 75 percent, or 38 complaints, charged unfair denial, termination,
or change in terms of credit. Fourteen of these complaints alleged unfair
treatment on the basis of characteristics protected by the act: five alleged unfair treatment based on sex; three, on age; two, on race, color,
or national origin; two, on source of income; one, on marital status; and
one, on exercise of rights under the Consumer Credit Protection Act. Of
the other complaints, six were on credit history; three, on level of income; one, on length of residency; one, on length of employment; and
thirteen, on miscellaneous bases.
Of the 38 complaints, 29 percent were resolved through correcting the
complainant's misunderstanding of the law; 27 percent through investigation that revealed no bank error; 3 percent through investigation that
revealed a factual dispute between the complainant and the bank, so the
consumer was referred to an attorney; and 3 percent through investigation that revealed a possible bank violation. Three percent were referred
to other agencies for resolution. As of November 29, 1979, the remaining 32 percent were still under investigation.
Other Agencies
Most of the federal agencies responsible for enforcing the Equal Credit
Opportunity Act and Regulation B have reported an apparent improvement in compliance in 1979. Statistics from summaries of examination
reports of the Board, the Federal Deposit Insurance Corporation (FDIC),
the Federal Home Loan Bank Board (FHLBB), and the National Credit
Union Administration (NCUA) show varying improvements. The Small
Business Administration (SBA), the U.S. Department of Agriculture




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(USDA), the Civil Aeronautics Board (CAB), and the Farm Credit Administration (FCA), all report that compliance among the creditors they
supervise generally appears good.
Federal Trade Commission. The Division of Credit Practices in the
FTC's Bureau of Consumer Protection is responsible for research, investigation, and enforcement activities related to multiregional and national
creditors. To identify potential violators of the act, the division relies
upon information supplied by consumer complainants and by consumer
and civil rights organizations, and referrals from other federal and state
enforcement agencies. When investigations reveal significant law violations, the FTC may seek adjudication, either through its own adjudicative processes or through a U.S. district court; if litigation is not warranted, it may recommend acceptance of an agreement to cease and
desist from violations and to provide remedial relief to aggrieved consumers.
According to the FTC, overall compliance with the act has improved
among creditors within its jurisdiction. At the same time, the FTC believes certain types of discriminatory practices persist—such as improper
requests for signatures of, or information about, an applicant's spouse.
The sales finance and small loan industries were mentioned particularly
in relation to such practices.
Investigation of the practices of mortgage lenders, sales finance, and
small loan companies suggests, according to FTC reports, that subtle
forms of discrimination may be replacing the more blatantly discriminatory lending practices documented during the enactment of the ECOA.
Practices such as discriminatory discouragement of applications, the
FTC has noted, are not detectable with traditional investigative techniques because such techniques involve no documents and are not part
of the written operating procedures of the companies involved.
In 1979 the FTC took formal action against two major creditors for
violating the ECO A. The first, which involved a large retail company,
resulted in a consent judgment that required, among other things, that
the company provide consumers with specific principal reasons for adverse action when credit is denied. The second, also resolved through a
consent agreement, enjoined a large sales finance company from certain
illegal practices, such as using prohibited information on marital status
in the evaluation of applications, failing to provide specific principal
reasons for adverse action, and failing to comply with recordkeeping
requirements of the regulation. Several investigations that did not war-




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rant formal actions were resolved voluntarily after the creditors had
agreed to modify their policies and practices.
According to FTC reports, fewer complaints relating to discrimination
in credit were received in 1979 than in the previous year.
National Credit Union Administration. The NCUA enforces consumer
protection and civil rights laws through examination of federal credit
unions and investigation of consumer complaints. The NCUA has reported a number of efforts toward more effective enforcement of consumer protection laws, such as doubling the number of NCUA regional
consumer affairs analysts, making separate examinations for consumer
compliance, and establishing eight consumer-compliance examiner districts for each of the NCUA's six regions.
The NCUA has reported that, during the month ending September 30,
1979, 44 percent of the 172 institutions that were examined had violations of Regulation B. The NCUA says that, for the most part, the
violations resulted from unacceptable loan applications, failure to identify loan accounts for proper credit reporting, and improper signature
requirements.
The NCUA has reported receiving 150 complaints related to the
ECO A. Of those, 61 alleged discrimination based on race or national
origin; 16, on sex; 15, on marital status; 9, on age; 5, on receipt of
public assistance; 2, on the exercise of rights under the Consumer Credit
Protection Act; and 31, on miscellaneous bases. The NCUA also received 11 complaints regarding adverse action notices.
Federal Deposit Insurance Corporation. The FDIC enforces the
ECO A and Regulation B with regard to insured nonmember banks. Its
program allows for each bank to be examined at least once every 18
months. Examiners report violations to regional offices, which are responsible for encouraging voluntary compliance by the banks before
recommending administrative action.
The FDIC has reported that during the period from October 1, 1978,
through September 30, 1979, it reviewed 5,824 pages of reports on
violations of Regulation B. Apparent violations were indicated in 2,938,
or about 50.4 percent, of these reports, compared with 51.3 percent in
1978.
The violations most frequently reported—in 22 percent of the reports—involved failure to notify applicants of adverse action. Failure to
advise that "other income" need not be revealed unless the applicant
wants it considered as income was noted in 6.2 percent of the reports,




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improper requests for a spouse's signature were cited in 6.1 percent,
and failure to designate accounts in which both spouses participate was
listed in about 6 percent. During the first 10 months of 1979, the FDIC
brought five cease-and-desist actions charging violations of the act and
Regulation B.
The FDIC has reported receiving 406 complaints and 90 inquiries
concerning equal credit opportunity. The largest percentage concerned
the notice of adverse action, alleged discrimination based on sex or
marital status, and alleged discrimination based on race or age.
Federal Home Loan Bank Board. The ECOA is enforced by the
FHLBB through examinations and the investigation of consumer complaints. If voluntary compliance is not achieved, the FHLBB may issue
a cease-and-desist order. Consumer complaints are referred to the supervisory agents, who are responsible for investigation and resolution, and
the disposition of each case is reported to the FHLBB.
Between October 1, 1978, and September 30, 1979, the FHLBB conducted 3,350 regular examinations; of these, 1,198, or about 36 percent,
revealed violations of the ECOA. Since the FHLBB reported that 53
percent of the creditors under their jurisdiction were in apparent violation in 1978, compliance seems to have significantly improved in 1979.
The total number of Regulation B violations reported was 8,658. The
majority were due to requests for improper information, failure to notify
applicants properly of adverse action or to conform to requirements for
adverse-action notices, and failure to obtain monitoring information.
During the period January 1, 1979, through November 30, 1979, the
FHLBB received 172 consumer complaints alleging various types of discrimination. Of these, 7 alleged discrimination based on age; 39, on
geographical area; 32, on sex; 21, on marital status; 34, on race or
national origin; and 39, on miscellaneous bases.
Office of the Comptroller of the Currency. The OCC has reported a
reorganization to oversee more effectively the agency's consumer compliance functions.
Between July 1, 1978, and June 30, 1979, 1,779 national banks were
examined for compliance with the ECOA and other laws. A total of
14,911 violations of Regulation B was discovered. The most frequently
reported violations include those governing the content of adverse action
notices, the collection of monitoring information, requests for information about marital status, and signatures of spouses.




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Between July 1, 1978, and June 30, 1979, the OCC received 1,084
consumer complaints involving the ECO A. The OCC has reported that
about one-third alleged a bank's failure to give adequate notice of the
reasons for credit denial, while about two-thirds were related to bank
credit cards.
Small Business Administration. The SB A is responsible for assuring
that the administration and its recipients comply with requirements of
the act and of Regulation B. During the 1979 fiscal year, 21,481 recipients were monitored for compliance with the act.
The SB A has reported that most creditors appear to be in compliance.
Routine reviews of a few temporary disaster offices indicated that some
temporary employees may have violated the age provisions of Regulation B. All loan applications are being reviewed, and relevant applicants
are being contacted.
In 1979 the SB A received 20 consumer complaints alleging that discrimination had played a part in credit denial.

Securities and Exchange Commission. The SEC is responsible
for examining broker-dealers registered with the SEC. When violations
of consumer laws are found, voluntary compliance is sought; follow-up
examinations are used to ensure such compliance. In case of continuing
violations, the SEC investigates and may bring an injunction against a
noncomplying broker-dealer. The SEC also enforces the act through
investigation of consumer compliants.
On 1979 no violations of the ECOA were reported; one consumer
complaint related to the act was received and resolved.
Civil Aeronautics Board. The CAB is responsible for ensuring compliance by air carriers with the act and with Regulation B. It is authorized to seek a cease-and-desist order against any creditor under its jurisdiction that violates the act. In cases of serious and continued noncompliance, it may also seek an injunction. In addition, the Airline Deregulation Act of 1978 empowers the CAB to assess civil penalties of up to
$1,000 for each violation of its regulations.
According to the CAB, a satisfactory level of compliance exists
among U.S. and foreign airlines. The CAB has reported receiving approximately 150 complaints involving the ECOA and Regulation B in
1979. These have been processed informally. The CAB instituted an
investigation into one airline's consumer credit practices but found no
violations.




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Interstate Commerce Commission. The ICC enforces the ECO A for
regulated common carriers. In its view, common carriers are forbidden
to discriminate in the granting of credit by the Interstate Commerce Act
and by several ICC credit regulations. The ICC has reported that no
formal action has been taken and that no complaints have been received
under the ECOA.
Farm Credit Administration. Administrative enforcement of Regulation B and the ECOA is accomplished by the FCA through its examination of Federal Land Banks, Federal Land Bank Associations, Federal
Intermediate Credit Banks, and Production Credit Associations.
The FCA reports few instances of noncompliance and no significant
problems in administering its responsibilities under the act. In 1979 the
FCA received eleven complaints alleging illegal discrimination in credit.
All except two have been withdrawn or resolved to the satisfaction of
the complainants. Of the complaints received in 1979, two alleged discrimination based on race; one, on age and religion; one, on national
origin; five, on sex or marital status; one, on marital status; and two, on
an unspecified basis.
U.S. Department of Agriculture. The ECOA gives the USDA enforcement authority over activities subject to the Packers and Stockyards
Act of 1921. The USDA reports no significant problems associated with
the limited program under this act.
The USDA also administers a large number of credit programs
through the Farmers Home Administration. Although enforcement authority for those credit programs rests with the FTC, the USDA's Office
of Equal Opportunity processes complaints and, along with the staff of
the Farmers Home Administration, conducts compliance review of the
credit programs.
Consumer Advisory Council
Established in 1976 to advise the Board on consumer-related matters,
the Consumer Advisory Council includes consumer, creditor, and academic representatives. At its three meetings in 1979, the council discussed how the antidiscrimination rules of Regulation B should be
applied to certain practices of creditors who use credit-scoring systems.
The practices considered included (1) assigning a score to the number of
jobs the applicant has or the number of sources of income; (2) not
assigning a score to the amount of the applicant's income from part-time




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employment, a pension, or alimony; (3) giving judgmental reasons for
adverse action on a credit application rather than reasons arising from the
creditor's scoring system; and (4) selecting reasons for adverse action
from among the 20 reasons in a model statement included in Regulation
B, even though the creditor uses a credit-scoring system with attributes
that are not reflected in the model statement.
With respect to the first practice, the council recommended by a vote
of 13-3 that the Board not prohibit the practice as such, but allow the
agencies charged with enforcement of Regulation B to determine on a
case-by-case basis whether scoring the number of jobs or sources of
income of an applicant has the effect of discriminating on a prohibited
basis. As to the third practice, the council voted 11-0 to recommend
that creditors using a credit-scoring system be allowed to give rejected
applicants either judgmental reasons or reasons based on the arithmetic
of the credit-scoring system. The council discussed the other practices
but reached no consensus.

Uniform Enforcement Guidelines
The five federal agencies that are represented on the Federal Financial
Institutions Examination Council—the Board of Governors, the Federal
Deposit Insurance Corporation, the Federal Home Loan Bank Board, the
National Credit Union Administration, and the Office of the Comptroller
of the Currency—have jointly proposed uniform guidelines for the enforcement of the ECO A, its implementing Regulation B, and of the Fair
Housing Act. The guidelines were field tested by several of these agencies in 1979. At the end of the year, the results were being compiled
and reviewed for further consideration by the council in early 1980.
Rulemaking Activities
Under the Equal Credit Opportunity Act, the Board of Governors has
responsibility for writing, amending, and interpreting Regulation B. Legislative recommendations from other agencies to amend the act are also
included in this section.
Amendments and Interpretations
In 1979 the Board of Governors issued one amendment, one official
Board interpretation, and two official staff interpretations of Regula-




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tion B. It also requested comment on how the regulation should apply to
certain credit-scoring practices.
Clarification of the definition of creditor. On April 23, 1979, the
Board amended Regulation B to make it clear that, for the purposes of
the rules prohibiting discrimination, the definition of creditor includes
not only those who grant credit but also those who regularly refer customers to creditors. Examples are automobile dealerships, home improvement contractors, and real estate brokers who regularly direct customers to creditors. To ensure that such parties are not overburdened by
regulatory requirements, they are not subjected to the mechanical requirements of Regulation B governing applications, adverse action, and
credit reporting, for example.
Determination on a New Jersey statute on credit applications. On
September 26, 1979, the Board issued an interpretation determining that
a New Jersey statute that prohibits inquiries about marital status in connection with a credit application is not inconsistent with the act and with
Regulation B. However, when commenters raised questions about the
effect of the New Jersey law, the interpretation was suspended on January 11, 1980, pending a ruling on the New Jersey statute from the State
Attorney General's Office.
Determination on NCUA's model loan application forms. On June 8,
1979, the Board issued an official staff interpretation stating that the
NCUA's model credit application form is in compliance with the requirements of Regulation B. The interpretation, which became effective
on July 30, 1979, is intended to ease the regulatory burden on credit
unions, most of which are small institutions lacking a large staff and
access to adequate legal counsel.
Determination on practices of credit-card issuers. On July 1, 1979,
the Board issued an official staff interpretation, effective August 30,
1979, providing that the issuer of a credit card may condition the acceptance of authorized credit-card users upon the users becoming coobligors and, thus, joint applicants. Such a policy, if applied in a nondiscriminatory fashion, would not violate Regulation B.
Proposed rulemaking: Regulation B and credit-scoring practices. On
April 23, 1979, the Board solicited comments on how the rules of
Regulation B should apply to the following credit-scoring practices: (1)
scoring number of jobs or number of sources of income; (2) not scoring
the amount of an applicant's income from part-time employment, a pension, or alimony; and (3) selecting and disclosing the reasons for adverse action. The closing date for comments was June 20, 1979, but




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because of the number of requests for an extension, it was later changed
to August 20, 1979. On July 24, 1979, the Board issued, as an aid to
discussion, a staff paper on the issues involved in the application of
antidiscrimination rules to credit scoring.
Legislative Recommendations
The USD A has made two recommendations for changes to the ECO A.
First, it recommends again that handicapped persons be made a protected class under the act, by adding handicap to the bases of prohibited
discrimination. Second, it recommends that the act be amended to place
enforcement authority for USDA credit programs in the USDA instead
of in the FTC.

Education
In 1979 the Federal Reserve System offered a variety of materials and
activities designed to educate consumers and creditors about their rights
and responsibilities under the ECO A and Regulation B. More than three
million copies of The Consumer Handbook to Credit Protection Laws,
probably the Board's most popular publication for consumers, have been
printed. It has been widely disseminated by the federal Consumer Information Center, by credit bureaus, and by other bank regulatory agencies. The Consumer Handbook summarizes the main provisions of seven
major laws on consumer credit protection: Equal Credit Opportunity,
Truth in Lending, Consumer Leasing, Real Estate Settlement Procedures, Home Mortgage Disclosure, Fair Credit Reporting, and Fair
Credit Billing. It also contains a glossary of technical terms used in
credit transactions and in laws and regulations on credit protection.
The Federal Reserve has produced and distributed more than 10 million copies of educational pamphlets on the Equal Credit Opportunity
Act, including "The Equal Credit Opportunity Act and . . . Women,"
" . . . A g e , " " . . . Doctors, Lawyers and Small Retailers,"
" . . . Credit Rights in Housing," and "How the New Equal Credit
Opportunity Act Affects You." These pamphlets are distributed free, in
response to inquiries from consumers and during presentations, to consumers and creditors by the Federal Reserve staff.
In 1979 the Federal Reserve released a color film, "To Your
Credit." Designed for school and television use, the film illustrates the
consumer credit protection afforded by Regulations B and Z. So far, in
showings by all the Federal Reserve Banks to consumer and student
groups, the film has had an audience of about 1.5 million.




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Many of the other federal enforcement agencies, including the FDIC,
FHLBB, FTC, NCUA, and the OCC, also provide speakers for groups
interested in consumer protection and civil rights laws. The SB A offers
seminars for women in business along with materials regarding the act.
Most of the agencies distribute consumer education pamphlets on the act
in response to consumer inquiries.
The staff of the OCC has served as faculty at professional schools
and schools sponsored by state banking associations. The OCC has also
assisted trade groups in the publication of materials to assist bank officers in complying with Regulation B and with other consumer and civil
rights laws. In 1979 the OCC developed a computerized mailing list of
consumer, civil rights, and community groups, particularly those representing low-income individuals.
The FTC has reported the development and successful promotion of a
public service announcement for radio and television designed to educate women about their rights under the act to a separate credit history.
It also offers written material to supplement the announcement.
The FDIC educates bankers through examinations and bankers' seminars, gives advice to insured nonmember banks upon request through its
compliance examiners, and provides information to consumers in response to complaints and inquiries.
FEDERAL TRADE COMMISSION ACT
This fifth annual report describes the activities of the Board of Governors of the Federal Reserve System in fulfilling its responsibilities
under section 18(f) of the Federal Trade Commission Act. The Board's
responsibilities under the act are (1) to identify unfair or deceptive banking practices and to adopt regulations that prohibit them; (2) to receive
complaints against state member banks and take appropriate action to
remedy them; and (3) within 60 days of the effective date of certain
rules prescribed by the Federal Trade Commission, to promulgate substantially similar regulations that are applicable to banks, unless certain
exceptions apply.

Identification of Unfair or Deceptive Practices
Under its responsibility to identify and regulate unfair or deceptive acts
or practices of banks, the Board took a number of actions in 1979. It
collected up-to-date information about problematic banking practices
from the Federal Reserve Banks; consulted with the Consumer Advisory




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Council about those practices and about actions the Board should take;
exchanged information on consumer complaints with the Federal Deposit
Insurance Corporation and the Office of the Comptroller of the Currency
as in previous years; and added an "early warning" feature to its computerized system for consumer complaints that signals the receipt of a
significant number of complaints (15 or more per quarter, or 50 annually) about any practice that is not subject to existing regulation.
Consumer complaints on such practices are currently divided into
eight major categories and more than sixty subcategories for computer
storage and retrieval. The major categories are (1) deposit functions,
which include complaints related to discrepancies in accounts, disputed
deposits, advertising, NSF (not sufficient funds) charges and procedures,
and service charges and the like; (2) electronic fund transfer payments;
(3) foreign operations; (4) loan functions; (5) safety deposit box and
safekeeping functions; (6) trust services; (7) general, which includes
complaints relating to information available to stockholders, incompetent
or rude personnel, and employee hiring, benefits, and firing, and so on;
and (8) miscellaneous or uncatalogued complaints.
The Board regularly asks the Federal Reserve Banks to summarize
any findings of examiners that might identify unfair or deceptive banking practices. In 1979 a significant number of the Banks responded that
the following practices should be investigated: changes in rules applying
to savings and demand accounts without notification to the depositor,
failure to disclose or explain the terms of an account when it is opened;
false advertisement of "free" or "interest free" checking; failure to
investigate consumer complaints without intervention by the Board or a
Federal Reserve Bank; and failure to disclose delayed availability of
funds. Delayed availability refers to the practice of placing a hold on a
check deposit to give time for the check to clear at the bank on which it
is drawn or to have payment refused.
In 1979 the Board's staff sought to determine the nature and scope of
consumer problems with respect to delayed funds availability and to
identify actions by the Board that might resolve them. The study explored various incentives for banks to accelerate return notifications, including regulatory action, profits, customer service, and others. It also
examined ways to improve the return-item segments of the check collection system.
In February 1979 the Consumer Advisory Council discussed banking
practices that were troublesome, from misleading use of the term "free
checking" to failure to make adequate disclosure of account terms to




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customers. Many council members, both consumer and creditor representatives, were opposed to new regulations; they favored guidelines or
policy statements. The Board's view is that the costs and burdens of a
complex regulatory scheme, which will be borne ultimately by depositors and borrowers, must be weighed carefully against the perceived
benefits to the public.

Consumer Complaints
In 1979 the Board's staff continued their efforts to meet the objectives
of the System's complaint-handling system: to protect the statutory
rights of bank customers, to identify problematic bank practices to determine the need for additional protective or regulatory measures, to help
monitor compliance and enforcement programs, and to provide bank
customers with a way to participate in the enforcement policies and
programs for consumer protection and civil rights.
In responding to complaints and inquiries from consumers, the staff
took actions ranging from the provision to individual consumers of specific explanations and printed materials to investigation and resolution of
complaints against state member banks. Complaints that involved creditors or businesses not under the Board's supervision were forwarded to
the appropriate enforcement agency.
The Board also strengthened the System's procedures for handling
consumer complaints. In its announcement of an expanded compliance
program in February 1979, the Board underscored its commitment to
thorough investigation of complaints of unlawful discrimination against
state member banks. In such cases the Board requires an on-site investigation unless the facts suggest otherwise. Also, in the summer of 1979,
the Division of Consumer and Community Affairs announced a new
procedure for assessing Reserve Bank practices in handling consumer
complaints. Effective January 1980, each Reserve Bank must submit to
the Board all correspondence connected with oral and written complaints
resolved during two separate one-month periods. The procedures and
actions of the Reserve Banks will then be reviewed for timeliness, thoroughness, responsiveness, and adherence to System procedures. In addition, the Board will send follow-up questionnaires on consumer satisfaction to each consumer whose complaint is reviewed. Since 1977 the
Board has been sending questionnaires to consumers whose complaints
were resolved by the Board or referred to the Federal Reserve Banks;
1980 will be the first year that this method is used to evaluate the re-




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sponses of the Reserve Banks to consumer complaints that they receive
directly.
In 1979 consumers returned 67 percent of these questionnaires, a dramatic increase over previous years. (The return rate was 45 percent in
1978 and 37 percent in 1977.) The data collected from the questionnaires show an encouragingly high percentage of favorable responses to
the Federal Reserve's practices for handling complaints: 72 percent of
the respondents reported that the explanation they received was clear
and understandable; 76 percent, that they were satisfied with the promptness with which the complaint was handled; 96 percent, that they felt
they were treated courteously by Federal Reserve staff; and 80 percent,
that they would contact the Federal Reserve again if they had another
problem with a bank. Fifty-two percent of the respondents found the
resolution of their complaint acceptable. This proportion of satisfaction
with the outcome is relatively lower than the proportions of satisfaction
with various aspects of the procedure reported above because a number
of complaints involve practices that, though objectionable to consumers,
do not violate state or federal law and therefore are beyond immediate
remedy by the Federal Reserve.
Two consumer-oriented pamphlets, The Consumer Handbook to Consumer Credit Protection Laws and How to File a Consumer Credit
Complaint, have been published by the Board and widely distributed by
the Federal Reserve System and other federal agencies. The latter booklet contains a complaint form that was used by about 20 percent of the
complainants who wrote to the Board in 1979. Both publications reaffirm the Board's commitment to help consumers resolve their problems
with banks, especially state member banks. In 1979 the Board's staff
responded to 345 written inquiries concerning consumer credit laws and
banking policies and practices. The responses were tailored to the needs
of the individual consumer; in addition, the consumer was often sent
pertinent educational pamphlets and brochures.
In 1979 the Federal Reserve System received 4,067 complaints: 2,309
by letter, 1,665 by telephone, and 93 in person. The total number received represents an increase of about 26 percent over that received in
1978. The Board views this increase as a result of an ongoing program
to help bank customers learn about their rights and how to exercise
them.
About 49 percent of the complaints received by the System refer to
bank practices that are not regulated by the Board and to practices of
businesses and nonbank financial institutions that are outside the Board's




246

Consumer Affairs

1. Consumer Complaints Received by the Federal Reserve System,
by Subject, 1979
Subject

Number

Regulation B (Equal Credit Opportunity)
Regulation C (Home Mortgage Disclosure)
Regulation E (Electronic Fund Transfer)
Regulation Q (Interest on Deposits)
Regulation T (Credit by Brokers and Dealers)...
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)

926
13
28

Fair Credit Reporting
Fair Debt Collection Practices
Fair Housing Act
Transfer agents
Holder in due course
Municipal securities dealer regulation
Other '
TOTAL

152
45
4
7

192
2
695
5

1.986
4.067

1. "Other" refers primarily to complaints that did not fall under identifiable consumer credit legislation administered by the Board of Governors, and includes complaints against business entities as well
as financial institutions.

purview. This category of complaints is designated as "other" in the
statistical review of consumer complaints (see table 1). The three most
common types of "other" complaints received in 1979 involved discrepancies in account balances, disagreements over the amount of a deposit
made to an account, and tactics used by creditors or businesses in collecting debts.
Table 2 summarizes the nature and resolution of complaints against
state member banks that were received in 1979. The complaints are
compiled according to bank functions, such as loans, deposits, electronic fund transfers, trusts, and other. About 58 percent of the complaints
against state member banks concerned bank loan functions. In this
category about 36 percent alleged illegal discrimination, and 22 percent
involved credit-cost disclosures and other general loan functions. Approximately 23 percent involved interest on deposits and general practices
concerning deposit accounts.
Rulewriting and the Federal Trade Commission
On September 21, 1979, the Federal Trade Commission approved in
substance an amendment to the trade regulation rule concerning preservation of consumers' claims and defenses. The proposed amendment,
published for comment on November 15, 1979 (Federal Register,




Consumer Affairs

247

volume 44, page 65771), would require certain creditors to insert in
certain consumer loan contracts a clause that preserves the consumer's
right to assert claims and defenses against any holder of the credit contract. The requirement applies to all contracts involving awareness of the
creditor that the loan proceeds will be spent by a consumer to purchase
goods or services from a seller who is "affiliated" with the creditor.
2. Complaints Received against State Member Banks, by Type of Complaint and
Type of Resolution, 1979 '
Type of complaint
Type of resolution

Total
complaints

Loan functions

Deposit Electronic- Trust
fund
functions
services
transfers

Other

Discrimination
Total complaints
Total concerning state member
banks
Insufficient information . . .
Information furnished
Bank legally correct
No accommodation
Accommodation made ..
Clerical error, corrected . . .
Factual dispute
Bank violation, resolved. ..
Possible bank violation,
unresolved
Customer error
Pending
December 31, 1979
January 31, 1980
Other

Other

4,067

1,210

930

1,021

37

65

804

1,108
57
232

240
14
53

403
10
97

252
11
43

19
2

30
0
8

164
20
29

340
100
129
32
19

65
20
32
3
8

144
38
38
5
0

77
23
37
15
7

11
1
1
1
1

40
15
20
6
3

12
16

4
5

3
3

1

2

171
123
2,959

31
970

6
6
35

28
25
640

36

65
30

527

33
30
769

3
1
18

1. The terms used in this table are defined as follows:
Insufficient information. The staff has been unable, after follow-up correspondence with the consumer, to obtain sufficient information to process the complaint.
Information furnished. When it is apparent that the complainant does not understand the law and that
there has been no violation on the part of the bank, the Federal Reserve System explains the law in
question and provides the complainant with other pertinent information.
Bank legally correct, accommodation made. In these cases the bank appears to be legally correct.
but chooses to make an accommodation to avoid losing the customer.
Clerical error, corrected. In these cases the bank has been found to have made a clerical error and
has made accommodation voluntarily or as ordered by the Federal Reserve System.
Factual dispute. These cases involve factual disputes not resolvable by the Federal Reserve System
and contractual disputes that can be resolved only by the courts. Consumers who wish to pursue the
matter are advised to seek legal counsel, to seek legal aid, or to use small claims courts.
Bank violation, resolved. In these cases a bank appears to have violated a law or regulation and has
taken corrective measures voluntarily or as ordered by the Federal Reserve System.
Possible bank violation, unresolved. When a bank appears to have violated a law or regulation,
customers are advised to seek civil remedy through the courts. Some cases that appear to involve
criminal irregularity are referred to the appropriate law enforcement agency.
Customer error. This category covers cases in which investigation reveals that the customer made
the error.
Pending. These are newly acquired cases or cases that are in process and have not been resolved.




248

Consumer Affairs

Following the comment period, ending January 14, 1980, the FTC
was to promulgate the amendment and set an effective date. Section
18(f) of the Federal Trade Commission Act requires the Board, with
some exceptions, to issue a substantially similar rule applicable to banks
within 60 days of the effective date of the FTC rule.
In anticipation of the FTC's final adoption of the rule, the Board,
along with the Federal Deposit Insurance Corporation and the Office of
the Comptroller of the Currency, is collecting information about relevant
contracts currently in use, and the effect on banks and consumers of a
rule similar to the proposed amendment of the FTC.
HOME MORTGAGE DISCLOSURE
The Board of Governors of the Federal Reserve System enforces the
Home Mortgage Disclosure Act (HMDA) and its implementing Regulation C (Home Mortgage Disclosure) with respect to state member banks.
The information required under the act is used to monitor the performance of those banks under the Community Reinvestment Act (CRA) and
its implementing Regulation BB (Community Reinvestment), and to
assess compliance with civil rights laws. The Board is also responsible
for granting exemptions from the disclosure requirements of the act to
any state-chartered depositary institution if the institution is subject to a
state law that is substantially similar to the HMDA in its requirements
and enforcement. No such exemptions were granted in 1979.
Without an extension by the Congress, the HMDA will expire on
June 27, 1980. In early 1980 the Board recommended to the Senate
Committee on Banking, Housing, and Urban Affairs that the reporting
requirements of the act be refocused to reduce compliance costs and to
distribute that cost more fairly. The Board also sought in its recommendations to preserve the act's requirements for information from financial
institutions located in truly urban areas. The amended requirements, the
Board said, should be incorporated in the CRA and reviewed in three
years. These recommendations were made in light of a study conducted
by the Federal Deposit Insurance Corporation and the Federal Home
Loan Bank Board.
Specifically, the Board suggested that the Congress amend the reporting requirements of the act (1) to exempt an institution that has a residential mortgage and home improvement portfolio of $10 million or
less unless it originates more than 200 home purchase loans each calendar year (the current exemption is for all institutions with assets of $10




Consumer Affairs

249

million or less regardless of the number of loans they make); (2) to
require disclosure by census tract for loans relating to homes located in
counties within standard metropolitan statistical areas that have a population of more than 50,000 persons, and by county in other areas within
an SMSA (the current requirement is for all loans on homes within an
SMS A); and (3) to simplify the reporting categories by grouping
together conventional loans on home purchases and government-insured
and -guaranteed loans by eliminating the separate disclosure of loans
made to nonoccupant borrowers.
COMMUNITY REINVESTMENT ACT
INFORMATION STATEMENT
The text of the Community Reinvestment Act Information Statement,
issued by the Board of Governors on January 3, 1980, is as follows:
The Board of Governors of the Federal Reserve System is issuing this statement for the guidance of applicants, community groups, and other persons interested in the Community Reinvestment Act of 1977 (CRA or the act). On the
basis of its experience during the first year of operation under CRA, the Board
is working to simplify its procedures for protested applications, and it expects to
develop a procedural guide for members of the public participating in CRA
matters. The procedures are, of necessity, subject to change as more experience
is acquired, and all procedures will be coordinated as far as possible with those
adopted by the other federal agencies charged with supervision of financial institutions.
CRA was enacted against a background of concern for unfair treatment of
prospective borrowers and unwarranted geographic differences in the pattern of
lending. The act requires the Board to encourage banks to meet the credit needs
of the local communities in which they are chartered consistent with the safe
and sound operation of those banks, to assess the banks' records of meeting
those credit needs, and to take their records into account in the Board's evaluation of various applications to expand the banks' activities or those of their
parent holding companies.
Although CRA is directed at the problem of meeting sound community credit
needs, it was not intended to establish a regulatory influence on the allocation of
credit. In implementing the act, the Board has acted on the belief that banks are
in the best position to assess the credit needs of their own local communities
and the Board believes that meetings with community groups can be an integral
part of the process. The first assessment factor in the Board's CRA regulation
stresses a bank's activities to ascertain the credit needs of its community, including communication with community members. More recently the Board has
adopted, as a regular procedure for applications that are protested on substantive
CRA grounds, a policy of encouraging meetings between applicants and protestants, one purpose of which is to facilitate communication between the parties.
Several community organizations have submitted materials to the Board sug-




250

Consumer Affairs

gesting that particular lending institutions have poor lending records because
they do not return to particular neighborhoods in loans as much as they accept
from those neighborhoods in deposits. The Board believes that there are many
reasons why a particular neighborhood may generate more deposits than loan
requests, or more requests than deposits, and that disparity in a particular local
area between credit granted and deposit totals is not prima facie evidence of
discrimination. The Board is more concerned with the lender sensitivity to the
needs of each area.
Banks may sometimes fail to recognize the credit needs of creditworthy borrowers in the banks' communities. For example, in its investigations to date, the
Board has found some evidence of disparity in banks' housing-related lending to
low- and moderate-income neighborhoods compared with higher income areas.
Factors affecting housing demand and considerations of safety and soundness do
not appear to account fully for the extent of these disparities.
The Board expects banks to offer types of credit listed on their CRA statements throughout their communities. In assessing banks' records, the Board
views favorably the record of a bank that has defined its community reasonably
and that offers credit that appears to help meet credit needs in its entire community. The Board will also give favorable weight to bank leadership in concerted efforts to improve low- and moderate-income areas in their communities.
However, the Board views as a serious matter disparities in lending to different
areas that do not appear to be fully attributable to safety and soundness considerations or to factors beyond a bank's control. When faced with evidence of
such disparities, the Board will inquire closely, both into the bank's efforts to
ascertain credit needs and to make the community aware of its credit services and
into any policies or practices of the bank that may discourage credit applications
from, or discriminate against, parts of the bank's community.
In acting upon applications covered by CRA, the Board considers a bank's
CRA record as a part of the convenience and needs aspect to be evaluated along
with other relevant factors. Following its longstanding policy, the Board may in
some circumstances give weight to commitments for future actions as part of its
consideration of convenience and needs. Such commitments are not viewed as
part of the CRA record but may be weighed with it, and they are considered an
important aspect of the Board's role in encouraging improved performance.
When such commitments are offered by an applicant to outweigh adverse
aspects in a CRA record, the Board will consider the likelihood that they will be
accomplished and in future applications and examinations will review closely an
applicant's performance on previous CRA commitments.
The Board has been working to simplify and streamline its procedures for
protested applications and expects to produce a guide for community organizations that are interested in CRA matters. In the meantime System staff is available to advise parties on procedural requirements. Just as the Board expects
banks to communicate responsibly with all segments of their community, it expects community organizations to investigate and document their complaints
and to bring those complaints to the attention of the banks involved before
protesting an application. The Board further expects all parties to an application
to observe the Board's procedural rules, and cautions all parties against ex partc
communications—private communications to Board Members without other par-




Consumer Affairs

251

ties present. Direct communication on protested cases with Members of the Federal Reserve Board must be in writing and will be part of the record.
As a part of its revised procedure when a protest is considered substantive,
the Board now asks that applicants and protestants meet together with Reserve
Bank staff to attempt to clarify the issues between them. These meetings have
been useful in helping the staff to plan the direction of its investigation and to
identify areas or questions meriting special attention. In addition, when particular differences among the parties have arisen from misunderstanding of the facts
or of another party's position, these meetings have helped resolve those differences.
Of five protested applications that the System has acted upon, three protests
have been resolved by negotiation, and agreements reached in negotiations
played a role in the Board's decision on a fourth. These are, however, several
aspects of this process that merit special attention. First, the withdrawal of a
protest does not alter the Board's obligation to assess the CRA record of an
applicant carefully. Second, while the Board reasonably expects all parties to
use these meetings to explain and clarify their positions, any decision to negotiate is entirely within the parties' discretion. Finally, even if parties agree, the
Board need not approve their agreement.
In particular, the Board does not endorse agreements to allocate credit. The
Board is aware that many banks have on their own initiative adopted specialpurpose credit programs, or pilot programs to test new credit offerings. The
Board does not wish to discourage these efforts. However, the Board will closely scrutinize any agreements to ascertain that they are not inconsistent with the
safety and soundness of the bank involved, and do not establish a preference for
credit extensions inconsistent with evenhanded treatment of borrowers throughout the community.
In designing procedures to accomplish the act's objectives, the Board appreciates the useful comments it has received from banking organizations and community groups, and it welcomes additional suggestions. The Board believes that
the applications process can encourage communication between banks and their
communities and help insure that sound credit needs are met within the capacity
of depositary lending institutions.




252

Securities Acts Amendments of 1975
Pursuant to the Securities Acts Amendments of 1975 (Public Law 9429), the Board of Governors of the Federal Reserve System is designated "the appropriate regulatory agency" with respect to state member
banks and bank holding companies that act as municipal securities dealers or as clearing agencies. As of December 31, 1979, 49 state member
banks, or separately identifiable departments or divisions of such banks,
were registered as municipal securities dealers; 48 were examined in
1979.
The four registered clearing agencies that were members of the Federal Reserve System on December 31, 1979, were examined during 1979.
These examinations are designed to determine whether the clearing
agency conducts its activities in accordance with safe and sound banking
practices and, if it does not, to evaluate the impact of the agency's
overall condition and to recommend and enforce appropriate corrective
action.




253

Legislative Recommendations
The Board of Governors has made the following recommendations for
legislation to the Congress of the United States.
RESERVE REQUIREMENTS
Financial innovation, shifting competitive patterns, and high interest
rates have made it progressively more costly and more difficult for
banks to continue their membership in the Federal Reserve System. The
non-interest-bearing reserve requirements associated with being a member have made membership an increasingly costly burden. As more
banks withdraw from the System, the share of money subject to reserve
requirements set by the Federal Reserve decreases; as a result the capacity of the Federal Reserve to conduct effective monetary policy is steadily weakened.
The proportion of bank deposits held by member banks has dropped
from 80 percent in 1970 to 70 percent at the beginning of 1980. During
the fourth quarter of 1979 and the first few weeks of 1980, 69 banks
with about $7 billion in deposits have given notice of withdrawal from
membership, a loss of deposits in a few months surpassing that in any
previous full year.
A recent survey by the Federal Reserve Banks found that 320 banks
were judged certain or probable to withdraw and another 350 were considering withdrawal. These 670 banks represent more than 10 percent of the
System's membership and have in excess of $71 billion in deposits. If
they do withdraw, the deposits of banks holding Federal Reserve membership will decline to 64 percent of the total deposits of the banking
system.
The loss of member banks has several adverse effects on monetary
control, as well as on the soundness of the banking system and on the
Federal Reserve System. As the total amount of reserves held at Reserve Banks declines, the "multiplier" relationship between reserves
and money increases and tends to become less stable, making possible
unintended and magnified changes in the money supply when reserves
are supplied by open market operations. Also, as banks leave the System, they lose ready access to the Federal Reserve discount window.




254

Legislative Recommendations

Operation of the window not only assists otherwise strong banks to
weather unexpected deposit outflows but also performs as an essential
safety valve for the monetary system by allowing individual institutions
to adjust more smoothly and without disruptions to changing credit conditions.
To enable the Federal Reserve to maintain disciplined control of the
money supply and to meet its other responsibilities for protecting the
safety and soundness of the banking system, the Board recommends
legislation that would apply reserve requirements to all depositary institutions on a universal and mandatory basis. The Board believes that the
following principles should be embodied in any legislative solution and
that prompt action is necessary to assure the Federal Reserve of adequate tools to manage the nation's monetary affairs:
• Reserves should be applied to all transactions accounts at all depositary institutions. Some relatively low exemption level, or a system of
graduated requirements for the smallest institutions, can be accommodated within this principle.
• If and when reserve requirements are imposed on time deposits,
such requirements should be confined to short-term nonpersonal accounts and should be at relatively low levels.
• To establish comparable competitive conditions, reserve requirements should be equal for all depositary institutions that offer comparable accounts.
• Authority should be provided to ensure that the reserve base is of
adequate size for the efficient and effective conduct of monetary policy.
• Access to Federal Reserve services should be open to all depositary
institutions with transactions accounts, and the Reserve Banks should, in
principle, aim to recover the full cost of their services from pricing—
provided that all institutions have a comparable reserve burden.
• Consistent with the dual banking system, institutions should remain
free to choose a state or federal charter, and membership in the Federal
Reserve System, with its implications for certain supervisory matters
and for the election of Federal Reserve Bank directors, should remain
voluntary.
FINANCIAL TRANSACTIONS WITH AFFILIATES
During 1976 and 1977 the Board conducted a major review of section
23A of the Federal Reserve Act. Section 23A is designed to protect




Legislative Recommendations

255

member banks from abuse by restricting non-arm's-length financial
transactions between these banks and affiliated companies. The Board's
review of this statute was prompted in part by the discovery that several
relatively large banks had been adversely affected by transactions with
their affiliates.
One of the Board's major conclusions is that bank transactions with
affiliates within the statutory limits have not caused substantial instability in the banking system. At the same time, the Board finds some
flaws in the present statute: (1) it is inordinately complex; (2) it contains
some potentially troublesome loopholes; and (3) it appears to be unduly
restrictive in several ways.
The Board has recommended amendments to section 23A to correct
these flaws. Principal among its recommendations are those (1) to allow
a holding company greater freedom to transfer funds among its sister
subsidiary banks but prohibit a bank from purchasing low-quality assets
from a sister susidiary bank; (2) to broaden the definition of "affiliate"
to include real estate investment trusts and other financial organizations
that are sponsored and advised by a banking organization; and (3) to
expand the types of collateral permitted on bank loans and extensions of
credit to affiliates while requiring that these new types of collateral have
a high value relative to the loan.

LENDING AUTHORITY OF FEDERAL RESERVE BANKS
The Board again urges enactment of legislation to permit member banks
to borrow from their Reserve Banks on the security of any sound assets
without paying a penalty rate of interest whenever paper ineligible for
discount by Federal Reserve Banks is presented as collateral.
Under section 13 of the Federal Reserve Act, Federal Reserve Banks
may extend credit at the basic discount rate to member banks on promissory notes that are secured by obligations eligible either for purchase
or for discount by the Reserve Banks.
Under section 10(b) the Reserve Banks are authorized to extend to
member banks credit on promissory notes secured to the satisfaction of
the Federal Banks. However, section 10(b) also provides that such
credit extensions "shall bear interest at a rate not less than one-half of 1
per centum per annum higher than the highest discount rate in effect" at
the Reserve Bank making the loan, except when the loan is secured by




256

Legislative Recommendations

mortgages on one- to four-family homes. The result is that many sound
member bank loans cannot qualify as security for Federal Reserve advances except at this penalty rate of interest, even though their quality
may be equal to that of currently "eligible" paper. Elimination of the
penalty rate would mean that obligations such as commercial paper with
maturities in excess of 90 days could be used as collateral for advances
at the basic discount rate.
EXPANSION OF CLASS C DIRECTORS
The Board has submitted to the Congress draft legislation to increase the
number of Class C directors at each Federal Reserve Bank from three to
five. The proposal aims to diversify further the backgrounds and interests represented on the Reserve Banks' boards of directors as a way of
accomplishing one of the objectives of the Federal Reserve Reform Act
of 1977. That act provides for the representation of the interests of
consumers, labor, and services, in addition to agriculture, commerce,
and industry, on the boards of the Reserve Banks.
TERM OF CHAIRMAN OF THE BOARD OF GOVERNORS
Proposals to establish a fixed term for the Chairman of the Board of
Governors have been under consideration in various forms for some
years. The Board has recommended legislation making the four-year
term of the Chairman begin one year following the inauguration of the
newly elected President. This arrangement would eliminate the possibility, which exists under present law, that the appointment of the Chairman might by chance come to occur regularly in a presidential election
year. It would also afford continuity in monetary policy when a new
President takes office, and would contribute to the coordination of
monetary, fiscal, and other economic policymaking, without undermining the independence of the Federal Reserve.
The bill also would authorize the Vice Chairman to act as Chairman
in the event of (1) the temporary absence and unavailability or incapacity of the Chairman; or (2) the death, resignation, or permanent incapacity of the Chairman, pending appointment and confirmation of a successor. In addition, it would clarify that the Chairman and Vice Chairman
continue to serve in those capacities after expiration of their terms until
a successor is designated and confirmed.




Legislative Recommendations

257

AUTHORITY FOR BANK HOLDING COMPANIES TO
ACQUIRE BANKS ACROSS STATE LINES IN
EMERGENCY AND FAILING-BANK SITUATIONS
The Board again recommends that the Congress give the Federal Reserve authority in certain emergency and failing-bank situations to approve the acquisition by an out-of-state bank holding company of a
large bank that is in severe financial difficulty. The purpose of the legislation is to avoid an adverse potential impact when the failing bank is
one of the largest in the state and the public interest would be served
best by such an acquisition. Existing law permits a foreign bank but not
an out-of-state U.S. banking institution, to acquire the failing bank.
The authority would be limited to cases involving a bank that had
assets in excess of $500 million or a bank that was one of the three
largest in the state. The authority would be used only in cases in which
few or no purchasers could be found within the state and in which the
size or other special characteristics of the problem bank and the probability of widespread financial effects of its failure warrant an exception
to the general restrictions on out-of-state bank acquisitions by a bank
holding company.
SIMPLIFICATION OF TRUTH IN LENDING ACT
As a result of widespread concern about the complexity of Truth in
Lending, the Board has made recommendations to the Congress to improve and simplify the statute. Creditors acting in good faith have experienced difficulty in complying with Truth in Lending. Likewise, the
complexity of the disclosures appears to have diminished their usefulness to consumers.
The Board's proposal has several major elements. It is designed to
inform consumers better and to emphasize the cost disclosures most
needed in shopping for credit: the annual percentage rate, the finance
charge, and the payments schedule. The 1977 Consumer Credit Survey,
which was initiated by the Board in cooperation with the Comptroller of
the Currency and the Federal Deposit Insurance Corporation and conducted by the University of Michigan's Survey Research Center, shows
that these disclosures are far more important to consumers than those of
other terms. The proposal reduces the detail of the disclosures—for
example, eliminating the itemization of the components of the finance




258

Legislative Recommendations

charge and the amount financed. Significant information that is less important for shopping purposes, such as whether the obligation is secured, would be summarized, but the details would be relegated to the
contract.
Under the proposal the disclosures required by federal law would be
segregated from other matters in the contract and from other disclosures
required by state law so that the Truth in Lending disclosures would not
be lost among other provisions. In addition, the credit-cost terminology
would be explained in plain English; and the Board would develop and
publish model forms and clauses that, if properly completed, would protect creditors from civil liability under the act. The proposal also contains extensive technical clarifications.
UNIFORM RULES FOR CREDIT AND EFT TRANSACTIONS
When the Ninety-Fifth Congress enacted the Electronic Fund Transfer
Act to regulate the consumer aspects of electronic fund transfers, the
Board was assigned the responsibility of writing regulations to implement the act. In doing so, the Board has become concerned that consumers will encounter unnecessary difficulty in understanding the rules
provided by the new act, and will confuse them with the rules under the
Truth in Lending and Fair Credit Billing Acts.
Confusion may arise particularly when a single card will perform
multiple functions and be subject at one time to the rules of the Truth in
Lending and Fair Credit Billing Acts, as in the case of a credit purchase, and at another time to the different rules of the Electronic Fund
Transfer Act, as in the case of a cash withdrawal. Even apart from the
multiple-function card, the Board believes that consumers should not
have to learn one set of rules for a credit card and another for an EFT
card. In order to minimize confusion, the Board recommends that the
act be amended to provide, so far as practicable, a single set of rules
governing credit and EFT transactions.




259

Litigation
During 1979 the Board of Governors was named in 22 lawsuits, the same
number as in 1978. Of the actions filed in 1979, 16 raise questions under
the Bank Holding Company Act, compared with 17 in 1978. As of December 31, 1979, 27 cases were pending, 14 of which raise questions under the
Bank Holding Company Act. A brief description of each case that was
pending at the end of the year or that was disposed of in 1979 follows.
BANK HOLDING COMPANIES—ANTITRUST ACTION
In 1979 the U.S. Department of Justice filed no challenges under the
antitrust laws of the United States to acquisitions by registered bank holding companies or bank mergers that had been previously approved by the
Board, and no such cases are pending from previous years.
BANK HOLDING COMPANIES—REVIEW OF BOARD ACTIONS
In Bankers Trust New York Corporation v. Board of Governors, No.
73-1805 (2d Cir., filed May 25, 1973), petitioner requested the court to
review and set aside a Board order (Federal Reserve Bulletin, volume 59,
May 1973, page 364) denying petitioner's application to engage in investment advisory activities through a newly formed subsidiary corporation in
Palm Beach, Florida. In October 1973, the court granted petitioner's request for a delay in the proceedings pending the outcome on appeal, of a
suit in U.S. District Court for the Northern District of Florida challenging
the constitutionality of a Florida statute prohibiting out-of-state banking
organizations from performing investment advisory services in Florida,
upon which the Board had based its order. On April 14, 1975, the U.S.
Supreme Court vacated the district court judgment in that suit, finding the
suit inappropriate for a three-judge court, and sent the case back to the
district court (421 U.S. 901). The district court, on December 15, 1978,
ruled that the Florida statute violated the commerce clause of the U.S.
Constitution. On June 12, 1979, the U.S. Court of Appeals for the Second
Circuit, pursuant to stipulation by the parties, ordered petitioner's action
dismissed without prejudice.
In Investment Company Institute v. Board of Governors, No. 77-1862




260

Litigation

(D.C. Cir., filed on September 23, 1977), petitioner sought judicial review
of a Board order, dated August 31, 1977 {Federal Reserve Bulletin, volume 63, September 1977, page 856), denying its petition for reconsideration and rescission of a portion of the Board's January 1972 amendment to
Regulation Y {Federal Register, volume 37, 1972, page 1463). Petitioner
challenged the validity, under the Glass-Steagall Act, of the Board's
amendment, which permits bank holding companies to act as investment
adviser to or sponsor of an investment company that is registered under the
Investment Company Act of 1940. On March 30, 1979, the court vacated
the Board's amendment. The Board petitioned the court for rehearing and
on July 13, 1979, the court amended its order to clarify that it did not reach
the question of whether a bank holding company could provide advice
alone to an investment company (606 F.2d 1004). The Board filed a
petition for certiorari with the U.S. Supreme Court on December 13, 1979.
In Florida Association of Insurance Agents, Inc. v. Board of Governors,
Nos. 75-3151 to 3153 (5th Cir., filed August 12, 1975), petitioner sought
judicial review of three Board orders {Federal Register, volume 40, 1975,
pages 30869, 30872, 30876) approving the applications of four bank holding companies to engage in certain insurance agency activities in Florida to
the extent permitted by state law. These cases were consolidated in the
Fifth Circuit with the claims brought in National Association of Insurance
Agents, Inc. v. Board of Governors, Nos. 75-3342, 75-3343, and
75-3358 (D.C. Cir.), in which the petitioner challenged the same Board
orders. On March 19, 1979, the court remanded the cases to the Board for
further consideration of the application (591 F.2d 334).
In BankAmerica Corporation v. Board of Governors, No. C77-1005
SW (N.D. Cal., filed May 13, 1977), petitioner sought a declaratory
judgment that its proposal to expand geographically and to continue data
processing activities through its subsidiary, the Decimus Corporation,
within a 500-mile radius of Piscataway, New Jersey, had been approved
because the Board failed to act on the proposal within the 91-day period
required for Board action under 12 U.S.C. 1843(c). On July 29, 1977, the
district court ruled in favor of BankAmerica Corporation. The Board appealed this decision (No. 77-3629, 9th Cir.), and on May 14, 1979, the
Court of Appeals for the Ninth Circuit reversed the district court's ruling.
In a related case, BankAmerica Corporation v. Board of Governors, No.
77-2173 (9th Cir., filed May 25, 1977), BankAmerica sought judicial
review of a Board order, dated May 20, 1977 {Federal Register, volume
42, 1977, page 27293), providing for a hearing with respect to its application to engage in data processing activities through the Decimus Corpora-




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261

tion. Both actions were consolidated in the Court of Appeals for the Ninth
Circuit. On May 14, 1979, the court dismissed the petition for review. On
June 8, 1979, the court denied BankAmerica's petition for a rehearing (596
F.2d 1368).
In Memphis Trust Company v. Board of Governors, No. C76-64 (W.D.
Tenn., filed February 19, 1976), plaintiff requested that the Board's order
of April 10, 1975 (Federal Reserve Bulletin, volume 61, May 1975, page
327), denying plaintiff's application to acquire Home Owners Savings and
Loan Association, Collierville, Tennessee, be set aside. In a decision on
June 4, 1976, the court held that plaintiff's application had been approved
by operation of law because the Board had not acted on the application
within 91 days after the submission of the complete record to the Board.
The district court further held that it had jurisdiction over the plaintiff's
suit.
The Board appealed the decision to the U.S. Court of Appeals for the
Sixth Circuit (No. 76-2183). The court held, on September 22, 1978, that
the district court lacked subject matter jurisdiction, reversed the district
court, and remanded the case for dismissal without prejudice to petitioner's
right to request the Board to reconsider its order of April 10, 1975 (584 F.
2d 921). Memphis Trust then petitioned the Board to reconsider that order,
and was denied reconsideration by the Board's order of April 25, 1979.
Memphis Trust appealed this denial (6th Cir., No. 79-3350), claiming that
its original application was approved by operation of law and alleging that
the Board had not acted on the application within 91 days after the submission of the complete record to the Board. The case is pending.
In Central Bank v. Board of Governors, No. 77-1937 (D.C. Cir., filed
October 17, 1977), petitioner asked the court to review a September 13,
1977, determination by the Board denying petitioner's request for a determination that the individual organizers of the Tri-City National Bank of
West Allis, West Allis, Wisconsin, constitute a company under the Bank
Holding Company Act. The court remanded the case to the Board for
further proceedings on November 21, 1978. On February 1, 1979, the
court granted the Board's petition for rehearing and affirmed the Board's
order (593 F.2d 1370).
In Vickars-Henry Corporation v. Board of Governors, No. 77-3890
(9th Cir., filed December 13, 1977), petitioner challenged a Board letter
determination, dated November 15, 1977, that petitioner is not a bank
holding company for purposes of the Bank Holding Company Tax Act of
1976. The case is awaiting oral argument.
In Michigan National Corporation v. Board of Governors, No. 78-3057




262

Litigation

(6th Cir., filed February 1, 1978), petitioner sought judicial review of the
Board's order, dated January 31, 1978 (Federal Reserve Bulletin, volume
64, February 1978, page 127), approving petitioner's application to acquire Michigan National Bank-Sterling, Sterling Heights, Michigan, a
proposed new bank, on the condition that petitioner discontinue the "accommodation transaction services" offered at its subsidiary banks. On
April 21, 1978, the court granted petitioner's motion to consolidate the
case with two others that petitioner has appealed from federal district court.
In June 1979, the court dismissed the case with prejudice by stipulation of
the parties.
In Security Bancorp v. Board of Governors, Nos. 78-1581 and 78-2031
(9th Cir., filed March 17 and May 12, 1978), petitioners challenged the
Board's action in denying Security Bancorp's application to become a bank
holding company through the acquisition of Security National Bank, Walnut Creek, California (Federal Reserve Bulletin, volume 64, May 1978,
page 405). The cases are awaiting oral argument.
In Citicorp v. Board of Governors, No. 78-4039 (2d Cir., filed March
23, 1978), petitioner sought judicial review of a Board order, dated March
13, 1978 (Federal Reserve Bulletin, volume 64, April 1978, page 321),
denying petitioner's application to retain Advance Mortgage Corporation,
Southfield, Michigan. On January 2, 1978, the court upheld the Board's
order, holding that the Board's decision was supported by substantial
evidence and that the Board had met the 91-day statutory requirement for
processing the application (589 F.2d 1182). Citicorp applied for and was
denied certiorari by the U.S. Supreme Court on April 2, 1979 (98 S. Ct.
2860).
In NCNB Corporation v. Board of Governors, No. 78-1363 (4th Cir.,
filed June 8, 1978), petitioner sought review of the Board's order, dated
May 10, 1978 (Federal Reserve Bulletin, volume 64, June 1978, page
506), refusing to publish for comment a proposal to engage in the underwriting of property and casualty insurance, adjusting insurance claims, and
appraising and valuing property in connection with those activities. Petitioner claims that the Board failed to act on the application within the 91day period required for Board action by 12 U.S.C. 1842(b) and that the
Board acted arbitrarily and capriciously in declining to publish for comment petitioner's proposal. On June 15, 1979, the court affirmed the
Board's order (599 F.2d 609).
In Mid-Nebraska Bancshares, Inc. v. Board of Governors, No. 78-1658
(D.C. Cir., filed July 14, 1978), petitioner sought judicial review of a
Board order, dated June 16, 1978 (Federal Reserve Bulletin, volume 64,




Litigation

263

July 1978, page 589), denying the application by Mid-Nebraska Baneshares, Inc., Ord, Nebraska, to become a bank holding company through
the acquisition of Nebraska State Bank, Ord, Nebraska. Petitioner claims
that the Board's order was not supported by substantial evidence and
exceeded the Board's authority under the Bank Holding Company Act.
Oral argument was heard by the court on October 1, 1979.
In Manchester-Tower Grove Community Organization/ACORN v.
Board of Governors, No. 78-1898 (D.C. Cir., filed September 12, 1978),
petitioner sought judicial review of the Board's order of June 16, 1978
(Federal Reserve Bulletin, volume 64, July 1978, page 576), approving
the merger of Manchester Financial Corporation, St. Louis, Missouri, into
Commerce Bancshares, Inc., Kansas City, Missouri. On December 1,
1978, the court denied petitioner's motion for a stay of the approved
merger. Petitioner claims the Board failed to comply with the recently
enacted Community Reinvestment Act in approving the merger. The court
affirmed the Board's order in a per curiam opinion on October 29, 1979
(607F.2d494).
In Metro North State Bank v. Board of Governors, No. 78-1786 (8th
Cir., filed October 30, 1978), petitioner sought judicial review of the
Board's order, dated September 27, 1978 (Federal Reserve Bulletin, volume 64, October 1978, page 803), approving the acquisition of the Commerce Bank of Clay County, N.A., Kansas City, by Commerce Bancshares, Inc., Kansas City. The court granted petitioner's motion to dismiss
on February 12, 1979.
In United Bank Corporation of New York v. Board of Governors, No.
78-4172 (2d Cir., filed November 1, 1978), petitioner challenged the
Board's order, dated October 3, 1978 (Federal Reserve Bulletin, volume
64, November 1978, page 894), denying petitioner's application to acquire
the Schenectady Trust Co., Albany, New York. The case was dismissed
with prejudice pursuant to stipulation, on April 9, 1979.
In Jackson v. Board of Governors, No. 78-3476 (5th Cir., filed November 13, 1978), petitioners sought judicial review of the Board's order,
dated November 1, 1978 (Federal Reserve Bulletin, volume 64, December
1978, page 982), approving the application of Texas American Bancshares, Inc., Fort Worth, Texas, to acquire additional shares of Bank of
Fort Worth, Forth Worth, Texas. The court affirmed the Board's order on
June 29, 1979, in a per curiam decision.
In Commercial National Bank v. Board of Governors, No. 78-2238
(D.C. Cir., filed December 4, 1978), petitioners sought judicial review of
the Board's order, dated November 3, 1978 (Federal Reserve Bulletin,




264

Litigation

volume 64, December 1978, page 964), approving indirect retention by
First Arkansas Bankstock Corporation, Little Rock, Arkansas, of First
National Bank in Mena, Mena, Arkansas. The court granted petitioner's
motion to dismiss on January 26, 1979.
In Hunter Holding Company v. Board of Governors, No. 78-1907 (8th
Cir., filed December 28, 1978), petitioner sought judicial review of a
Board order, dated November 29, 1978 (Federal Reserve Bulletin, volume
64, December 1978, page 976), denying petitioner's application to become
a bank holding company by acquiring Security State Bank of Hunter,
Hunter, North Dakota. The court granted petitioner's motion to dismiss on
February 6, 1979.
In California Life Corporation v. Board of Governors, No. 79-1013
(D.C. Cir., filed January 4, 1979), petitioner sought judicial review of a
December 7, 1978, letter of the Federal Reserve Bank of Kansas City
regarding the proposed acquisition by Baldwin-United Corporation, Cincinnati, Ohio, pursuant to 12U.S.C. 1843(c)(12) and 12 C.F.R. 225.4(d),
of College/University Corporation, Indianapolis, Indiana. The court
granted petitioner's motion to dismiss the case with prejudice on June 25,
1979.
In Gibraltar Financial Corporation of California v. Board of Governors, No. 79-1236 (D.C. Cir., filed March 5, 1979), petitioner challenged, and sought a stay pending review of, the Board's decision of
March 2, 1979, pursuant to 12 U.S.C. 1843(c)(12) and 12 C.F.R.
225.9(d), to permit Lumbermens Mutual Casualty Company ("Lumbermens") and its subsidiary, Kemper Corporation ("Kemper"), both of
Long Grove, Illinois, to acquire not more than 25 percent of the stock of
Gibraltar Financial Corporation of California, Beverly Hills, California
("Gibraltar"), a savings and loan holding company. Lumbermens and
Kemper are bank holding companies that have filed irrevocable declarations with the Board to the effect that they will cease to be bank holding
companies by January 1, 1981, and are thereby entitled to make nonbanking acquisitions pursuant to 12 C.F.R. 225.4(d). On March 7, 1979, the
court denied petitioner's motion for a stay of the Board's order. The court
dismissed the action on May 2, 1979, pursuant to a motion filed by Gibraltar.
In Independent Insurance Agents of America, Inc., et al. v. Board of
Governors, etal, Nos. 79-1280, 1398, 1471 (D.C. Cir., filed March 14,
April 20, and May 9, 1979), petitioners challenged orders of the Federal
Reserve Banks of New York, Kansas City, and Cleveland approving the
applications of First National State Bancorporation, Newark, New Jersey,




Litigation

265

New Mexico Bancorporation, Inc., Santa Fe, New Mexico, and Pittsburgh
National Corporation, Pittsburgh, Pennsylvania, respectively, each to engage through its subsidiary in certain property and casualty insurance
agency activities. Petitioner claimed that the orders are not based on substantial evidence, that petitioners were unlawfully denied hearings on the
applications, and that the orders violated the Administrative Procedure Act
and the Board's procedural regulations. The case is awaiting oral argument.
In Credit and Commerce American Investments, B.V., etal.v. Board of
Governors, et al, No. 79-1294 (D.C. Cir., filed March 16, 1979), petitioners challenged a Board order {Federal Reserve Bulletin, volume 65,
March 1979, page 254) dismissing petitioners' application to acquire
Financial General Bankshares, Inc., Washington, D.C. The Board found
that it was precluded from approving the application because the proposed
transaction would violate Maryland law. The case is awaiting oral judgment.
In American Affiliates, Inc. v. Board of Governors, No. S79-0078 (N.D.
Ind., filed April 2, 1979) and No. 79-1332 (7th Cir., filed March 30,
1979), petitioner challenged the Board's decision of March 1, 1979, denying petitioner certification under section 6158 of the Internal Revenue
Code of 1954 for the sale of shares of the Wickes Corporation, San Diego,
California. On April 7 and 20, 1979, respectively, the United States District Court and the United States Court of Appeals granted petitioner's
request to dismiss the actions.
In U.S. Labor Party v. Board of Governors, Nos. 79^083, 4084 (2d
Cir., filed April 16, 1979), petitioner sought judicial review of the Board's
orders of March 16, 1979 (Federal Reserve Bulletin, volume 65, April
1979, pages 350, 354). Those orders approved the applications of Standard
Chartered Bank Limited and Standard Chartered Overseas Holdings Limited, London, England, and Standard Chartered Bancorp, San Francisco,
California, to acquire Union Bank, Los Angeles, California, and The
Chartered Bank of London, San Francisco, California, and to merge Union
Bank and The Chartered Bank of London; and approved the application of
Hongkong and Shanghai Banking Corporation, Hongkong, Kellett N.V.,
Curacao, Netherlands Antilles, and HSBC Holdings B.V., Amsterdam,
the Netherlands, to acquire 51 percent of the voting shares of Marine
Midland Banks, Inc., Buffalo, New York. The court dismissed the actions
on May 22, 1979, because of petitioner's failure to file its briefs and
appendixes in a timely fashion. On June 1, 1979, the court denied
petitioner's motions to vacate its earlier dismissals.




266

Litigation

In Jackson v. Board of Governors, No. 19-2111 (5th Cir., filed May
14, 1979), petitioners challenged the Board's order, dated May 2, 1979
(Federal Reserve Bulletin, volume 65, June 1979, page 500), approving
the application of Texas American Bancshares, Inc., Fort Worth, Texas, to
acquire additional shares of Riverside State Bank, Fort Worth, Texas.
Petitioners alleged that Texas American Bancshares engaged in discriminatory hiring and promotion practices and claimed that the Board should have
denied the application for this reason. The case is pending.
In Connecticut Bankers Association, et al. v. Board of Governors, No.
79-1554 (D.C. Cir. filed May 30, 1979), petitioners challenged the
Board's order (Federal Reserve Bulletin, volume 65, June 1979, page 506)
approving the application by Citicorp, New York, New York, to engage de
novo through its subsidiary in Westport, Connecticut, in the activities of
second-mortgage lending and the sale of credit-related insurance. On June
19, 1979, the court stayed the Board's order pending court review. Petitioners argued that the Board was in error in denying petitioners a hearing
on the application. Oral argument was heard on October 11, 1979.
In County National Bancorporation, et al. v. Board of Governors, No.
79-1783 (8th Cir., filed September 18, 1979), petitioners challenged the
Board's order of August 27, 1979 (Federal Reserve Bulletin, volume 65,
September 1979, page 763), denying petitioners' application to acquire TG
Bancshares, Co., St. Louis, Missouri. Petitioners alleged that the Board of
Governors relied upon an improper standard in denying the application.
The case is pending.
In Boggs, et al. v. Board of Governors, No. 79-1891 (8th Cir., filed
October 19, 1979), petitioners challenged the Board's order of September
21, 1979 (Federal Reserve Bulletin, volume 65, October 1979, page 871),
approving the application of Missouri Country Bancshares, Inc., Liberal,
Missouri, to acquire Bank of Raymondville, Raymondville, Missouri. The
case is pending.
In Independent Bank Corporation v. Board of Governors, No. 79-3652
(6th Cir., filed October 22, 1979), petitioner challenged the Board's order
of September 21, 1979 (Federal Reserve Bulletin, volume 65, October
1979, page 867), denying petitioner's application to acquire The Old State
Bank of Fremont, Fremont, Michigan. Petitioner claimed that the Board's
order was not supported by substantial evidence and that the denial of the
application by only three of the four Governors present, with one Governor
dissenting, rendered the Board's order ineffective.




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267

OTHER LITIGATION INVOLVING CHALLENGES
TO BOARD PROCEDURES AND REGULATIONS
In a case related to the failure of the United States National Bank, San
Diego, California, Roberts Farms, Inc. v. Comptroller of the Currency,
No. 75-0268 (S.D. Cal., filed November 20, 1975), plaintiff sought damages on the grounds that the federal bank regulatory agencies negligently
supervised the bank. The case has been stayed indefinitely pending the
outcome of similar suits.
In Merrill v. Federal Open Market Committee, No. 75-0736 (D.D.C.,
filed May 8, 1975), plaintiff brought suit under the Freedom of Information Act to compel the Committee to disclose immediately records of its
policy actions and memoranda of discussion at its meetings in January and
February 1975. By order of March 9, 1976 (413 F. Supp. 494), the court
ruled that the records of the Committee's policy actions must be made
available to the public upon adoption and that reasonably segregable factual portions of the memoranda of discussions must also be disclosed. The
Committee appealed the ruling on policy actions (No. 76-1379) to the
U.S. Court of Appeals for the District of Columbia Circuit. That court, on
November 10, 1977 (565 F.2d 778), affirmed the ruling of the district
court that the Committee's monthly policy actions, including its Domestic
Policy Directives and tolerance ranges for the money supply and the federal funds rate, must be publicly released upon adoption by the Committee.
The Board filed a petition for a writ of certiorari by the Supreme Court for
review of the decision of the court of appeals, which was granted (46 U.S.
L.W. 3722, 1978). On June 28, 1979, the court vacated the decision of the
court of appeals and remanded the case to the district court for consideration of whether the Committee's records would be discoverable in litigation and whether the operative portions of the records can be reasonably
segregated from the factual materials (47 U.S.L.W. 4892, 1979).
In Re: Franklin National Bank Securities Litigation, MDL No. 196
(cases consolidated on April 22, 1977), consolidated several actions for
damages brought against various defendants who were connected with the
Franklin National Bank, New York, New York, which was declared insolvent by the Comptroller of the Currency on October 8, 1974. Several
defendants in these actions—the insurers and auditors of Franklin National
Bank and its parent holding company—filed, or sought to file, third-party
actions against the United States based on the alleged negligence of the




268

Litigation

banking regulatory agencies, including the Board and the Federal Reserve
Bank of New York, in the supervision of the bank. In an opinion dated
January 17, 1978, the court declined to dismiss completely the
government's motion to dismiss the third-party actions. The court held that
in certain circumstances the United States may be liable for alleged negligent supervision by bank regulatory agencies if their decisions with respect
to the bank were substituted for those of the bank's management to the
bank's detriment. The court granted defendants' motion for summary judgment on November 13, 1979.
In Hansen v. The National Commission on Observance of International
Women's Year, No. 77-1158 (D. Ida., filed September 21, 1977), plaintiff, a U.S. Congressman, brought suit against the National Commission
on Observance of International Women's Year and various federal officials, including the Chairman of the Board of Governors, to prevent the
expenditure of federal funds in connection with the activities of the Commission. The court granted defendant's motion to dismiss on February 2,
1978, and the plaintiff appealed the case to the U.S. Court of Appeals for
the Ninth Circuit (No. 78-2210). The case is pending.
In Arneyv. United States, etai, No. 77-3503-NA-CV (M.D. Tenn.,
filed November 11, 1977), plaintiff sought to recover damages for personal
injuries allegedly sustained at a construction project at a branch of the
Federal Reserve Bank of St. Louis. On December 4, 1979, the court
granted defendant's motion for summary judgment.
In Emch v. United States, No. 77-C-677 (E.D. Wis., filed November
18, 1977), plaintiff, a shareholder of the parent company of the American
City Bank & Trust Co., N.A., Milwaukee, Wisconsin, a failed bank,
alleged that the Board and other bank regulatory agencies were negligent in
supervising and examining the bank. On May 8, 1979, the court dismissed
the case without prejudice, and on August 15, 1979, denied plaintiff's
motion to file an amended complaint. Plaintiff has filed an appeal.
Three cases were pending in 1979 involving challenges to the Board's
employment practices. On June 29, 1977, the complaint in Hilliard v.
Burns, No. 76-1655 (D.D.C., filed December 8, 1976), was dismissed.
Plaintiff has filed a notice of appeal from that decision (D.C. Cir. No.
77-1700), and the case is pending. In Hadigian v. Board of Governors,
No. 76-1694 (D.D.C., filed September 17, 1976), the court granted, on
December 6, 1978, the Board's motion for summary judgment. The court
held that the Board's action was neither arbitrary nor capricious (463 F.
Supp. 437). Plaintiff appealed the district court's order (D.C. Cir. No.




Litigation

269

79-1216). In Wiley v. United States, et al., No. 79-2374 (D.D.C., filed
September 7, 1979), the defendants have filed a motion for summary
judgment.
In U.S. League of Savings Associations v. Board of Governors, et al.,
No. 78-0878 (D.D.C., filed May 16, 1978), the plaintiff challenged the
Board's May 1, 1978, decision to amend Regulation Q, effective November 1, 1978, to permit individual bank customers to transfer funds automatically from their savings to their checking accounts. The court granted the
Board's motion for summary judgment on October 31, 1978. The plaintiff
appealed the decision to the U.S. Court of Appeals for the District of
Columbia, which reversed the district court on April 20, 1979, and set
aside the amendments effective January 1, 1980. The U.S. Supreme Court
denied defendant's petition for certiorari on October 15, 1979 (48
U.S.L.W. 3258).
In Independent Bankers Association of Texas v. First National Bank in
Dallas, No. CA 3-78-0918-F (N.D. Tex., filed July 26, 1978), the plaintiff alleged that the Board and the Federal Reserve Bank of Dallas are
unlawfully permitting the collection of share drafts drawn on federal credit
unions. The federal defendants have moved to dismiss.
In Beckley v. Board of Governors, No. 78-C-2955 (N.D. 111., filed July
27, 1978), petitioner challenged the Board's withholding of certain raw
data used to compile reports. The court dismissed the case on September
14, 1979, pursuant to stipulation by the parties.
In Consumers Union of United States, Inc. v. Miller, No. 78-2188
(D.D.C., filed November 21, 1978), the plaintiff seeks declaratory and
injunctive relief, alleging that the Board exceeded its authority and acted
arbitrarily in amending Regulation Z (see Federal Register, volume 42,
1977, page 62146) to provide certain exceptions to the right of rescission
for credit secured by a consumer's residence. The parties filed a stipulation
of dismissal on October 12, 1979.
In Cundariv. United States, etal, No. 78-2267 (D.N.J., filed September 19, 1978), plaintiff alleged that the monetary policies of the United
States caused inflation that eroded the value of plaintiff's assets and thus
deprived him of his property without due process. He also alleged that
U.S. monetary policy also violated his right to equal protection because, as
a retiree on a fixed income, he is more severely affected by inflation than
employed persons. The court dismissed the suit for lack of standing on
January 29, 1979, pursuant to defendant's motion.
In Cundari v. United States, No. 215-79C (Ct. Cl., filed May 17,




270

Litigation

1979), plaintiff made the same allegations described above; he sought
$500,000 in damages and asked that the court enjoin defendants from
pursuing inflationary policies. The case is pending.
In Brink's Incorporated, et al. v. Board of Governors, et al., No.
78-2296 (D.D.C., filed December 6, 1978), plaintiff alleged that the
Service Contract Act, 41 U.S.C. 351 et seq., applies to certain contracts by
the Federal Reserve Bank of Richmond and sought to compel the Reserve
Bank to keep in effect a contract between it and plaintiff. On December 8,
1978, the court granted plaintiff a temporary restraining order to compel
the Reserve Bank to extend the contract.
On January 11, 1979, the court denied plaintiff's motion for a preliminary injunction and vacated its temporary restraining order (466 F. Supp.
112). On January 26, 1979, the court found that the Service Contract Act
applied to the Federal Reserve Bank of Richmond (466 F. Supp. 116).
In Tangalos v. United States, et al., No. 79C-1987 (N.D. 111., filed
May 16, 1979), plaintiff sought a declaration that a certain Treasury bill
was his property and an injunction preventing the government from making
payment on the bill to another person. On June 21, 1979, the plaintiff
stipulated to dismissal of the case; on October 4, 1979, the plaintiff moved
to reinstate the case.
In Riegle v. Federal Open Market Committee, et al., No. 79-1703
(D.D.C., filed July 2, 1979), plaintiff, a member of the U.S. Senate,
sought to enjoin the presidents of the Federal Reserve Banks from serving
as members of the Federal Open Market Committee. Plaintiff alleged that
the provisions of the Federal Reserve Act governing the appointment of
members of the Federal Open Market Committee violate the appointments
clause of the Constitution, Article II, Section 2, Clause 2. On October 26,
1979, the court granted defendant's motion to dismiss for lack of standing.
On November 9, 1979, the court denied plaintiff's motion to alter judgment.
inGregory, etal. v. Board ofGovernors, No. 79-1787 (D.D.C., filed July
27,1979), plaintiffs sued under the Freedom of Information Act claiming that
the Board had improperly withheld portions of memoranda containing staff
advice and material from examination reports that concern the acquisition of a
failed bank in which plaintiffs were shareholders. Both plaintiffs and the
Board have moved for summary judgment.
In American Bankers Association v. Board of Governors, et al., No.
79-2066 (D.D.C., filed August 7, 1979), plaintiff sought a declaration that
the guidelines {Federal Register, volume 44, January 4, 1979, page 1222)
published by the financial institutions regulatory agencies for the enforce-




Litigation

271

ment of the Truth in Lending Act, 12 U.S.C. 1601 et seq., and Regulation
Z, 12 C.F.R. Part 226, are void; they also sought an injunction to prevent
the Board of Governors, the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation from enforcing the guidelines. Plaintiff
alleges that the agencies are not authorized to adopt or enforce such guidelines, and that their adoption was arbitrary and capricious, not according to
proper administrative procedure, and in violation of the Truth in Lending
Act. The agencies have moved to dismiss the complaint for lack of ripeness. Consumers Union has moved to intervene as a codefendant and to
crossclaim against the agencies, seeking an injunction requiring the agencies to initiate enforcement programs under the Truth in Lending Act.
Consumers Union has also moved to implead the Federal Home Loan Bank
Board as a codefendant. These motions are pending. On October 16, 1979,
the court granted the motion of the U.S. League of Savings Associations
for leave to appear as amicus curiae.
In Gordon v. Board of Governors, et al, No. 79-2893 (5th Cir., filed
August 10, 1979), and Gordon v. Board of Governors, et al., No.
C79-1427A (N.D. Ga., filed August 31, 1979), petitioner challenged the
action of the Federal Reserve Bank of Atlanta, in declining to investigate
his allegations of fraud by two national banks that acted as trustees for
certain real estate syndications in which he apparently invested and lost
money. Petitioner asked the courts to compel defendants to investigate his
allegations. The U.S. Court of Appeals for the Fifth Circuit dismissed the
action before it on January 4, 1980, upon respondents' motion. Petitioner
has moved for reinstatement of the petition. Defendants have moved to
dismiss the action in the district court.
In Hadigian v. Board of Governors, etal., No. 79-2447 (D.D.C., filed
September 14, 1979), plaintiff sued under the Freedom of Information Act
for disclosure of documents that plaintiff alleged had been withheld by the
Board. The Board responded that it had no record of plaintiff's request for
documents. The court dismissed the case on November 9, 1979, without
prejudice.
In State of Indiana, et al. v. United States, et al., No. 79-2452
(D.D.C., filed September 17, 1979), plaintiffs alleged that defendants
unlawfully refused to redeem various government bonds that the state had
obtained by escheat and requested the court to compel defendants to redeem the bonds. The Board of Governors has filed a motion to dismiss the
complaint as to the Board of Governors.




272

Legislation Enacted
INCREASE IN DEBT CEILING
Public Law 96-78, approved September 29, 1979, increases the temporary
debt limit to $879 billion through May 31, 1980. It also increases to $50
billion the amount of long-term U.S. government bonds that may be issued
with interest rates above the 4.25 percent statutory ceiling.
Public Law 96-78 also amends the rules of the House of Representatives
to permit the House to treat its approval of the budget resolution as its
approval of the public debt limit.
An earlier authorization (Public Law 96-5, April 2, 1979) increased
the temporary debt limit from $798 billion to $830 billion through September 30, 1979, and increased from $32 billion to $40 billion the amount of
long-term U.S. government bonds that could be issued to the public with
interest rates above the 4.25 percent statutory ceiling.
Public Law 96-5 also increases the ceiling rate on savings bonds from 6
to 7 percent. In addition, Public Law 96-5 directs the Budget Committees
of the Congress to report balanced budgets for the fiscal years 1981 and
1982. It provides that if a budget transmitted by the President to the
Congress would result in a deficit in fiscal years 1981 or 1982, the President shall also transmit alternative budget proposals that would not result in
a deficit. Such alternative proposals shall include a clear explanation of
differences between the budget and alternative budget proposals.
AMENDMENTS TO COUNCIL ON WAGE AND
PRICE STABILITY ACT
Public Law 96-10, approved May 10, 1979, extends the termination date
of the Council on Wage and Price Stability from September 30, 1979, to
September 30, 1980. Among other things, it directs the Council to focus
attention on the need to improve productivity in both the public and the
private sectors of the economy. It also amends the Employment Act of
1946 to establish numerical goals for the reduction of the share of the gross
national product accounted for by federal outlays in 1981 through 1983,
but specifies that such policies and programs shall be designed so as not to
impede achievement of goals and timetables for the reduction of unemployment.




Legislation Enacted

273

DIRECT PURCHASE AUTHORITY OF
FEDERAL RESERVE BANKS
Public Law 96-18, approved June 8, 1979, provides that Federal Reserve
Banks may purchase U.S. obligations directly from the Treasury only in
unusual and exigent circumstances for renewable periods not to exceed 30
days; these purchases may be made only when authorized by an affirmative
vote of not less than five members of the Board of Governors. In other
circumstances, the Treasury Department is authorized to borrow securities
from the Federal Reserve and to sell them in the open market for the
purpose of meeting its short-term cash needs. The Treasury must repurchase these securities and return them to the Federal Reserve not more than
six months after the date of sale.
EXEMPTION OF SAVINGS AND LOAN ASSOCIATIONS
FROM FEDERAL TRADE COMMISSION ACT
Public Law 96-37, approved July 23, 1979, exempts savings and loan
associations from the jurisdiction of the Federal Trade Commission to the
same extent as banks have been previously exempted. Regulations concerning unfair trade practices are to be enforced against savings and loan
associations by a division of consumer affairs to be established by the
Federal Home Loan Bank Board.
r

rh»;-RA. DFPuSIT *\MTRANCE OF BRANCHES
i)\ '" >k* iGN BANK.Public Law 96-64, approved September 14, 1979, extends until January
31, 1980, the time in which a branch of a foreign bank that has applied for
federal deposit insurance and whose application has not been denied may
continue to accept domestic retail deposits.
CONGRESSIONAL BUDGET RESOLUTIONS
By concurrent resolution adopted by the Senate on November 16, and by
the House of Representatives on November 28, the Congress set the appropriate federal budget deficit for the fiscal year beginning October 1, 1979,
at $29.8 billion and the appropriate level of the public debt at $886.4
billion, based on budget outlays of $547.6 billion and revenues of $517.8
billion.




274

Legislation Enacted

HOUSING AND COMMUNITY DEVELOPMENT
AMENDMENTS OF !9"T9
Public Law 96-153, approved December 21,1979, provides for the extension of FHA insurance authority until October 1,1980. Public Law 96-153
also increases from $60,000 to $75,000 the basic limit on single-family
mortgages at savings and loan associations and increases the ceilings on
FHA-insured loans to $67,500 for single-family residences, $76,000 for
two-family, $92,000 for three-family, and $107,000 for four-family residences. It also overrides state usury laws for FHA-insured loans (subject to
reimposition by state legislative action). Public Law 96-128, approved
November 28, 1979, exempts VA-guaranteed or -insured loans from state
usury ceilings whenever FHA-insured loans are exempted.
CONSUMER SERVICES AND USURY
Public Law 96-161, approved December 28, 1979, authorizes automatic
transfer services for banks, remote-service units for savings and loan associations, and share drafts for credit unions from December 31, 1979, until
March 31, 1980. Effective on the date of enactment, NOW accounts are
authorized in New Jersey. State usury ceilings on residential mortgage
loans are removed until March 31, 1980.
Interest rate ceilings on business and agricultural loans of $25,000 or
more are preempted by an interest rate of not more than 5 percent in
excess of the Federal Reserve discount rate on 90-day commercial paper
until July 1, 1980, if the state usury ceiling is set by statute; if the
ceiling is set by the state constitution, the period of preemption ends
July 1, 1981. Both of these preemptions may be overridden by state
legislative action. Subject to state override, state laws limiting the
amount of interest that may be charged or received shall not apply to
any deposits held by banks or savings and loan associations for the same
time periods.
CHR\Sl HR CORPORATION LOAN GUARANTEE ACT
Public Law 96-185, approved January 7, 1980, authorizes a Chrysler
Corporation Loan Guarantee Board to extend loan guarantees to Chrysler
not to exceed $1.5 billion until December 31, 1983. The Board consists of
the Secretary of the Treasury, the Chairman of the Board of Governors of




Legislation Enacted

275

States. The Secretary of Labor and the Secretary of Transportation are ex
officio nonvoting members.
The Board is authorized to make commitments to guarantee the payment
of principal and interest on loans subject to the following conditions,
among others: Chrysler must submit to the Board a satisfactory operating
plan for the fiscal years 1980-83 demonstrating its ability to continue
operations as a going concern in the automobile business and a satisfactory
financing plan that includes an aggregate amount of nonfederally guaranteed assistance of at least $1.43 billion. The financing plan must include
financial commitments or concessions from parties with a stake in
Chrysler's continued operations, such as banks, other creditors, suppliers,
and state and local governments; capital infusions; and asset sales. In
addition, employees are required to accept reductions of scheduled increases in wages and benefits. An employee stock ownership plan must
also be established.




276

Bank and Bank Holding Company
Supervision and Regulation by the
Federal Reserve System
DOMESTIC ACTIVITIES AND APPLICATIONS
Bank Holding Companies
The Federal Reserve System is responsible for the supervision and regulation of the activities of bank holding companies and their nonbank subsidiaries, and uses the following major supervisory tools to carry out this
function: on-going monitoring and computerized surveillance of financial
condition through annual reports and other periodic reports; on-site inspections by examiners trained to analyze financial conditions and to determine
compliance with federal banking laws and regulations; and action on applications to form bank holding companies or to establish or acquire additional bank or nonbank subsidiaries.
Monitoring and surveillance have recently been enhanced by a detailed
computer-generated Bank Holding Company Performance Report. This
report processes information received from bank holding companies into
standard formats, and groups the banks by size of assets to make possible
the early screening and analysis of a company's financial condition.
The System also receives an annual report from all bank holding companies, which includes a separate financial statement on the parent holding
company, on each bank and nonbank subsidiary, and on the consolidated
organization. Most large holding companies also file a semiannual report,
which includes the parent only and consolidated financial statements; and a
quarterly report on intercompany transactions. By using these reports, as
well as publicly available information, the Federal Reserve can be currently aware of the condition of bank holding companies and can promptly
detect a significant deterioration in condition.
The most direct tool for supervising bank holding companies is the
System's on-site inspection function. Among other areas of interest, the
bank holding company examiners review the following:
1. Policies formulated by management to administer the operations of
subsidiaries




Supervision and Regulation

277

2. Recordkeeping and controls necessary to manage the organization
properly
3. The quality of assets held by the parent company and its nonbank
subsidiaries
4. The overall financial condition of the parent and the consolidated
entity, and the parent's ability to service its debt obligations properly
5. Nonbank activities for compliance with federal banking laws and
regulations.
Over the last two years, the Federal Reserve has expanded and intensified the inspection program for bank holding companies. It now conducts
an annual inspection of most bank holding companies that have consolidated assets in excess of $300 million and that engage in permissible creditextending nonbank activities, such as leasing, mortgage banking, and consumer finance.
In 1979 the System introduced a new standardized Report of Bank
Holding Company Inspection for use in inspecting small bank holding
companies that do not engage in significant nonbank activities. This new
report and the form used for inspecting large bank holding companies,
which was adopted in 1978, together constitute a uniform and comprehensive source of information to the companies being inspected, as well as to
the various bank regulatory agencies. In addition, the System has finished
drafting a new manual for the supervision and inspection of holding companies; it will be available to supervisory personnel in 1980.
During 1979 the federal bank regulatory agencies approved policies to
enhance interagency coordination in the inspection and implementation of
corrective action for holding companies and their banking subsidiaries.
Henceforth, these agencies will undertake to coordinate the inspection of a
bank holding company with the examination of the lead bank, whenever
possible; such coordination will be required for holding companies with
consolidated assets in excess of $10 billion and those considered in need of
special supervisory attention.
At the end of 1979, 2,520 bank holding companies were in operation.
On December 27, 1979, revisions to the bank holding company application forms (FR Y-l, FR Y-2, and FR Y-4) became effective. The revisions
are part of the System's broad-based effort to review and restructure the
forms filed by bank holding companies, to improve the quality of responses,
and to reduce the reporting burden on the respondent. Each of the revised
application forms requests the minimal information necessary to support
reasonable judgments about the actions proposed in the applications.




278

Supervision and Regulation

Each action by the Board on an application to form a bank holding
company or to expand an existing company through acquisition of a bank
or an existing nonbank company is effected by an order. Orders set
forth the action taken, the votes by the Board members participating, the
essential facts, and the basis for the action.
Whether issued by the Board or by Reserve Banks acting under delegated authority, orders are released immediately to the public and press.
Copies are available from the Board's offices, and the System's actions are
reported in Board publications, including the Federal Reserve Bulletin and
the weekly H.2 release on actions of the Board. In September 1979, the
Board issued revised rules for delegation that provided for substantial
further delegation of authority to Reserve Banks to approve bank holding
company and merger applications. The new rules provide for approval
only; all denials will continue to result from a Board vote. Moreover,
Reserve Banks must act under delegated authority within the framework of
policy established by the Board and must strictly adhere to all standards set
by the Board.
The new plan should have several major benefits. First, shifting the
Board's workload of applications will allow Board members to devote
more time to bank regulatory issues and legislative requirements, as well as
to policy issues concerning applications. Second, there will be a reduction
in the average time required to process those applications that are handled
under delegated authority. Third, Reserve Bank and Board staff resources
will be more efficiently used through the elimination of some duplication
of effort in processing routine cases.
The number of proposals acted on during 1979 by the Board, and under
delegated authority by the Secretary's Office and the Federal Reserve
Banks, are shown in the table below.

Direct action
Section

Delegated authority
Secretary's
Office

Board

Reserve Banks

Approved
3(a)(l)
3(a)(3)
3)a)(5)
4(c)(8)
4(c)(12)
4(d)
Total ..

Denied

Approved

Approved

Permitted

73
68
4
61
2
1
209

3
6
2
3
0

38
11
0
3
0
0
52

258
83
0
33
0
0
374

0
0
0
450
22
0
472

Total




0
14

372
168
6
550
24
1
1,121

Supervision and Regulation

279

Although the number of applications processed increased by 7 percent in
1979 over 1978, the System again processed more than 90 percent within
90 days of the filing of a legally and informationally sufficient application,
as the table below indicates. This standard is self-imposed and is considerably more difficult to meet than the period referred to in the Bank Holding
Company Act.

1978

1979

Item
Ql
Number processed
Percent processed
within 90 days

Q2

Q3

Q4

Year

Ql

Q2

Q3

Q4

Year

269

257

270

251

1,047

265

222

286

348

1,121

90

90

95

94

92

94

91

89

93

92

During 1979, the Board, as well as the other federal financial regulatory
agencies, completed a full year of experience with the Community Reinvestment Act (CRA). That statute provides that, in acting upon an expansion proposal involving depositary financial institutions, an agency must
consider the applicant's record in meeting the credit needs of its community. Since November 6, 1978, all applications to acquire a bank have had
to discuss the applicant's performance in this respect.
Of 546 bank holding company applications subject to CRA that came
before the Board in 1979, only 7 were protested on CRA grounds. After
prolonged processing periods, all 7 applications were approved. In each
case, however, the applicant modified, or promised to modify its behavior
toward meeting the credit needs of its community. It became clear, during
the processing of the protested cases, that neither the communities nor the
applicants are well served by protracted processing periods and repeated
exchanges of charges and responses. The Board, therefore, refined its
procedures for handling protests, and made them available to the public in
connection with the release of a CRA Information Statement on January 3,
1980; that release also outlined the Board's views with regard to its experience with CRA.
Although many firms have responded positively to the Board's recent
policy statements requesting bank holding companies with grandfather
rights expiring on December 31, 1980, to file retention applications or
divestiture plans promptly, a number of firms either have not complied or
have not made provisions for compliance. On December 13, 1979, therefore, the Board issued a fourth policy statement on the subject, which




280

Supervision and Regulation

pointed out the further consequences of noncompliance. In aggravated
cases, these may include the assessment of civil money penalties or referral
to the U.S. Department of Justice for possible criminal prosecution. The
potential for penalties is not lessened because applications or divestitures
are in progress on December 31, 1980. However, time and a variety of
feasible options do remain for affected firms. Further, the Federal Reserve
System has intensified its contacts with each situation believed to present serious difficulties.
Aiding compliance with the December 31, 1980, deadline was the
repromulgation of the Board's regulation governing the sale of insurance in
towns of less than 5,000 persons. On remand from a federal appeals court,
the Board again determined that such insurance was closely related to
banking and in the public interest. This determination paves the way for
approximately 140 bank holding companies, whose grandfather rights with
respect to this activity expire on December 31, 1980, to file for retention
under the Bank Holding Company Act.
Member Banks
Each state member bank is subject to examination, made by direction of
the Board of Governors or of the Federal Reserve Bank of the district in
which it is located, by examiners selected or approved by the Board. The
general policy is for the Bank to conduct at least one regular examination
of each state member bank in its district during each calendar year and to
prepare a complete examination report. Banks that exhibit no major unsatisfactory features in operations and financial condition, and that have
been operated prudently, may have a limited examination in one year, with
a brief report, and a full examination in the following year. Banks with
severe problems are examined fully at least once in each calendar year and
more often when necessary. In some states concurrent examinations are
made in cooperation with the state banking authorities; in others, the
examinations are independent. In 1979, 958 of 977 state member banks
were examined.
The Board makes its reports of examination of state member banks
available to the Comptroller and to the Federal Deposit Insurance Corporation (FDIC). Also, upon request, the FDIC provides its reports of examination of insured nonmember state banks to the Board.
In its supervision of state member banks, the Board analyzes reports of
examination of state member banks and coordinates and evaluates the
examination and supervisory functions of the System. Similar oversight is




Supervision and Regulation

281

exercised with respect to bank holding companies, for which the Board has
sole supervisory responsibility.
National banks, all of which are members of the Federal Reserve System, are subject to examination by direction of the Board or of the Federal
Reserve Banks. As a matter of practice, neither examines them because the
law charges the Comptroller of the Currency with that responsibility. The
Comptroller provides reports of examination of national banks to the Board
upon request, and to each Federal Reserve Bank.
The Board passes on applications for admission of state banks to membership in the System, administers the public-disclosure requirements of
the Securities Exchange Act of 1934, as amended, with respect to equity
securities of state member banks within its jurisdiction under the 1934 act,
and regulates certain security credit transactions. Under provisions of the
Federal Reserve Act and other statutes, the Board passes on applications of
member banks for permission to (1) merge banks, (2) establish domestic
and foreign branches, (3) exercise expanded powers to create bank acceptances, (4) establish foreign banking and financing corporations, and (5)
invest in bank premises an amount in excess of 100 percent of the bank's
capital stock.
By Public Law 95-630, approved November 10, 1978, proposed
changes in the control of state member banks and bank holding companies
and loans by insured banks that are secured by 25 percent or more of the
voting stock of any state member bank must be brought to the attention of
the appropriate Reserve Bank; proposed acquisitions may be disapproved
by Board action. Seven changes in ownership of the outstanding voting
stock of state member banks in 1979 were reported to the Federal Reserve Banks as changes in control; 32 changes were reported with respect to bank holding companies. Arrangements continue among the
three federal supervisory agencies for exchange of reports received pursuant to the act and prior legislation. The Reserve Banks send copies of

Total loans to executive officers
Period covered
(condition report dates)
July 1-Sept. 30,1978
Oct. 1-Dec. 31,1978
Jan. l-Mar.31,1979
Apr. 1-June 30,1979
July 1-Sept. 30,1979
Oct. 1-Dec. 31,1979




Number

Amount (dollars)

1,076
1,009
1,007
1,244
1,109
1,001

5,036,667
4,337,671
4,617,356
5,398,006
5,838,257
6,118,045

Range of
interest rates
charged
(percent)
7-15
7-16
7-15
7-16
7-15
8-15

282

Supervision and Regulation

all reports received to the appropriate district office of the FDIC, the
Regional Administrator of National Banks (Comptroller of the Currency), and the state bank supervisors.
By Public Law 90-44, approved July 3, 1967, each member bank of the
Federal Reserve System must include with its reports of condition a list of
all loans to its executive officers since its previous report. Data submitted
by state member banks during 1979 appear in the accompanying table.

Federal Reserve Membership
As of December 31, 1979, member banks accounted for 37 percent of the
number of all commercial banks in the United States and for 57 percent
of all commercial banking offices, and they held approximately 57.9 * percent
of the total deposits in such banks. State member banks accounted for 11
percent of the number of all state commercial banks in the United States
and for 27 percent of the banking offices, and they held approximately
46.6 l percent of total deposits in state commercial banks.
Of the 5,425 banks that were members of the Federal Reserve System at
the end of 1979, there were 4,448 national banks and 977 state banks.
During the year there were net declines of 116 national and 23 state
member banks. The decline in state member banks was offset in part by the
organization of 42 new national banks and by the conversion of 1 nonmember bank to a national bank. The decrease in state member banks reflected
mainly 29 withdrawals from membership and 31 conversions to branches
incident to mergers and absorptions.
At the end of 1979, member banks were operating 23,686 branches,
facilities, and additional offices, 856 more than at the end of 1978.
During the year member banks established 1,051 de novo branches.
Detailed figures on changes in the banking structure during 1979 are
shown in table 18 in the Statistical Tables section of this REPORT.

Bank Mergers
Under section 18(c) of the Federal Deposit Insurance Act, 12 U.S.C.
1828(c), the prior written consent of the Board of Governors must be
obtained before a bank may merge, consolidate, or acquire the assets and
1. This percentage reflects the call report figures of September 30, 1979.




Supervision and Regulation

283

assume the liabilities of another bank if the resulting bank is to be a state
member bank.
In deciding whether to approve an application, the Board is required by
section 18(c) to consider the impact of the proposed transaction on competition, the financial and managerial resources and prospects of the existing and proposed institutions, and the convenience and needs of the community to be served. The Board is precluded from approving "any proposed merger transaction which would result in a monopoly, or which
would be in furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of the United
States." A proposed transaction "whose effect in any section of the country may be substantially to lessen competition, or to tend to create a
monopoly, or which in any other manner would be in restraint of trade"
may be approved only if the Board is able to find that the anticompetitive
effects of the transaction would be clearly outweighed in the public interest
by the probable effect of the transaction in meeting the convenience and
needs of the community to be served.
Before acting on each application the Board must request reports from
the Attorney General, the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation on the competitive factors involved in each
transaction. The Board in turn responds to requests by the Comptroller or
the FDIC for reports on competitive factors involved when the resulting
bank is to be a national bank or an insured nonmember state bank.
During 1979 the Board approved 7 merger applications and submitted 78
reports on competitive factors to the Comptroller of the Currency and 62 to
the FDIC. In addition, the Secretary of the Board approved 2 merger
applications and the Federal Reserve Banks approved 23 merger applications on behalf of the Board pursuant to delegated authority. As required
by section 18(c), a description of each of the 32 applications approved by
the Board, the Secretary, or the Reserve Banks, with other pertinent information, is shown in table 20.
Orders of the Board with respect to all bank merger applications,
whether approved or disapproved, are released immediately to the press
and public. These orders set forth the factors considered, the conclusions
reached, and the vote of each member of the Board present.
Miscellaneous Actions under Delegated Authority
In addition to delegating action on certain applications concerning bank
holding companies and bank mergers, the Board of Governors has autho-




284

Supervision and Regulation

rized the Reserve Banks to approve certain applications of state member
banks to establish domestic branches, to invest in bank premises, and to
grant or deny a waiver of six months' notice by a bank of its intention to
withdraw from membership in the Federal Reserve System.
The Board has authorized the Reserve Banks to furnish to the Comptroller of the Currency and the Federal Deposit Insurance Corporation reports
on competitive factors under section 18(c)(4) of the Federal Deposit Insurance Act, 12 U.S.C. 1838(c)(4).
INTERNATIONAL ACTIVITIES AND APPLICATIONS
In 1979 the Board issued a new Regulation K entitled "International
Banking Operations." The revised regulation governs the establishment of
foreign branches of member banks, the organization and operation of Edge
and agreement corporations, and foreign investments by member banks,
bank holding companies, and Edge and agreement corporations.
The revision of Regulation K resulted in part from section 3 of the
International Banking Act of 1978, which was intended to improve the
competitiveness and efficiency of Edge corporations in providing international banking and financial services. In addition, several provisions of the
regulation had been under review for modification. The Congress declared
in section 3 that Edge corporations are to have powers sufficiently broad to
enable them to compete with foreign banks in the United States and abroad;
to provide all segments of the economy, especially exporters, financing for
international trade; and to foster participation by regional and smaller
banks in international banking and finance.
Important new provisions of the revised regulation permit domestic
branching of Edge corporations; permit those corporations to finance the
production of goods and services for export; liberalize the approval procedures under which foreign investments may be made and foreign branches
established; specify permissible foreign activities; and permit foreign
ownership of Edge corporations.
Foreign Activities of Member Banks
Under provisions of the Federal Reserve Act (section 25 for national banks
and sections 9 and 25 for state member banks) and Regulation K, member
banks may establish branches or subsidiaries in foreign countries and invest in foreign banks, usually subject to prior Board approval. In reviewing
proposed transactions, the Board considers regulatory limitations, the condition of the bank, and the bank's existing foreign operations. In 1979 the




Supervision and Regulation

285

Board approved 65 applications and notifications for the establishment of
branches in foreign countries.
At the end of 1979, member banks had in active operation 779 branches
in foreign countries and overseas areas of the United States: 107 national
banks were operating 660 of these branches, and 32 state member banks
were operating 119 branches. The growth in the number and total assets of
foreign branches is shown in the table below.

Number
Year

Foreign
branches

Total assets (billions of dollars)
Sections
25 and 25(a)
corporations

Foreign
branches1

Sections
25 and 25(a)
corporations

1971
1972
1973
1974

577
627
699
732

85
92
103
117

55.1
72.1
108.8
127.3

5.5
6.1
6.9
10.1

1975
1976
1977
1978
1979

762
731 2
738
761
779

116
117
122
124
132

145.3
174.5
205.0
232.0
290.0 e

9.1
11.1
13.4
14.8
16.3 e

e

Estimated.
1. These data are derived from reports of condition that were filed at the end of the year with the
Comptroller of the Currency and the Federal Reserve System, and they differ in certain respects from other
statistical reports on overseas branch operations. The amounts shown are net of claims on other foreign
branches of the same bank.
2. This decrease from 1975 is due primarily to the conversion of 30 branches in Colombia into
subsidiaries to conform with Colombian banking laws.

International Financial Corporations
Under provisions of sections 25 and 25 (a) of the Federal Reserve Act and
Regulation K, corporations ("Edge Act" or "agreement" corporations)
may be established to engage in international banking or foreign financial
transactions. These corporations are generally of two types: banking corporations that are located in U.S. commercial centers other than the location of their parent banks, and that engage in international banking; and
investment corporations that hold foreign investments for their parent
banks in such financial institutions as commercial banks, finance companies of various kinds, and leasing companies.
Under the provisions of section 25(a) of the Federal Reserve Act, the
Board issued eight final permits during 1979 for corporations to engage in
international or foreign financial operations. The articles of association




286

Supervision and Regulation

were approved and a preliminary permit was issued for the formation of
one other corporation.
Growth in the number of section 25 and 25(a) corporations is given in
the accompanying table.

Capitalization and Activities of Edge Corporations
The International Banking Act of 1978 (IB A) amended section 25(a) of the
Federal Reserve Act dealing with Edge corporations in several respects.
One amendment removed the provision that limited an Edge corporation's
liabilities on account of debentures, bonds, and promissory notes to ten
times the corporation's capital and surplus. Another removed the statutory
minimum 10 percent reserve requirement on the deposits of an Edge corporation. Still another permitted foreign banks for the first time to own and
control Edge corporations. Section 3(h) of the IB A requires the Board, as
part of its ANNUAL REPORT, to assess the effects of these amendments on
the capitalization and activities of Edge corporations, banks, and the banking system.
Among other things, the new Regulation K establishes rules governing
Edge corporations. The rules conform to the elimination of the statutory
minimum reserve requirement. They also establish a new capital requirement for Edge corporations that are engaged in banking activities in the
United States—namely, 7 percent of risk assets.
Because the revised regulation implementing the provisions of the IBA
affecting Edge corporations was in effect for only half the year, it is not
possible to provide a full assessment of their effects on the capitalization
and activities of Edge corporations, banks, or the banking system. It is
noteworthy that during 1979, the Board approved applications by four
foreign banks to establish Edge corporations. These corporations, located
in Miami, Houston, and Los Angeles should add to the international financial services available within the United States in furtherance of the foreign
commerce of the country. The Board also approved in December the
establishment by two Edge corporations of four branches, in Chicago,
Houston, Miami, and New York.

Investment Activity
In the area of foreign investments, the Board has responsibility under
sections 25 and 25(a) of the Federal Reserve Act and section 4(c)(13) of the
Bank Holding Company Act to approve applications and notifications for
foreign investments by bank holding companies, member banks, Edge




Supervision and Regulation

287

corporations, and agreement corporations. In 1979 the Board processed
170 such applications and notifications. The vast majority of proposals for
foreign investments were for additional investments, including those in
investment banks in Spain, Germany, and Argentina; in leasing companies
in France and Canada; and in finance companies in Japan and Venezuela.
New investment proposals included those for commercial bank subsidiaries
in Argentina and Bahrain and those by bank holding companies for foreign
financing subsidiaries to raise funds abroad.

Timely Processing of Applications
As in the domestic area, the System measures its performance in the timely
processing of international applications against a 90-day standard. The
number of international applications processed declined from 287 in 1978
to 235 in 1979. In that year, 93 percent of the applications were processed
within 90 days compared with 86 percent the year before, as the following
tabulation shows.

Q4

Q3

Q2

Ql

Year

Year
Number
1978
1979

Percent

Number

Percent

Number

Percent

Number

Percent

Number

Percent

47
73

89
99

67
64

82
94

75
47

84
85

98
51

89
90

287
235

86
93

A new Federal Reserve program, implemented in 1979, has placed greater
emphasis on the training of bank examiners. With the passage of legislation creating the Federal Financial Institutions Examination Council, the
responsibilities for training assigned to the Federal Reserve System have
been added to this program.
One of the objectives of the program is to train approximately 750
System examiners and other staff members with supervisory and regulatory
responsibilities. A core of training courses, basic through advanced, is
offered; subject matter includes examination procedures as well as instruction in specialized areas such as consumer protection, civil rights, and the
Community Reinvestment Act; trust activities; international banking; electronic data processing; bank fraud; and management and instructor training. Much of the specialized training is offered in interagency courses,




288

Supervision and Regulation

which are developed jointly by the Federal Reserve and other members of
the Examination Council.
During 1979 the Board's banking schools consisted of two sessions each
of the School for Examiners; the School for Assistant Examiners; the
Banking I School, which replaced the School for Assistant Examiners in
the second half of 1979; the basic Consumer Affairs School; the special
Consumer Affairs School, which deals with civil rights, the Community
Reinvestment Act, and annual percentage rates; and the Bank Holding
Company Application School. There was also one session each of the
School for Trust Examiners, the Senior Trust Workshop, the Bank Holding
Company Inspection School, the Financial Analysis School, and the FIRA
(Financial Institutions Regulatory and Interest Rate Control Act of 1978)
Seminar. System staff participated jointly with staff of other members of
the Examination Council in one session each of the Community Reinvestment Act School, the Senior Trust Workshop and the Train the Trainer
Workshop; and two sessions each of the Data Processing School, the
Management Seminar, and Instructor Training School.
System schools continued to offer enrollment to representatives of various state banking departments and several foreign countries. Approximately 650 students attended in 1979.




289

Condition of the Banking System
In the last three years by most traditional measures the banking system
has performed well. The number of bank failures each year from 1977
through 1979 has been below the levels prevailing during the mid1970s; and in 1979 no bank of significant size failed. The number of
so-called problem banks also has been declining during this period; and
by the end of 1979 only about 2 percent of the state member banks that
are supervised by the Federal Reserve were subject to special supervisory attention. Finally, there has been significant improvement during the
last three years in most of the indexes of bank soundness.
The financial condition of the American banking system to a significant extent mirrors the state of the domestic economy and, increasingly,
the world economy. The close relationship between the domestic economy and the banking system was vividly demonstrated during the mid1970s, when the worst economic downturn since the Great Depression
contributed to a sharp rise in bank loan losses, the failure of several
large banks, and an ebbing of public confidence in the banking system.
Since the mid-1970s, the economy has experienced a significant expansion, although at an uneven rate. In this economic environment the condition of the banking system has improved markedly, although inflation
has continued to exert a strain on bank capital ratios. As 1980
approaches, many economic forecasters are calling for a mild recession,
followed by a slow recovery. If this less favorable environment should
evolve, it will likely present bank managers with new challenges as the
year unfolds.
In the last 15 years the largest U.S. banks have greatly expanded their
operations abroad, and many now derive a sizable portion of their total
earnings from international banking. As a result, they have become subject, both directly and indirectly, to foreign economic and political developments that previously had little relevance for U.S. banks. Probably
the most far-reaching international development in the field of banking
has been the role of U.S. banks as major depositories for oil-producing
nations and as major lenders to the less developed countries that import
oil. In this recycling process, U.S. banks are stressing diversification of
risk and are monitoring closely their exposure to loss in individual countries.




290

Condition of the Banking System

The competitive environment in which U.S. banks now operate is
changing rapidly and is having a pervasive effect on the behavior and
performance of banks. In recent years U.S. banks have had to face
steadily rising competition from thrift institutions and foreign banks, and
more recently from money market mutual funds. These competitive
forces have motivated banks to offer a variety of new or improved
financial instruments and services, and have tended to narrow bank profit margins.
INDEXES OE BANK SOUNDNESS
The condition of the banking system is determined by a variety of factors, key among which are asset quality, capital, and earnings.

Asset Quality
In the last several years the quality of bank portfolios has improved
substantially, following the sharp deterioration experienced in the mid1970s. At the end of 1979, the volume of nonperforming assets of the
nation's larger banking organizations was down more than 40 percent
from the level recorded at the end of 1976.1 Stated differently, the ratio
of nonperforming assets to total assets for these large organizations was
about 1 percent at the end of 1979 compared with a little over 2Vi
percent at the end of 1976. Improved asset quality also has been reflected in a steady decline in bank loan charge-offs over the last three
years. Real estate loans and foreclosed properties continued to be the
largest single category of low-quality bank assets at the end of 1979.
As the banking system moves into 1980 there are several areas of
potential vulnerability. One is consumer credit. Consumer installment
debt has been growing at a rapid rate — about 16 percent per year, on
average, beginning in 1976. As a consequence, consumer debt-servicing
burdens have risen significantly, with annual payments relative to disposable income reaching their highest level in many years. During the
last several years delinquencies on consumer installment loans as a
percentage of outstanding consumer loans have remained fairly flat. This
percentage moved up in late 1979, and could rise further in 1980 if the
economy should turn down. In past recessions, however, consumers
1. Nonperforming assets include assets that are not accruing interest, assets that are
accruing interest at rates below that originally contracted, and real estate acquired by the
bank as a result of foreclosure.




Condition of the Banking System

291

have shown substantial resilience and have avoided large-scale defaults
on their debts.
Another area that bears watching is bank lending to less developed
countries (LDCs), especially those that are not oil producers. Many of
these countries already are carrying sizable burdens of debt. In addition,
it now seems likely that a number of the countries that have been running sizable balance of payments deficits will have to run even larger
deficits in 1980 and perhaps beyond. One reason is the recent substantial increases in petroleum prices set by the Organization of Petroleum
Exporting Countries. These price increases will tend to boost the cost of
imports of the non-oil LDCs. Another reason is the likely economic
slowdown in the United States and Europe, which will tend to lower the
value of exports of raw materials and manufactured goods of the LDCs.
These increasing deficits will have to be financed until the LDCs can
adjust their trade positions. During this interval, the debt-servicing capabilities of these nations may deteriorate somewhat and several countries
could be forced to restructure their bank debt.
A third area of concern is that some large banks are known to have
loans outstanding to two large American corporations whose financial
problems have been well publicized. If these problems cannot be solved,
some banks could suffer significant losses; they should, however, be
able to absorb them out of current earnings.
Finally, in the last several years the number of municipalities experiencing financial difficulties has significantly increased and several
have been forced to default on their debt. Because banks are large holders of municipal debt, these developments are troublesome. However,
banks have not suffered a significant loss of principal on municipal debt
since the 1930s. Moreover, any defaults on such debt in the near future
are likely to be temporary and probably would result only in an interruption in the flow of income.

Capital
During the years 1977-79, bank capital ratios have resumed their longterm decline, and by the end of 1979 were about equal to the previous
historic lows established in 1974. By far the sharpest decline in such
ratios in this period has been experienced by banks with total assets in
excess of $5 billion. In contrast, capital ratios have risen for banks with
total assets of less than $100 million, many of which serve the slowergrowing rural areas of the nation.




292

Condition of the Banking System

By spurring the demand for bank credit by businesses, consumers,
and governments, inflation has made the major contribution to this decline in capital ratio. In response to the demand for credit, banks have
increased their assets and loans during the last three years at relatively
rapid annual rates of about 13 and 14 percent respectively, thereby eroding their capital ratios. In an attempt to arrest the decline, banks have
been building up their equity capital from retained earnings at a reasonably healthy annual rate of 8 to 9 percent. However, they have not been
able to use external equity financing because bank stock prices have
been depressed. In fact, at the end of 1979, the stocks of most of the
nation's major banking organizations were selling at only four to six
times earnings, and also were selling below book value.
The key to arresting the decline in bank capital ratios is control of
inflation. If the rate of inflation is reduced, banks need not grow so fast
to provide the economy with adequate financing. Moreover, such a reduction should have a favorable impact on bank stock prices, thereby
increasing the ability of banks to build up capital through equity
financing.

Earnings
During the past three years bank earnings have been strong, outdistancing the growth of total corporate profits. For 1979 alone, earnings for
the banking system appear to have risen 15 to 20 percent, with banks in
all size groups participating. Two factors accounted for the good earnings performance of 1979: the earning assets of banks continued to rise
at a healthy rate; and net interest margins held up well, aided by a rise
in the general level of interest rates, fewer nonaccruing assets, and a
shift in bank portfolios toward higher-yielding assets.2 One offsetting
factor was a significant change in the composition of bank liabilities
from certain low-cost sources of funds, such as savings deposits, to
higher-cost sources, such as money market certificates.
During late 1979 some banks, particularly small banks, began to encounter earnings problems. Banks most affected were those experiencing
(1) a rapid increase in interest expense due to a shift in their liabilities
from savings deposits to money market certificates; and (2) a slow
growth in interest income because a relatively large portion of their
assets, such as bonds and mortgages, have fixed interest rates.
2. The net interest margin for a bank is equal to the difference between the interest
earned and the interest paid by the bank divided by its average total assets.




Condition of the Banking System

293

SUPERVISORY AND REGULATORY IMPROVEMENTS
During 1979 the Federal Reserve continued efforts to improve the effectiveness of the supervisory process and to ensure uniform and equitable
supervisory treatment of all federally regulated depositary financial institutions. In cooperation with the other federal regulatory agencies, the
Federal Reserve developed and refined new programs for the supervision
and regulation of commercial banks, bank holding companies, Edge corporations, and the U.S. offices of foreign banking institutions. Considerable effort was devoted to implementing two pieces of significant banking legislation enacted in the latter part of 1978: the Financial Institutions Regulatory and Interest Rate Control Act and the International
Banking Act. As part of the process, the Federal Reserve reexamined
supervisory policy for foreign bank holding companies and developed a
framework based upon national treatment for the supervision of U.S.
branches and agencies of foreign banks. Reporting requirements for
these institutions were also developed and will be implemented in the
near future. Other major accomplishments included the consolidation of
several foreign regulations into a revised and simplified Regulation K,
as well as a major revision of regulations for the purpose of implementing the act.
The Federal Reserve continued past initiatives and undertook new
steps in 1979 to strengthen its program for supervising bank holding
companies. Progress was made in implementing the Board's expanded
program for subjecting most large bank holding companies (those with
consolidated assets in excess of $300 million) to annual on-site inspections. The bank holding company supervisory process has also been enhanced by (1) the drafting of a comprehensive holding company supervision and inspection manual that sets forth the Federal Reserve's supervisory policies and procedures; (2) the adoption of a system for evaluating and rating holding companies to identify better the institutions requiring special attention; (3) the establishment of a Systemwide surveillance program that provides for semiannual computer-assisted screening
of bank holding company data; and (4) the development of a performance report for bank holding companies that provides a systematic presentation of historical and peer-group financial data.3

3. For further details, see Bank Holding Companies in the section "Bank and Bank
Holding Company Supervision and Regulation by the Federal Reserve System."




294

Condition of the Banking System

To streamline the applications process, additional authority has been
delegated to the Reserve Banks to act on bank holding company applications. In recent months about 90 percent of such applications have been
processed within 90 days.
During 1979 the Board also reviewed its policies regarding the treatment of acquisition debt arising in the formation of small one-bank
holding companies and issued its proposed changes for public comment.
These changes were designed to improve the transferability and to encourage continued local ownership of small banks, while assuring that
acquisition debt remains within prudent limits.
Improvements also were made in 1979 in the supervision of state
member banks. These improvements include (1) new policies and procedures to implement the Community Reinvestment Act; (2) procedures to
ensure that formal administrative actions are utilized in a timely and
consistent fashion with respect to banks that require special supervisory
attention; and (3) further development of the Federal Reserve's bank
surveillance program, which provides quarterly computerized screening
and analysis of data from bank balance sheets and income statements. In
addition, the Federal Reserve continued efforts to enhance supervisory
cooperation among central banks and the banking authorities of the major countries. Finally, an interagency committee on country risk exposure, a group assigned the responsibility of administering uniform examination procedures for country risk, was established early in 1979. Its
purpose was to review foreign lending situations that could have a significant impact on U.S. banks.
During the year the Federal Reserve devoted considerable resources to
assisting in the organization of the Federal Financial Institutions Examination Council and to the work undertaken by that group. Among the
principal supervisory accomplishments of the council in which the Federal Reserve played a significant role were the development of a uniform rating system for identifying financial institutions in need of special supervisory attention, the establishment of procedures for coordinating the examination and supervision of banks and their parent holding
companies, and the design of a uniform report of examination and report
of condition for branches and agencies of foreign banks operating in the
United States. The council has also formulated uniform curricula and
established joint schools for the training of examination personnel from
all the federal regulatory agencies.




295

R<'k'iifatorv imi)r;n\jmew

Project

The Regulatory Improvement Project, initiated in mid-1978, represents an
effort to reduce regulatory burden. It entails a zero-base review of the form
and substance of existing Federal Reserve regulations. It also involves the
application of expanded rulemaking procedures. Under these procedures,
the Board's policy is to encourage public participation in the development of
regulations, analyze the costs and benefits of regulatory proposals and their
alternatives, and inform the public of the reasons for the Board's regulatory
actions. Throughout the project, special consideration is given to the impact
of regulatory burdens on small business.
During 1979 the new rulemaking procedures began to be applied to new
regulations and regulatory amendments, while noticeable progress was
made in reviews of existing rules.
As of the end of the year, reviews had been completed on eight regulations: C (Home Mortgage Disclosure); E (Purchase of Warrants); K (International Banking Operations); L (Management Official Interlocks); M
(Foreign Activities of National Banks); O (Loans to Executive Officers,
Directors, and Principal Shareholders of Member Banks); S (Bank Service Arrangements); and V (Loan Guarantees for Defense Production).
Three (E, M, and S) had been abolished. However, as a result of the
adoption of new legislation, two (E and S) had to be replaced with new
regulations concerning electronic fund transfers and reimbursement to
financial institutions for providing financial records.
During the year, the Board adopted simplified rules for the computation of annual percentage rates under Regulation Z (Truth in Lending).
The simplified rules are of particular value to small financial institutions
and other small businesses without the highly specialized personnel or
equipment sometimes needed to compute annual percentage rates.
In addition, the Board invited public comment on a revision of Regulation J (Collection of Checks and Other Items and Transfers of Funds),
rewritten to make it easier to understand. Comment also was requested
on proposed amendments to Regulation F (Securities of Member State
Banks). The amendments would, among other things, facilitate preparation of financial reports for stockholders, which are especially burdensome to smaller banks.




296

Federal Reserve Banks
DEVELOPMENTS IN PAYMENTS MECHANISM
Payments through automated clearinghouses (ACHs) continued to expand
in 1979 as a result of efforts to bring the program to its full potential for
increasing the efficiency of the nation's payments mechanism. Approximately 146 million items were cleared through ACHs in 1979, an increase
of 40 percent over the previous year. New time schedules were adopted for
items presented to ACHs in order to increase the attractiveness of such
fund transfers to users. Additions to the Direct Deposit of Federal Recurring Payments Program during the year were retirement payments of the
Department of the Army; payments of the Marine Corps to marines on
active duty; and salary payments of the Veterans Administration, the Small
Business Administration, the National Aeronautics and Space Administration-Langley Field, and the Air Force-Newark Station. Subpart C of Regulation J (Collection of Checks and Other Items and Transfer of Funds),
which will govern the use of ACH facilities by financial institutions, was
drafted and published for comment in the Federal Register (volume 44,
1979, page 67995).
Federal Reserve float, a continuing source of concern, moved higher
during the year with increases in both the volume and the dollar value of
checks. Among the actions initiated to control or to reduce float were the
design of an automated system for tracking interterritory check shipments,
and improvements in the System's Interdistrict Transportation System
(ITS) and in the check-processing capabilities of the Federal Reserve
Banks. These actions contributed to a substantial reduction in the high
levels of float experienced in early 1979.
Recently, in an effort to delay payment, some banks and their corporate
customers have made arrangements to write checks on banks that are
distant from the areas where the checks probably will be deposited. On
January 11, 1979, the Board issued a policy statement expressing its concern that such arrangements expose both the bank and the recipient of the
check to a greater risk of loss, and represent unsound banking practices.
The statement, emphasizing the public responsibility of the banking industry not to offer services that are designed to delay settlement, called on




Federal Reserve Banks

297

banks to make a joint effort to eliminate such practices. A broad program
in support of this policy was outlined.
During the year, work progressed on the design of several new payments
system services to be offered by Federal Reserve Banks. These included
settlement services for private-sector clearing facilities such as Bankwire
and CHIPS, and electronic check-presentment facilities to speed settlement
and reduce resource requirements. In addition, design work was begun on
a new Federal Reserve communications system to support payments systems in the 1980's.
* \ A Mi NATION
•

The Board's Division of Federal Reserve Bank Operations examined the
12 Federal Reserve Banks and their 25 branches during 1979, as required
by section 21 of the Federal Reserve Act.
In conjunction with the examination of the Federal Reserve Bank of
New York, the Board's examiners audited accounts and holdings related to
the System Open Market Account and the foreign currency operations
conducted by that Bank in accordance with policies formulated by the
Federal Open Market Committee, and furnished copies of these reports to
the Committee. The procedures followed by the Board's examiners were
surveyed and appraised by a private firm of certified public accountants,
pursuant to the policy of having such reviews made annually.
i- ^ N i N G S AND EXPENSES
The accompanying table summarizes the earnings, expenses, and distribution of net earnings of the Federal Reserve Banks for 1979 and 1978.
Current earnings of $10,310 million in 1979 were 21.9 percent higher
than in 1978. The principal changes were increases of $1,705 million on
U.S. government obligations, $75 million on loans, and $67 million on
foreign currencies.
Current expenses were $694 million, or 6.3 percent more than in 1978.
Assessments for expenditures of the Board of Governors amounted to $51
million.
The profit and loss account showed a net deduction of $151 million,
primarily because of net losses of $153.5 million on sales of U.S. government securities and $3.7 million on foreign exchange operations.
Statutory dividends to member banks totaled $67 million, $4 million




298

Federal Reserve Banks

more than in 1978. This rise reflected an increase in the capital and surplus
of member banks and a consequent increase in the paid-in capital stock of
the Federal Reserve Banks.
Payments to the Treasury as interest on Federal Reserve notes totaled
$9,279 million for the year, compared with $7,006 million in 1978. This
amount consists of all net earnings after dividends and the amount necessary to bring surplus to the level of paid-in capital.
A detailed statement of the earnings and expenses of each Federal
Reserve Bank during 1979 is shown in table 6 and a condensed historical statement in table 7, in the Statistical Tables section of this REPORT.
A detailed statement of assessments and expenditures of the Board of
Governors appears in 4'Financial Statements," pages 301-05.
Earnings, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1979 and 1978
Thousands of dollars
Item
Current earnings
Current expenses
Current net earnings
Net deduction from current net earnings
Assessments for expenditures of Board of Governors.
Net earnings before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal Reserve notes)
Transferred to surplus

1979

1978

10,310,148
693,559
9,616,589
151,148
50,530
9,414,911
67,194

8,455,390
652,617
7,802,773
633,123
53,322
7,116,328
63,280

9,278,576
69,141

7,005,780
47,268

FEDERAL RESERVE BANK PREMISES
During 1979 the Board of Governors authorized construction of a new
building for the Baltimore Branch. With approval of the Board, the Jacksonville Branch acquired property for a future building site; properties
adjacent to the Federal Reserve Bank of Kansas City and to the Little Rock
Branch were acquired for future expansion; and the Federal Reserve Bank
of Boston sold its vacated building and property.
Table 8 in the Statistical Tables section of this REPORT shows the cost
and book value of bank premises owned and occupied by the Federal
Reserve Banks, and of real estate acquired for banking-house purposes.




Federal Reserve Banks

299

HOLDINGS OF LOANS AND SECURITIES
The accompanying table shows holdings, earnings, and average interest
rates on loans and securities of the Federal Reserve Banks during the
past three years.
Average daily holdings of loans and securities during 1979 amounted
to $119,134 million, an increase of $3,843 million over 1978. Holdings
of U.S. government securities increased $3,354 million; loans, $462
million; and acceptances, $27 million.
The average rates of interest on holdings increased from 7.33 to 8.57
percent on U.S. government securities, from 7.58 to 10.54 percent on
loans, and from 7.85 to 10.86 percent on acceptances.
Loans and Securities of Federal Reserve Banks, 1977-79
Item and year

Total

U.S. government
securities l

Loans

Acceptances

Millions of dollars
Average daily holdings
1977
1978
1979
Earnings
1977
1978
1979

2

104,704
115,291
119,134

104,002
114,210
117,564

465
876
1,338

237
205
232

6,859
8,449
10,237

6,820
8,367
10,071

26
66
141

13
16
25

5.68
7.58
10.54

5.27
7.85
10.86

Percent
Average rate of interest
1977
1978
1979

6.55
7.33
8.59

6.56
7.33
8.57

1. Includes federal agency obligations.
2. Based on holdings at opening of business.

LOAN GUARANTEES FOR DEFENSE PRODUCTION
Under the Defense Production Act of 1950, the Departments of the Army,
Navy, and Air Force; the Defense Logistics Agency of the Department of
Defense; the Departments of Commerce, Interior, Agriculture, and Energy; the General Services Administration; the National Aeronautics and
Space Administration; and the Nuclear Regulatory Commission are autho-




300

Federal Reserve Banks

rized to guarantee loans for defense production that are made by commercial banks and other private financing institutions. The Federal Reserve
Banks act as fiscal agents of the guaranteeing agencies under the Board's
Regulation V.
As of December 31, 1979, only two guaranteed loans, totaling
$957,333, were outstanding. Of that amount, $4,465 was guaranteed.
On February 12, 1979, the Board of Governors revised the interest rate
and guarantee structures that applied to loan guarantees for defense production. The maximum rate was changed from a fixed one to the rate that an
institution currently charges its most creditworthy business customers for
loans of comparable maturity, unless the governmental guarantor decides
that a particular loan that bears a higher interest rate is necessary for the
purpose of the Defense Production Act of 1950.
VOLUME AND COST OF OPERATIONS
Table 9 in the Statistical Tables section of this REPORT shows the volume
of operations in the principal departments of the Federal Reserve Banks for
1976-79, and table 10 shows the cost of the larger operations of the
Reserve Banks.
The number of pieces of paper money received and counted totaled 8.8
billion, an increase of 3.5 percent over 1978, and amounted to $93.1
billion. The number of checks handled rose by 6.4 percent to 15.9 billion.
Issues, redemptions, and exchanges of U.S. government securities
amounted to $8,279 billion, an increase of 3 percent. Transfers of funds
through the Federal Reserve Banks increased by 22 percent to 35 million
transfers, or $64 trillion in value.




301

Board of Governors
FINANCIAL STATEMENTS
The accounts of the Board for the years 1979 and 1978 were examined by
Arthur Andersen & Co., independent public accountants.
AUDITORS' REPORT

Board of Governors of the
Federal Reserve System
Washington, D.C.
We have examined the balance sheets of the Board of Governors of the Federal
Reserve System as of December 31, 1979 and 1978, and the related statements of
assessments and expenses 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, 1979 and 1978, 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 20, 1980.




302

Financial Statements

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
December 31
ASSETS

1979

1978

$ 1,771,762
586,417

$ 4,797,310
360,095

OPERATING FUND:

Cash
Miscellaneous receivables and advances
Stockroom and cafeteria inventories, at lower of cost
(first-in, first-out) or market
Total operating fund
PROPERTY FUND, at cost (Notes 1 and 4):
Land and improvements
Buildings
Furniture and equipment
Computer equipment
Total property fund

126,984

155,543

2,485,163

5,312,948

1,297,829
60,162,893
7,319,583
3,616,332

1,299,884
59,223,136
6,753,431
3,476,832

72,396,637

70,753,283

$74,881,800

$76,066,231

$ 1,845,996
1,825,760

$ 2,872,392
1,562,912

3,671,756

4,435,304

877,644
(2,064,237)

2,189,338
(1,311,694)

LIABILITIES AND FUND BALANCES
OPERATING FUND:

Liabilities—
Accounts payable
Accrued payroll and related taxes
Commitments and contingencies (Notes 1, 2 and 4)
Fund balance (Note 1)—
Balance, beginning of year
Expenses in excess of assessments
Balance, end of year
Total operating fund

(1,186,593)

877,644

2,485,163

5,312,948

70,753,283
1,842,978
(199,624)

63,772,559
8,688,619
(1,707,895)

PROPERTY FUND (Note 1):

Fund balance—
Balance, beginning of year
Additions—at cost
Disposals—at cost
Total property fund

72,396,637

70,753,283

$74,881,800

$76,066,231

The accompanying notes are an integral part of these balance sheets.




Financial Statements

303

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF ASSESSMENTS AND EXPENSES
Year ended December 31
1979

1978

ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS (Note 1):

For Board expenses and property additions
For expenditures made on behalf of the Federal Reserve
Banks for printing, issuance and redemption of Federal
Reserve notes
Total assessments

$ 50,529,700

$ 53,321,700

71,600,273

60,454,967

122,129,973

113,776,667

33,572,060
8,038,006
1,300,277
509,283
649,130
1,420,993
1,199,560
658,307
619,523
487,532
925,294
351,132
507,779
145,794
419,377

31,212,936
6,313,145
1,174,888
564,501
492,689
1,117,575
1,687,813
683,049
415,660
405,986
877,116
305,653
424,402
130,318
227,395
46,033,126

EXPENSES (Note, 1):

Board expenses—
Salaries
Retirement and insurance contributions (Note 3)
Travel expenses
Professional fees
Contractual services
Printing and binding, net
Equipment, office space and other rentals (Note 2)
Telephone and telegraph
Postage
Stationery, office and other supplies
Heat, light and power
Cafeteria operations, net
Repairs and maintenance
Books and subscriptions
Miscellaneous

50,804,047

Board property additions, net of recoveries on disposals of
$53,088 in 1979 and $88,351 in 1978 (Note 1)

Expenditures for printing, issuance and redemption of Federal
Reserve notes on behalf of the Federal Reserve Banks (Note
1)
Total expenses
EXPENSES IN EXCESS OF ASSESSMENTS

1,789,890

8,600,268

52,593,937

54,633,394

71,600,273

60,454,967

124,194,210

115,088,361

$ (2,064,237)

$ (1,311,694)

The accompanying notes are an integral part of these statements.




304

Financial Statements

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended December 31
1979

1978

SOURCES OF FUNDS:

Assessments levied for Board expenses and property
additions
Assessments levied for expenditures made on behalf of the
Federal Reserve Banks
Recoveries from disposals of property

$ 50,529,700

$ 53,321,700

71,600,273
53,088

60,454,967
88,351

122,183,061

113,865,018

Board expenses

50,804,047

46,033,126

Expenditures for printing, issuance and redemption of Federal
Reserve notes on behalf of the Federal Reserve Banks

71,600,273

60,454,967

470
939,757
762,751
140,000

88,970
6,511,319
1,953,620
134,710

1,842,978

8,688,619

Total sources
APPLICATIONS OF FUNDS:

Additions to property—
Land and improvements
Buildings
Furniture and equipment
Computer
Decrease (increase) in liabilities

763,548

(711,222)

Increase (decrease) in miscellaneous receivables, advances and
inventories

197,763

Total applications
DECREASE IN CASH
CASHBALANCE, beginning of year
CASH BALANCE, end of year

113,964,893

(3,025,548)
4,797,310
$

1,771,762

The accompanying notes are an integral part of these statements.




(500,597)

125,208,609

(99,875)
4,897,185
$

4,797,310

Financial Statements

305

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1979 AND 1978
(1) SIGNIFICANT ACCOUNTING POLICIES

In preparing its financial statements, the Board has applied accounting principles which, in its opinion, best reflect its financial position and results of operations. These accounting principles include
certain principles which are generally accepted for organizations in the private sector and also certain
principles which are generally accepted for governmental units. A summary of significant accounting
policies is shown below.
Accounting for Assessments, Board Expenses and Property Additions—Assessments made by the
Board on the Federal Reserve Banks for Board expenses and additions to property are calculated based
upon expected cash needs and are accrued when assessed. Board expenses and property additions are
recorded on the accrual basis of accounting.
Accounting for Assessments and Expenditures Made on Behalf of the Federal Reserve Banks—
Assessments and expenditures made on behalf of the Federal Reserve Banks for the printing, issuance
and redemption of Federal Reserve notes are recorded on the cash basis. This treatment produces
results which are not materially different from those which would have been produced using the accrual
basis of accounting.
Accounting for Property—The Board does not charge depreciation as an operating expense. Property
additions are charged to expense in the Operating Fund in the year of acquisition; recoveries on the
disposal of property are recorded as a reduction of expense in the Operating Fund in the year of
disposal. When property is acquired or sold, the property accounts in the Property Fund are increased
or reduced at cost, with a corresponding increase or decrease in the Property Fund balance.
Accounting for Employee Annual Leave—The Board does not accrue for salary expense related to
employee annual leave that has been earned and would be paid if not taken prior to termination of
employment. As of December 31, 1979, vested employee annual leave is approximately $2,043,000.
(2) LEASES

The Board leases office and computer equipment and office and storage space under leases which
may generally be terminated within one year. At December 31, 1979, fixed future rental commitments
are $641,500 for 1980.
(3) RETIREMENT PLANS

There are two major retirement programs for employees of the Board. Approximately 87 percent of
the employees are covered by the Federal Reserve Board Plan. All new members of the staff who do
not come directly from a position in the government are covered by this Plan. The second Plan, the
Civil Service Retirement Plan, covers all new employees who come directly from government service.
Employee contributions are the same percentage of salary under both Plans, and benefits are similar,
being based upon the Civil Service Plan.
Under the Civil Service Plan, Board contributions match employee payroll deductions. Under the
Federal Reserve Board Plan, the Board funds currently all normal costs and all past service costs, as
actuarially determined.
Additionally, employees of the Board participate in the Federal Reserve System's Thrift Plan. Under
this Plan, the Board adds a fixed percentage to allowable employee savings.
Board contributions to all retirement plans totaled approximately $7,404,000 in 1979 and $5,691,000
in 1978.
(4) CONTINGENT LIABILITIES

The Board has been named as a defendant in litigation involving challenges to, or appeals from, actions
or proposed actions of the Board pursuant to statutory requirement or authorization. Such lawsuits generally
seek injunctive or declaratory relief against the Board rather than monetary awards. It is the opinion of
Board counsel that lawsuits involving monetary awards do not represent a material liability to the Board.
The Board does not maintain insurance against loss of its buildings and furniture and equipment from
fire or other casualties. Coverage for other customarily insured risks, such as workers' compensation
insurance, builders' risk and comprehensive general liability insurance, is carried by the Board.




Statistical 'fabler




308

Tables

1. Detailed Statement of Condition f All Federal Reserve
Banks Combined, December 3 1 , 1979
Thousands of dollars

ASSETS
Gold certificates on hand
Gold certificates due from U.S. Treasury

1,278
11,110,266

11,111,544
1,800,000
411,841

Total gold certificate account
Special drawing rights certificate account
Coin.
Loans to member banks, by type of security
U.S. government and agency obligations
Other eligible paper
Other paper, sec. 10(b)

397,276
461,463
594,016

1,452,755

Loans to others
Total loans
Acceptances held under repurchase
agreement
:
Federal agency obligations
Bought outright
Held under repurchase agreement
U.S. government securities
Bought outright
Bills
Notes
Bonds
Total bought outright
Held under repurchase agreement

1,452,755
703,548
8,215,577
493,905
45,243,530
56,494,487
14,552,645
116,290,662
1,167,670

Total U.S. government securities

117,458,332

Total loans and securities

128,324,117

Cash items in process of collection
Transit items
Exchanges for clearing house
Other cash items

12,333,670
330,542
3,030,430

Total cash items in process of collection
Bank premises
Land
Buildings (including vaults)
Building machinery and equipment
Construction account

255,242
116,117
110,660

Total bank premises
Less depreciation allowance

482,019
147,665

Bank premises, net.
Other assets
Furniture and equipment . . . .
Less depreciation

Total furniture and equipment, net
Denominated in foreign currencies'
Interest accrued
Premium on securities
Real estate acquired for banking-house purposes
Suspense account
Overdrafts
Prepaid expenses
All other

15,694,642
74,927

334,354

409,281
114,399
29,284
85,115
2,513,897
1,617,273
93,127

27,393
646,602
86,451
45,234

78,426

Total other assets

5,193,518

TOTAL ASSETS

162,944,943




Tables

309

LIABILITIES
Federal Reserve notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
Total Federal Reserve notes, net
Deposits
Reserve accounts
Member banks
Edge Act corporations
U.S. agencies and branches of foreign banks
Total
U.S. Treasury—General account
Foreign
Other deposits
Nonmember bank—Clearing accounts
Officers' and certified checks
International organizations
Secretary of Treasury special account
Government-sponsored agency accounts
Allother2
Total other deposits

125.301.011
II .946.435
113,354,576
29,520,878
265,189
6,689
29,792,756
4,075,336
428,516
3.112
23.045
384.211
30.161
52.179
919.709
1,412,417

Total deposits
Deferred availability cash items

35,709,025
8,932,139

Other liabilities
Exchange-translation account
Unearned discount
Discount on securities
Sundry items payable
Suspense account
All other

162.777
752
1.990.402
22.529
464,665
17.256

Total other liabilities

2,658,381

TOTAL LIABILITIES

160,654,121
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts3
TOTAL LIABILITIES AND CAPITAL ACCOUNTS

1,145,411
1,145,411
162,944,943

1. Includes $30.9 million in U.S. government securities held under repurchase agreement against receipt of
foreign currencies and $2,106.8 million foreign currencies warehoused for the U.S. Treasury.
2. In closing out the other capital accounts at year-end, the Reserve Bank earnings that are payable to the
Treasury for December are included in this account pending payment.
3. During the year, this item includes the net earnings, expenses, profit and loss items, and accrued dividends.
which are closed out on Dec. 31; see Table 7 in the Statistical Tables section of this REPORT.
NOTE. Amounts in boldface type indicate items in the Board's weekly statement of condition of the Federal
Reserve Banks.




2. Statement of Condition of Each Federal Reserve Bank, December 31, 1979 and 1978

©

Millions of dollars
Total

Item

Boston

Philadelphia

New York

1979

1978

1979

1978

11,112
1,800
403

11,671
1,300
274

992
93
25

760
67
17

428
1,026

717
455

31
6

30
0

Acceptances
Bought outright
Held under repurchase agreement

0
704

0
587

Federal agency obligations
Bought outright
Held under repurchase agreement

8,216
493

7,896
133

397
0

U.S. government 1
securities
Bought outright
Held under repurchase agreement

116,291
1,167

109,478
1,084

Total loans and securities

128,325

TUcImond

Cleveland

H

1979

1978

1979

1978

1979

1978

1979

1978

2,841
459
21

3,206
330
21

924
91
21

598
69
15

646
149
42

921
112
33

1,293
161
45

974
116
23

54
457

80
231

16
0

68
10

55
0

31
0

61
104

24
24

0
704

0
587

367
0

2,025
493

1,921
133

393
0

395
0

660
0

657
0

673
0

647
0

5,625
0

5,095
0

28,664
1,167

26,632
1,084

5,560
0

5,483
0

9,343
0

9,111
0

9,524
0

8,965
0

120,350

6,059

5,492

33,564

30,668

5,969

5,956

10,058

9,799

10,362

9,660

15,694
408

15,084
394

457
103

566
106

2,090
14

1,360
10

440
54

631
55

662
23

808
23

2,822
83

2,432
80

2,483
2,722

1,606
2,543

77
164

50
104

646
575

416
624

102
160

69
168

211
160

136
162

132
202

87
183

-871

-525

+1,266

+ 854

-739

-637

-628

-438

-362

-262

7,099

6,637

41,476

37,489

7,022

6,924

11,323

11,556

14,738

13,293

ASSETS
Gold certificate account
Special drawing rights certificate account...
Loans
Secured by U.S. government and agency
obligations
Other

Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
All other
Interdistrict Settlement Account
TOTAL ASSETS




162,947

153,222

LIABILITIES

Total deposits
Deferred-availability cash items
Other liabilities and accrued dividends
TOTAL LIABILITIES

113,355

103,325

5,767

5,308

29,935

26,335

5,457

5,198

9,027

8,551

10,304

9,249

29,792
4,075
429
1,412

31,223
4,196
368
1.256

661
258
9
42

666
222
6
23

7,321
1,252
207
719

6,884
1,033
217
815

825
249
12
45

1,081
208
9
21

1,101
358
26
73

1,798
388
17
36

1,308
316
16
74

1,781
248
11
.53

35,708

Federal Reserve notes
Deposits
Reserve accounts3
U.S. Treasury—General account
Foreign—Official accounts
All other

37,043

970

917

9,499

8,949

1,131

1,319

1,558

2,239

1,714

2,093

8,927
2,667

8,579
2.119

152
144

270
76

711
751

920
725

239
105

234
85

376
172

446
136

2,431
173

1,680
157

160,657

151,066

7.033

6,571

40.896

36,929

6,932

6,836

11,133

11,372

r4,622

13,179

1,145
1,145
0

1,078
1,078
0

33
33
0

33
33
0

290
290
0

280
280
0

45
45
0

44
44
0

95
95
0

92
92
0

58
58
0

57
57
0

162,947

153,222

7,099

6,637

41.476

37,489

7,022

6,924

11,323

11,556

14,738

13,293

125,301

112,836

6.405

6,068

32,636

28,269

6,142

6,165

9,615

9,077

11,022

9,925

11,946

9,511

638

760

2.701

1.934

685

967

588

526

718

676

5.308

29.935

26.335

5,457

5,198

9,027

8,551

10,304

9,249

CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
TOTAL LIABILITIES AND CAPITAL ACCOUNTS
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes
Issued to Federal Reserve Bank by Federal
Reserve Agent and outstanding
Less held by issuing Bank, and forwarded for
redemption
Federal Reserve notes, net4

113.355

103.325

5.767

Collateral held by Federal Reserve Agent for notes
issued to Bank
Gold certificate account
Special drawing rights certificate account
Eligible paper
U.S. government and agency securities

11,112
1,800
894
111,495

11,671
1,300
907
98,958

992
93
31
5.289

760
67
30
5.2115

2.841
459
318
29.018

3,206
330
175
24,558

924
91
14
5,113

598
69
71
5,427

646
149
54
8,766

921
112
31
8,013

1,293
161
131
9,437

974
116
44
8,791

125,301

112,836

6,405

6,068

32.636

28,269

6,142

6,165

9,615

9,077

11,022

9,925

TOTAL COLLATERAL
For notes see end of table.




c
r

2. Statement of Condition of Hach Federal Reserve Bank, December 31. 1979 and 1978—Continued
to

Millions of dollars
Item

Chicago

Atlanta
1979

1978

1979

St. Louis

1978

1979

Minneapolis

1978

1979

1978

Kansas City
1979

1978

Dallas
1979

San Francisco
1978

1979

— s
*
1978 2CD

ASSETS
Gold certificate account
Special drawing rights certificate account
Coin

525
64
39

518
51
32

1,591
300
31

1,763
215

474
79
33

466
55
22

232
32
17

Loans
Secured by U.S. government and
agency obligations
Other

11
111

104
50

73
78

59

14
47

32
30

21
10

Federal agency obligations
Bought outright
Held under repurchase agreement

340
0

357
0

1,304
0

1,259
0

349
0

322
0

183
0

U.S. government securities
Bought outright'
Held under repurchase agreement

4,819
0

4,952
0

18,454
0

17,460
0

4,948
0

4.470
0

Total loans and securities

5,281

5,463

19,909

18,786

5,358

Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2 . . .
All other

1,563
31

1,879
22

2,114
16

1,630
16

186
151

120
190

375
395

Interdistrict Settlement Account

-446

-740

7,394

7,535

231
28

473
75
49

425
48
38

451
86
29

509
57
17

670

1,300

211

152

51

31

28
22

20
15

27
107

46
47

37
84

215
38

190
0

363
0

324
0

448
0

410
0

1,081
0

1,047
0

2,585
0

2.627
0

5,134
0

4,486
0

6,336
0

5,683
0

15,299
0

14,5146
0

4,854

2,799

2,827

5,547

4,845

6,918

6,186

16,501

15,814

690
13

583
13

994
28

802
29

1,511
20

1,292
19

1,519
12

1,066
12

832
11

2,035
9

246
337

77
95

50
105

79
80

48
56

104
135

68
83

144
137

91
126

350
468

225
405

-769

+ 184

-346

+ 68

-765

-434

+ 366

+ 385

+ 329

+ 439

+ 2,965

+ 1,106

23,962

23,191

6,473

6.216

3,496

3,598

8,280

7,203

9,625

8,503

22,059

21,077

14

Acceptances
Bought outright
Held under repurchase agreement

TOTAL ASSETS




LIABILITIES
Federal Reserve notes
Deposits
Reserve accounts3
U.S. Treasury—General account
Foreign
All other
Total deposits
Deferred-availability cash items
Other liabilities and accrued dividends .
TOTAL LIABILITIES

3,550

3,682

18,505

17,190

4,748

4,540

2,151
230
23
33

2,099
229
15
57

3,689
284
45
150

4,091
428
31
107

840
225
9
40

888
246
6
20

2,437

2,400

4,168

4,657

1,114

1,135
98

1,184
107

590
363

758
260

457
84

7,220

7,373

23,626

22,865

87
87
0

81
81
0

168
168
0

7,394

7,535

5,242

4,736

1,692

1,054

3,550

3,682

525
64
9
4,644
5,242

1,909

1,854

5,000

4,321

5,959

4,964

13,194

12,133

675
175
10
22

866
183
6
8

1,459
306
13
42

1,485
255
9
18

2,471
85
17
51

2,481
162
12
34

7,291
337
42
121

7,103
594
29
64

1,160

882

1,063

1,820

1,767

2,624

2,689

7,791

7.790

380
70

572
61

560
53

1,264
98

945
78

798
110

643
81

202
508

559
291

6,403

6J50

3,424

3,530

8,182

7,111

9,491

8,377

21,695

20,773

163
163
0

35
35
0

33
33
0

36
36
0

34
34
0

49
49
0

46
46
0

67
67
0

63
63
0

182
182
0

152
152
0

23,962

23,191

6,473

6.216

3,496

3,598

8,280

7,203

9,625

8,503

22,059

21,077

19,535

17,722

5,289

4.891

2,530

2,313

5,803

4,780

6,551

5,683

14,531

13,207

1,030

532

541

351

621

459

803

459

592

719

18,505

17,190

4,748

4.540

1,909

1,854

5,000

4,321

5,959

4,964

13,194

12,133

518
51
128
4,039

1,591
300
89
17,555

1,763
215
59
15,685

474
79
51
4,685

466
55
46
4.324

232
32
24
2,242

231
28
8
2,046

473
75
42
5,213

425
48
26
4,281

451
86
94
5,920

509
57
75
5,042

670
211
37
13,613

1,300
152
214
11,541

4,736

19,535

17,722

5,289

4,891

2,530

2,313

5,803

4,780

6,551

5,683

14,531

13,207

CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
TOTAL LIABILITIES AND
CAPITAL ACCOUNTS...
FEDERAL RESERVE NOTE
STATEMENT
Federal Reserve notes
Issued to Federal Reserve Bank by
Federal Reserve Agent and
outstanding
Less held by issuing Bank, and
forwarded for redemption
Federal Reserve notes, net4
Collateral held by Federal Reserve Agent
for notes issued to Bank
Gold certificate account
Special drawing rights certificate account
Eligible paper
U.S. government and agency securities
TOTAL COLLATERAL .

1. Includes securities loaned—fully guaranteed by U.S. government securities pledged with
Federal Reserve Banks—and excludes any securities sold and scheduled to be bought back
under matched sale-purchase transactions.
2. Beginning Dec. 29, 1978, such assets are revalued monthly at market exchange rates.
3. Includes reserves of member banks, Edge Act corporations, and U.S. agencies and
branches of foreign banks.




1,337

1,074

flL &

4. Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve Banks other
than the issuing Bank.
5. Includes securities borrowed from other Federal Reserve Banks.
6. Includes securities loaned to other Federal Reserve Banks.

314
3

Tables

Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 3 ! , 1977-7 c )
Millions of dollars

Description of issue
U.S. governmentt s
securities—
Total
Held outright '
Treasury bills—Total
Within 3 months
3-6 months
After 6 months
Treasury notes—Total
Dec. 31, 1977 — P . . . .
Jan. 31, 1978 — J . . . .
Feb. 15, 1978 —A . . .
Feb. 28, 1978 — G . . .
Mar. 31, 1978 — K . . .
Apr. 30, 1978
May 15, 1978

F ....
May 31, 1978 —M....
June 30, 1978 — N . ...
July 31, 1978
Aug. 15, 1978 —c.
Aug. 31, 1978
Sept. 30, 1978
Oct. 31, 1978
Nov. 15, 1978
Nov. 30, 1978
Dec. 31, 1978
Jan. 31, 1979
Feb. 15, 1979
Feb. 28, 1979
Mar. 31, 1979
Apr. 30, 1979
May 15, 1979
May 31, 1979
June 30, 1979
July 31, 1979
Aug. 15, 1979
Aug. 31, 1979
Sept. 30, 1979
Oct. 31, 1979
Nov. 15, 1979
Nov. 30, 1979
Dec. 31, 1979
Jan. 31, 1980
Feb. 15, 1980
Feb. 29, 1980
Mar. 31, 1980
Apr. 30, 1980
May 15, 1980
May 31, 1980
June 30, 1980
July 31, 1980
Aug. 15, 1980
Aug. 31, 1980
Sept. 30, 1980
Oct. 31,
Nov. 15,
Nov. 30,
Dec. 31,

1980
1980
1980
1980

Coupon
(per cent)

December 31
1979

102,819

6,896

7,743

42,159
20,661
14,911
6,586
54,855

3.085
2.432
-4,205
4.859
1,639

403
1,512
399
809
457
5,273
177
322
859
714
2,435
688
461
153
725
354
700
307
33
538
383
351
1,074
397
218
698

244
643
151
1,731
368
640
159
550
239
157
291
159
669
880
440
230
333
455
890
250
366
475
137
568
365
1,461
334
724
437
5,272
177
294
858
699
2,435
657
416
153
686
309
693
250
33
0
0
351
1,007
0
203
0

41.560
20,106
15,690
5.765
50,509
328
272
2.650
53
312
391
953
1.539
175
771
259
633
2.571
173
415
192
2.468
234
177
446
88
1.724
308
570
118
538
209
119
265
111
630
838
210
222
248
248
890
228
362
261
107
0
0
1.452
0
167
0
5.267
0
288
0
0
2.427
489
0
141
0
0
658
0
33
0
0
349
914
0
55
0

598
555
-779
821
4.346
-328
-272
-2,650
-53
-312
-391
-953
-1.539
-175
-771
-259
-633
-2.571
-173
-415
-192
-2,468
234
67
197
63
7
60
70
41
12
30
38
26
48
39
42
230
8
85
207
0
22
4
214
30
568
365
9
334
557
437
5
177
6
858
699
8
168
416
12
686
309
35
250
0
0
0
2
93
0
148
0

63/4
6'/2
7'/8
77/8
71/8
67/8
67/8
83/4
75/8

6'/8
6'/4
6'/4
67/8
65/8
8'/2
65A
VA

73/4

c

Feb. 28, 1981 - Q
Mar. 31, 1981 — H

R



1978

110,562

7'/4
6V8
6'/4

R .....
—S
—A
J
—T
—F
U
—V . .
—B
K
C
—W
—G
X
—K
—G

w

1979

45,244
23,093
10,706
11,445
56,494

6%
6!/4
5%
6
53/4
8'/8
5'/4
57/8
7
5%
6
57/8
77/8
6'/8

Jan. 31, 1981 —p
Feb. 15, 1981 —A

1977

117,458

E .
-Q
—R .
—S .
—B .
—T .
—H.
U.
— H .....
—M
—N
—P
—D
-Q

—C
—N
—A
—P
—D
Q
—R
—B
H
—S
—E
T
—U
—J
—V

1978

Increase or decrease ( - )

5

6 /8
6'/4

7
7'/8
V/2
V/a
V/2
6'/2
7%
7'/2
73/4
67/8

8

75/8
8'/4
8'/2
9
6-V4
83/8
67/8
85/8
8%
71/8
9'/4
57/8
97/8
93/4
7
73/8
93/4
67/8
95/8

-244
-643
-151
-1.731
-368
-640
-159
-550
-239
-157
-291
-159
-669
-880
-440
-230
-333
-455
-890
-250
-366
-475
-137
-568
38
51
65
85
20
1
0
28
1
15
0
31
45
0
39
45
7
57
0
538
383
0
67
397
15
698

Tables

315

Jmnnued

Description of issue
Treasury notes—Cont.
Apr. 30, 1981 —S .
May 15, 1981
—D . .
M..
May 31, 1981
—T . .
June 30, 1981
—J...
U ..
July 3 1 , 1981
—V . .
Aug. 15, 1981 — F . .
N..

Aug. 31,1981 — W . .
Sept. 30, 1981 — K .
.
X..
Oct. 31, 1981 — Y . .
Nov. 15, 1981 — B .
.
G..
Nov. 30, 1981 — Z .
.
Dec. 31, 1981 — L .
.
AB.
Feb. 15, 1982 — D .
.
Mar. 31, 1982 — G .
.
May 15, 1982 — A .
.
June 30, 1982
Aug. 15, 1982
Sept. 30, 1982
Nov. 15, 1982

K..
—H . .
—B . .
M..
—J...
—C . .
F ..

Dec. 31, 1982
Feb. 15, 1983
Mar. 31, 1983
May 15, 1983

—L .
.
—A .
.
—D .
.
—C .
.
G.
.

June 30, 1983
Sept. 30, 1983
Nov. 15, 1983
Dec. 31, 1983
Feb. 15, 1984
May 15, 1984
Aug. 15, 1984
Feb. 15, 1985
May 15, 1985
Aug. 15, 1985
May 15, 1986
Aug. 15, 1986
Feb. 15, 1987
Nov. 15, 1987
May 15, 1988
Nov. 15, 1988
May 15, 1989
Nov. 15, 1989

—E
—F
—B
—H
—A
—C
—B
—A
—C
—B
—A
—B
—B
—A
—A
—B
—A
—B

..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..

Treasury bonds—Total...
1975-85—May
1978-83—June
1980—Feb
Nov
1981—Aug
1982—Feb
1984—Aug
1985—May
1986—Nov
1987-92—Aug
1988-93—Feb
Aug
1989-94—May
1990—Feb
May
1992—Aug
1993—Feb
Feb
Aug
Nov
1993-98—May




Coupon
(per cent)

93/4
VA
V/2
9'/8
93/8
75/8

8%
95/8
63/4
10'/8
125/8
7-y4

7
12 !rt

7'/4
H 3 /8

6to

V/s
8
7

9'/4
8'/4

8to

9
8%
77/8

7 to
93/8

8
9'/4
7%
H 5 /8

8%
93/4

7
lO'/z
7'/4
9'/4
7>/4

8
103/8
8«/4
77/8

8
9
7V8
8'/4
83/4
9'/4
103/4
4'/4
3'/4
4
3'/2
7
63/8
63/8
3'/4

6to
4'/4
4

V/2
4to
3'/2
8'/4
7'/4
63/4
7%
85/8
85/8

7

Increase or decrease ( - )

December 31
1979

159
185
1,041
313
80
306
311
343
1,301
563
131
405
527
1,600
116
594
167
571
59
245
1,447
53
1,018
115
1,162
1,068
64
770
227
459
2,138
9
95
837
408
284

101
156
3,913
69
385
1,448
38
1,624
1,137
1,987
1,657
616
1,751
1,130
451
422
14,553
156
87
266
74
123
386
355
47
310
509
24
384
77
84
342
92
70
136
118
144
157

1978

1977

1.744
1.087
0
0

0
175
0
0
67
0
0
241
0
0
48
0
0
1.591
83
0
13
0
35
0
1.439
14
0
0
1.110
0
0
715
4
0
2.101
0
0
0
0
0
95
0
3.659
0
337
0
0
0
852
1.941
0
448
0
0
0
0

12,465
156
87
266
74
123
371
355
47
310
509
24
380
77
84
342
91
70
127
61
121
157

8.848
156
87
266
74
123
364
355
47
310
509
24
380
77
84
285
76
70
0
0
0
157

0
182
1,034
0
70
0
0
297
1,297
0
72
0
0
1,597
113
0

124
0
56
235
1.444
30
1,018
93
1.161
0
62
754
209
0

2,136
0
89
0
0
0
95
0
3,900
0
372
1,448
0
1,618
1,086
1,978
0
616

1979

1978

159
3
7
313
10
306
311
46
4
563
59
405
527
3
3
594
43
571
3
10
3
23
0
22
1

1,068
2
16
18
459
2
9
6
837
408
284
6
156
13
69

13
0
38
6
51

9
1.657
0
7
43
451
422
2.088
0
0
0
0
0
15
0
0
0
0
0
4
0
0
0
1

0
9
57
23
0

0
7
1.034
0
3
0
0

56
1.297
0
24
0
0
6
30
0
0
21
235
5

16
1.018
93
51
0
62
39
205
0
35
0
89
0
0
0
0
0
241
0
35
1.448
0
1.618
234
37
0
168
1.744
1.087
0
0

3.617
0
0
0
0
0
7
0
0
0
0
0
0
0
0
56
15
0
127
61
121
0

316

Tables

3. Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 3 1 , 1977-79—Continued
Millions of dollars
December 31

Coupon
(per cent)

Description of issue
1994-99—May...
1994_Feb
Aug
Nov
1995_Feb
1995-2000—Feb..
Aug. ..
1996-2001—Aug.
1998—Nov
2000-05—May...
2002-07—Feb....
Nov. ..
2003-08—Aug. ..
Nov. ..
2004-09—May...
Nov. ..

1979

1978

Increase or decrease ( —)
1977

60
32
0
2
566
2,042
488

999
0
0
0
2
562
2,004
480

31

31

1,493
1,389
265
747

1,534

3

8 /4

lO'/g

3
VA
3'/2
8'/4
75/8
77/8
83/8
83/4
9'/8

661
0
0

1979

31

1,493
1,389
265
747

950
1,379
240
0
0
0
0

1,004

8'/2
9

633
326

955
0
0
0
2

1978

5
60
32
0
0
4
38
8
0
0
0
0
0
873
633
326

517

902
430

44
0
0
0
0
45
1,102
50
0
543
10

-817

25
747
661
0
0

1,168

1,084

1.901

84

117,458

110,562
24,097
29,465
31,608
14,717
10,675

102,819
25,309
32,539
27,516
10,388
7,067

6,896
2,744
7.765
-3,744
-1,943
2,073

7,743
-1,212
-3,074

8,004
112
106
58
2,151
465

320
-50
-53
883
82
-369

-108
-27
-37

97
1,163
196

7,896
85
69
68
2,189
466
1,377
196

1,352
238

-214
0

3,237

3,196

3,266

41

-70

83
37

83
37

87
37

0
0

-4
0

117

117
14

117

14
494

133

451

0
0
361

0
0
-318

Held under RPs
U.S. government securities—Total .
Within 90 days
91 days to 1 year
1-5 years
5-10 years
Over 10 years

26,841
37,230
27,864
12,774
12,748

Federal agency obligations
Held outright—Total
Banks for Cooperatives
Export-Import Bank .
Farm Credit Banks
Federal1 Farm C
Federal Home Loan Banks
Federal Intermediate Credit Banks..
Federal Land Banks
Farmers Home Administration
Federal National Mortgage
Association
Government National Mortgage
Association—PCs
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration . . .
Held under RPs

8,216
35
16

951
2,271

14

4,092

4,329
3.608

10
38
1
25
-42

1. Excludes securities sold under matched sale-purchase agreements, and securities held under repurchase
agreements.
NOTE. Details may not add to totals because of rounding.

4. Federal Reserve Bank Holdings of Special Short-Term Treasury
Certificates Purchased Directly from the United States, 1972-79
Millions of dollars
Date

Amount

1972
Sept. 12

38

1973
Aug. 15
Sept. 7
8
91
10
11
12
14

351
73
73
73
42
485
169
319

Date

Amount

1973
Sept . 15
161

319
319

1974
Nov . 6

131

1975
Mar . 11
12
13
14

626
1,043
315
820

Date

Date

Amount

1975
Mar . 15
16'
17
Aug . 5
6
7
11
12

820
820
832
656
965
474
204
543

13
15

399
481

Amount

1977
Sept . 30
Oct . 11
2
3

2,500
2.500
2,500
2.500

1979
Mar . 31

2.600

Apr

11

2
3

2,600

376

1. Sunday or holiday.
NOTE. Under authority of section 14(b) of the Federal Reserve Act.
Throughout the period shown the interest rate paid on such securities was lA percent below the prevailing
discount rate of the Federal Reserve Bank
FRASERANNUAL REPORT. No holdings on of New York. For data for earlier years, beginning with 1942, see
previous
dates not shown.

Digitized for


317

Tables
5. Open Market Transactions of the Federal Reserve System. 1979
Millions of dollars
Outright transactions in U.S. government securities, by maturity
(excluding matched sale-purchase transactions)
Treasury bills

Others within 1 year

Month
Gross

Gross
purchases

Redemp-

1-5 years

Exch.,
maturity
shifts, or
redemptions

Gross
purchases

chases

Gross
sales

January
February . . .
March
April
May
June
July
August
September..
October
November ..
December . i

0
0
2,012
1,721
0
518
2,252
2,351
1,692
861
2,752
2,464

3,758
228
475
100
251
623
0
380
353
780
154
378

500
400
400
600
200
0
0
0
200
300
300
0

0
48
2,600
0
0
42
218
57
120
28
0
90

-673
-30
724
-2,960
4,660
1,152
33
1,526
876
-783
-937
-155

TOTAL

16,623

7,480

2,900

3,203

3,434

Gross
sales

0
426
0
0
0
0
237
699
354
35
0
398
2,148

Gross
sales

673
2,205
-724
360
0
0
0
0
0

0

5-10 years
Gross
purchases
January
February . . .
March
April
May
June
July
August
September..
October
November ..
December ..
TOTAL

0

0

0 -2,465

454

ReGross dempsales tions

Gross
sales

Gross

64,691
56,291
61,669
62,362
54,343
52,640
40,310
35,159
41,395
58,656
45,204
53,681

60,750
58,426
63,707
61,968
53,692
52,949
40,300
35,480
41,583
58,671
45,979
49,738

Gross
sales

4,201
6,931
10,137
6,163
3,488
12,226
19,690
12,226
10,380
11,336
3,869
6,643

107,374 107,291

Gross
purchases
3,117
6,931
11,817
5,784
2,188
15,531
18,464
10,539
10,850
10,599
4,303
7,251

Gross
purchases
0
700

500
400
400
3,200
200
0
0
0
200
300
300
0

1,619 22,950

0

4,612
1,721
0
561
2,945
3,327
2,326
924
2,752
3,084

3,758
228
475
100
251
623
0
380
353
780
154
378
7,480

5,500 626,403 623,245

Federal agency obligations
Net
change
in U.S.
Government
securities

Month

TOTAL

0
800
0
0
200
0
0
305
0
0
314
0

51

523

0
0
0 -2,975
0
0
0
350
0
0
-240
0
0
400

Repurchase
agreements
(U.S. government securities)

January
February . . .
March
April
May
June
July
August
September..
October
November ..
December ..

Exch.
Gross or masales turity
shifts

0
93
0
0
0
0
142
81
87
0
0

0
134
0
0
0
0
96
140
73
0
0
81

-5,187

Total

Over 10 years

Exch.
or ma- Gross
purturity chases
shifts

Gross
sales

-5,209
-1,152
-33
-1,591
-876
783
222
155

Matched
sale-purchase
transactions
(U.S. government securities)

Outright transactions (continued)

Month

Exch.
or
maturity
shifts

Bankers
acceptances,

Outright
Gross
pur-

Sales or
redemptions

-9,283
2,207
7,454
-2,352
-2,403
3,552
1,708
1,582
2,431
-878
3,507
-629

0
0
0
0
0
371
482
0
0
0
0
0

389
20
23
*

6,896

853

533

40
33
0
*

18
3

Repurchase
agreements,
net

Outright

-133
0
369
-219
-149
826
-187
-487
947
-1,042
917
-480

361

Repurchase
agreements

Net
change1

-587 -10,392
0
2,187
204
8,003
48
-2,524
-252
-2,844
1,400
6,115
-241
1,761
-684
412
578
3,937
-735
-2,658
-48
4,376
434
-679
0

116

7,693

1. Net change in U.S. government securities, federal agency obligations, and bankers acceptances.
*Less than $500,000.
NOTE. Sales, redemptions, and negative figures reduce System holdings; all other figures increase them. Details may not

 hprnncp nf rnnnriino
aHH tn tntalc


6. Earnings and Expenses of Federal Reserve Banks during 1979
Dollars
Item

Total

Boston

New
York

Philadelphia

Cleveland

Richmond

Atlanta

Chicago

St. Louis

Minneapolis

Kansas
City

Dallas

San
Francisco

CURRENT EARNINGS
Loans
140.966,212 7,349.117
16.363.688 11.015.195
7.083.266 13.256.414 .11.007.843
24.582.030
8.530.599
6,356,440 9,453,210 13,324,291
12,644,119
25,190,562
25.190.562
Acceptances
U.S. government securities . 10,071,394,339 477,831.511 2.528,841.215 486.395.139 810.245.205 817.737.338 424.358.225 1.586.819.726 420.087.194 226,908,118 431,916,313 536,863,656 1,323,390,699
Foreign currencies
68,900,454
2,129.129
18.073.226 2.818.677
5.837.934
3.641.490
5.151.118
10.373.651
2.129,129
2,195,078 2,884,626
3,982,165
9,684,231
All other
3,696,839
45.726
2.438.326
9.136
82.703
152.311
203.508
222.897
141,185
104,853
136,970
116,308
42,916
TOTAL

10,310,148,406 487,355.483 2,590.907.017 500.238.147 823.249.108 834.787.553 440.720.694 1.621.998.304 430.888,107 235,564,489 444,391,119 554,286,420 1,345,761,965
CURRENT EXPENSES

Salaries
Retirement and other
benefits
Fees
Travel
Postage
Other shipping expenses ..
Communications
Materials and supplies....
Bank premises
Taxes on real estate . . . .
Depreciation
Utilities
Rent
Other building expenses
Furniture and equipment
Rentals
Depreciation
Cost of Federal Reserve
currency
Allother
Contra—expense '

346,984,400 23,070.372

79.984.986

16.986.726

21.833.984

26.908.651

31.578.705

43.215.417

17.400.245

97.311.442
4,488,414
9,768,267
13,029,935
63,416,052
12,540,616
29,441,147

6.866,789
318,360
557.241
632,048
3,539,620
788.060
2,153,708

21.460,133
1.229.620
1.494.793
2.156.111
8.257.204
2.641.333
5.507.566

5.123.905
227.877
308.652
496.242
2.600.587
564.123
1.384.507

6.130.505
335.130
783.719
715.173
5.282.731
817.589
1.705.056

7.424.119
371.645
807.843
1.074.970
7.264.039
1.060.507
2.679.249

8.531.490
236.431
1.021.777
998.398
7.283.567
1.104.403
3.230.237

12.106.230
284.058
1.054.329
1.266.798
8.562.077
1.505.561
3.962.009

5,202.800
293.621
497,969
972,289
3.992,085
482.461
1.455,631

13,212.568
9,177,623
12,930,865
8,443,497
6,299,880

2,018,135
1,825,735
1,521,643
432.993
399,030

2.372.251
235.698
2.693.067
4,667.632
818.635

1.225.982
1.445.529
1.198.970
18.831
395.891

795.357
632.485
946.344
140.015
325.805

1.286.901
2.070.443
1.300.575
808.227
639.428

683.564
308.213
873.933
726.496
368.797

1.612.635
406.032
1.152.841
907.965
1.417.811

40,715,109
11,914,766

1,745,000
1,205,261

6,724.467
2,342.495

1.762.117
875.584

2.728.583
777,544

4.757.594
974.588

3.790.519
922.377

68,391,270
18,666,085
- 1,839,645

3,695.015
1,780.932
- 160.745

13.244.057
3,687.611

3.262.654
1.144.752
-41.252

4.382.058
1.404.476
-135.391

7.560.930
1.244.273
-277.446

TOTAL 2
Reimbursements and
recoveries

762,313,401

52,389.197

159.517.659

38.981.677

49.601.163 ' 65.377.646

68,753,870

6,089,314

15.471.196

3.323.766

5.492.515

4.615.706

6.976.140

7.651.145

3.361.030

Net expenses

693,559,531

46,299,883

144,046,463 35.657.911

44.108.648

60.761.940

62.242.578

87.948.026

35.129.402




13,900.988 22,553,689

17,673,326

31,877,311

3,615,266
238,478
562,732
922,213
2,316,098
572,367
1,040,617

6,435,158
236,864
949,432
1,584,476
3,829,740
960,537
2,131,562

4,702,603
231,805
597,960
672,794
3,569,736
810,416
1,695,261

9,712,444
484,525
1,131,820
1,538,423
6,918,568
1,233,259
2,495,744

446,582
371.385
686,427
135.863
314.989

1,325,017
873,465
466,478
51,290
475,619

487,848
483,875
730,536
31,383
297,652

459,327
178,328
667,883
13,208
584,369

498,969
346,435
692,168
509,594
261,854

6.631,196
703.531

1.964,957
700.249

870,216
509,561

3,459,199
807,606

2,458,298
775,547

3,822,963
1,320,423

6.264.672
1.535.372
-240.233

9.645.885
1.482.844
-318,048

2.898.315
755.096
-80.532

992,628
1,015,030
-41,958

3,697,995
1,227,942
-276,104

4,572,524
1,501,857
-130,389

8,'174,537
1,885,900
-137,547

69.218.718

95.599.171

38.490.432

29,706,105 49,629,390

41,034,853

72,767,390

4,232,202

2,549,036

6,582,312

27,296,597 45,397,188

2,409,508

38,485,817

66,185,078

PROFIT AND LOSS
9,616,588,875 441.055.600 2,446.860,554 464.580,236 779.140.460 774.025.613 378.478.116 1.534.050,278 395.758,705 208,267,892 398,993,931 515,800,603 1,279,576,887
Current net earnings
Additions to current
net earnings
9,566,673
411,866
1,474,474
222.528
634,945
839.716
738.848
953.394
412.683
259,819
535,589
702,317
2,380,494
)eductions from current
net earnings
Losses on sales of U.S.
government securities
153,540,294 7.295,987
37,616,259 7.502.838 12.540,229 12.573.630
6.632.176
24.422.267
6.411,272
3,538,876
6,552,263
8,182,764
20,271,733
Losses on foreign ex- 3
949.579
113,219
149.741
310.439
3,652,226
193.568
273.917
514,964
116,871
change transactions
551.486
113,219
153,394
211,829
All other
3,522,373
1.061,832
257.491
367.681
29.006
83.179
101.738
456.575
67,764
225,379
78,111
309,705
483,912
Total deductions . .
sJet deductions from current net earnings
\ssessment for expenditures of Board of Governors 4
^et earnings before payments to U.S.
Treasury

160,714.893

8.471.038

38,823.329

8.020.260

12.879.674

12.850.377

7.007.831

25.430.328

6.592,255

3,881,126

6,783,768

8,704,298

21,270,609

151,148,220

8.059.172

37.348.855

7.797.732

12.244.729

12.010.661

6.268.983

24.476.934

6.179,572

3,621,307

6,248,179

8,001,981

18,890,115

50.529.700

1.526.100

13.075.100

2.044.800

4.288.000

2.640.900

3.781.700

7.600.200

1.566,200

1,593,400

2,135,800

2,947,500

7,330,000

9.414.910.955 431.470.328 2,396,436.599 454,737.704 762.607.731 759.374.052 368.427.433 1.501.973,144 388,012,933 203,053,185 390,609,952 504,851,122 1,253,356,772

1,984,427
17.101.407 2.693.608
dividends paid
67.193.615
5.622.240
3.485.252
5.050.938
10,329,471
9.980,655
2,835,650
3,931,557
2.057,365
2,121,045
Payments to U.S.
Treasury (interest on
Federal Reserve notes) . 9,278.576.140 429.479.301 2,369.292.692 450.453.896 753.871.891 754.286.850 357.326.595 1.486.696.439 384.828,318 198,716,290 384,374,352 496,323,565 1,212,925,951
Transferred to surplus
Surplus, January 1

69,141,200
6.600
1,076,270,050 32,791,200

10.042.500
1,590.200
279.842.250 43.799.250

3.113.600
91.780.300

1.601.950
56.630.850

6.049.900
80.608.350

5.296.050
162.601.950

1.127,250
33.469,950

2,215,850
34,040,300

3,399,950
45,655,250

4,596,000
62,813,750

30,101,350
152,236,650

Surplus, December 31

1,145.411,250 32,797.800

289,884.750 45.389.450

94.893.900

58.232.800

86.658.250

167.898.000

34.597,200

36,256,150

49,055,200

67,409,750

182,338,000

1. This item includes expenses for labor and materials temporarily capitalized and charged to
activities when the products are consumed.
2. The total expense for Richmond has been adjusted to exclude $2,578,890, which was
allocated to the expenses of other Federal Reserve Banks for operation of the Federal Reserve
Communications System.




3. Does not include unrealized gains and losses.
4. For additional details, see the last three pages of the section "Board of Governors, Income and Expenses."
NOTE. Details may not add to totals because of rounding.

C
5

7. Earnings and Expenses of Federal Reserve Banks, 1914-79
Dollars

Period, or Federal
Reserve Bank

Current
earnings

Current
expenses

Net additions
or
deductions ( - )

Assessments
for expenditures of
Board of
Governors

Payments to U.S. Treasury
Dividends
Franchise
tax

All Banks
1914-15.
1916....
1917...
1918....
1919....

2,173,252
5,217,998
16,128,339
67,584,417
102,380,583

2,018,282
2,081,722
4,921,932
10,576,892
18,744,815

5,875
-193,001
-1,386,545
-3,908,574
-4,673,446

302,304
192,277
237,795
382,641
594,818

217,463
1,742,775
6,804,186
5,540,684
5,011,832

1920....
1921....
1922....
1923....
1924....
1925....
1926....
1927....
1928....
1929...

181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496

27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
26,628,458
26,739,327
26,207,133
28,909,469

-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,457,792
-5,026,029
-4,861,642

709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644

5,654,018
6,119,673
6,307,035
6,552,717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911

1930....
1931....
1932....
1933....
1934....
1935....
1936....
1937....
1938....
1939....

36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665

27,533,141
26,322,110
25,562,571
28,422,677
27,869,374
30,171,545
28,194,457
27,052,234
27,186,684
27,025,391

-93,136
311,451
-1,413,192
-12,307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2,232,134
2,389,555

809,585
718,554
728,810
800,160
,372,022
,405,898
,679,566
,748,380
,724,924
,621,464

10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462

1940....
1941....
1942....
1943....
1944....
1945....
1946....
1947....
1948....
1949....

43,537,805
41,380,095
52,662,704
69,305,715
104,391,829
142,209,546
150,385,033
158,655,566
304,160,818
316,536,930

27,461,466
31,123,609
36,877,718
41,129,934
46,879,564
46,376,762
54,975,323
62,753,308
69,466,518
74,235,176

11,487,697
720,636
-1,568,208
23,768,282
3,221,880
-830,007
-625,991
1,973,001
-34,317,947
-12,122,274

,704,011
,839,541
,746,326
2,415,630
2,296,357
2,340,509
2,259,784
2,639,667
3,243,670
3,242,500

8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373

1950....

275,838,994

77,138,071
91,373,589

36,294,117
-2,127,889

3,433,700
4,095,497

13,082,992
13,864,750

394,656,072
Digitized for1951....
FRASER


Under
section 13b

Interest on
Federal Reserve
notes

Transferred
to surplus
(section 13b)

Transferred
to surplus
(section 7)

1,134,234
48,334,341
70,651,778

1,134,234
2,703,894
60,724,742
59,974,466
10,850,605
3,613,056
113,646
59,300
818,150
249,591
2,584,659

82,916,014
15,993,086
-659,904
2,545,513
3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

4,283,231

-2,297,724
-7,057,694

17,308

11,020,582

2,011,4i8
-60,323
27,695

297,667
227,448
176,625
119,524
24,579

67,304
-419,140
-425,653

82,152
141,465
197,672
244,726
326,717
247,659
67,054
35,605

-54,456
-4,333
49,602
135,003
201,150
262,133
27,708
86,772

102,880

75,223,818
166,690,356
193,145,837
196,628,858
254,873,588

-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977
17,617,358
570,513
3,554,101
40,237,362
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770
21,849,490
28,320,759

1952
1953
1954
1955
1956
1957
1958
1959

456,,060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116

100,572,489
109,415,220
105,558,331
105,865,923
115,842,696
124,306,103
131,804,455
138,232,106

1,583,988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253

4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600

14,681,788
15,558,377
16,442,236
17,711,937
18,904,897
20,080,527
21,197,452
22,721,687

291,934,634
342 567 985
276,289,457
251 740 721
401,555,581
542 708 405
524,058,650
910 649 768

1960
1961
1963
1964
1965
1966
1967
1968
1969

1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559

147,348,575
155,009,475
169,481,234
179,700,557
188,740,689
195,713,790
198,379,526
209,351,250
228,152,172
259,953,236

13,874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553

6,533,700
6,265,100
6,654,900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084

23,948,225
25,569,541
27,412,241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36,959,336
39,236,599

896 816 359
687,393,382
799 365 981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907 498,270
2,463,628,983
3,019 160,638

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

3,877,218,444
3,723,369,921
3,792,334,523
5,016,769,328
6,280,090,965
6,257,936,784
6,623,220,383
6,891,317,498
8,455,390,401
10,310,148,406

300,145,586
344,550,798
379,371,852
450,705,676
506,424,874
551,488,714
606,948,264
623,859,582
652,617,206
693,559,531

11,441,829
94,266,075
-49,615,790
-80,653,488
-78,487,237
-202,369,615
7,310,500
-177,033,463
-633,123,486
-151,148,220

21,227,800
32,634,002
35,234,499
44,411,700
41,116,600
33,577,201
41,827,700
47,366,100
53,321,700
50,529,700

41,136,551
43,488,074
46,183,719
49,139,682
52,579,643
54,609,555
57,351,487
60,182,278
63,280,312
67,193,615

3 493 570,636
3,356,559,873
3 231 267,663
4,340,680,482
5 549 999,411
5,382,064,098
5,870,463,382
5,937,148,425
7,005,779,497
9,278,576,140

86,789,293,536

9,228,814,669 -1,187,570,774

589,145,608

1,302,245,572

149,138,300

2,188,893 73,056,109,927

4,230,527,580
22,192,682,761
4,639,851,107
6,929,552,530
6,431,047,508
4,430,028,018
13,796,187,958
3,389,679,519
1,911,565,085
3,521,126,186
3,984,826,267
11,332,219,017

633,580,757
1,950,665,036
503,836,565
683,248,221
726,837,996
727,866,192
1,230,018,044
519,736,640
361,399,045
551,001,543
467,983,410
872,641,220

-43,226,749
-305,746,127
-49,390,193
- 102,442,926
-66,143,678
-85,065,130
-190,141,271
-40,999,499
-30,857,361
-48,034,739
-66,942,677
-158,580,426

25,983,486
157,818,086
31,434,018
52,356,290
30,695,176
38,759,360
87,305,972
19,857,872
15,102,715
24,265,109
31,541,573
74,025,951

63,614,330
369,700,281
78,014,410
119,795,320
63,898,910
75,993,098
182,286,674
43,987,123
32,134,726
52,414,494
66,357,806
154,048,400

7,111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561
25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341

280,843 3,413,701,984
369,116 19,013,669,945
722,406 3,910,884,281
82,930 5,858,666,609
172,493 5,473,057,975
79,264 3,401,384,132
151,045 11,897,732,990
7,464 2,722,644,979
55,615 1,426,614,486
64,213 2,785,220,512
102,083 3,279,596,104
101,421 9,872,935,930

86,789,293,536

9,228,814,669 -1,187,570,774

589,145,608

1,302,245,572

149,138,300

2,188,893 73,056,109,927

1962

TOTAL, 1914-79. ..
Aggregate for each
Bank, 1914-79
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL

1. The $1,274,083,449 transferred to surplus was reduced by direct charges of $500,000 for
charge-off on Bank premises (1927), $139,299,557 for contributions to capital of the Federal
Deposit Insurance Corporation (1934), and $3,657 net upon elimination of sec. 13b surplus (1958)




.

46,333,735
40,336,862
35,887,775
32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791

.
.
.

42,613,100
70,892,300
45 538,200
55,864,300
-465,822,800
27,053,800
18,943,500
29,851,200
30,027,250
39,432,450

.
.
.
.
.
.

32,579,700
40,403,250
50,661,000
51,178,300
51,483,200
33,827,600
53,940,050
45,727,650
47,268,200
69,141,200

.
.
.
.
.
.
.

-3,657 1,274,083,449

135,411
-433,413
290,661
-9,906
-71,517
5,491
11,682
-26,515
64,874
-8,674
55,337
-17,089

42,892,625
327,141,321
59,719,672
108,127,693
64,112,608
91,924,790
183,226,754
39,716,828
40,133,363
53,195,150
71,687,228
192,205,417

-3,657 1,274,083,449'

and was increased by $11,131,013 transferred from reserves for contingencies (1945) leaving a
balance of $1,145,411,248 on Dec. 31, 1979.
NOTE. Details may not add to totals because of rounding.

2s
a;

322

Tables

8. Bank Premises of Federal Reserve Banks and Branches.
December 31, 1979
Dollars
Federal
Reserve
Bank
or branch
Boston
Annex
New York
Annex
Buffalo

Cost

Net
book
value

Land

Buildings
(including
vaults) r

20,243,833
27,840

87,309,977
89,202

44,538

107,553,810
161,580

3,436,277
477,863
673,076

15,126,186
1,136,219
2,806,585

12,390,451
716,471
1,640,525

30,952,914
2,330,553
5,120,186

11,278,649
477,862
2,423,605

Other
real

103,238,561
136,209

Building machinery and
equipment

Total

2

Philadelphia

1,876,601

51,803,403

4,952,772

58,632,776

53,911,345

Cleveland
Cincinnati
Pittsburgh

1,000,000
1,980,331
1,658,376

4,960,719
13,554,160
4,603,952

4,097,395
7,521,727
2,950,159

10,058,114
23,056,218
9,212,487

1,791,973
17,074,333
4,358,485

Richmond
Annex
Baltimore
Charlotte

3,930,244
522.733
4,618,738
347,071

54,670,666
3,939,815
3,388,607
1,077,926

14,315,142
3,616,991
1,203,478
736,745

72,916,052
8,079.539
9,210,823
2,161,742

70,336,347
5,078,673
7,014,788
1,017,192

Atlanta
Birmingham .
Jacksonville
Annex
Miami
Nashville
New Orleans .

1,202,255
2,214,015
164,004
107,925
1,667,108
592,342
3,080,344

18,429,709
2,011,871
1,706,794
76,236

3,558,580
1,019,618
765,188
15,842

1,474,678
2,754,272

1,172,681
1,465,131

23,190,544
5,245,503
2,635,986
200,003
1,667,108
3,239,701
7,299,747

18,091,255
3,514,552
968,675
160,400
1,667,108
1,552,839
5,206,750

Annex
Detroit

4,511,942
50,000
797.734

14,487,323
302,248
2,965,643

11,320,939
93,916
1,952,171

30,320,204
446,164
5,715,548

13,107,313
395,922
2,494,645

St. Louis
Little Rock
Louisville
Memphis

700,378
1,049,411
700,075
1,135,623

3,379,948
2,057,689
2,882,480
4,220,335

3,684,560
1,018,004
1,159,753
2,126,755

7,764,886
4,125,104
4,742,308
7,482,713

2,344,084
2,822,976
2,514,013
5,583,123

Minneapolis...
Helena

1,394,384
65,681
1,338,737
2,997,746
646,385
1,030,226

23,757,464
101,000
9,784,015
3,209,227
2,372,784
1,720,756

10,928,091
61,906
4,302,144
2,351,642
1,702,342
817,214

36,079,939
228,587
15,424,896
8,558,615
4,721,511
3,568,196

27,689,707
92,628
8,263,697
5,804,360
3,702,760
2,118,692

3,687,482
262,477
1,959,770

5,193,804
787,728
1,408,574

3,570,804
393,301
714,187

12,452,090
1,443,506
4,082,531

8,965,702

6,638,552
832,136
3,078,263

Kansas City . . .
Denver
Oklahoma City .
Omaha
Dallas
El Paso
Houston
San Antonio

448,5%

1,400,390

570,847

2,419,833

475,488
247,201
644,238

4,015,818
131,114
4,720,825

2,174,233
62,078
2,387,584

6,665,539
440,393
7,752,647

1,510,973
355,196
3,781,462

207,380
480,222
274,772

1,680,478
2,043,899
2,357,534

649,432
735,229
1,156,717

2,537,290
3,259,350
3,789,023

74,926,924

365,902,054

116,117,283

556,946,261

409,281,338

944,481
283,753

139,735
418,111
457,973

1,697,719
2,012,223
1,747,478

TOTAL.

1,635,312

1,393,815

San Francisco..
Annex
Los Angeles..
Portland
Salt Lake City ..
Seattle

1,224,363

13,323,510

27,392,940

1. Includes expenditures for construction at some offices pending allocation to appropriate accounts.
2. Excludes charge-offs of $17,698,968 prior to 1952.
3. Includes acquisitions for banking-house purposes, and Bank premises formerly occupied and being held
pending sale.
NOTE. Details may not add to totals because of rounding.




Tables

323

9. Volume of Operations in Principal Departments of Federal
Reserve Banks, 1976-79
Operation

1979

1978

1977

1976

Millions of pieces '
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postalmoney orders
Allother
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

(2)
8,839
2,969
1«,756

(2)
8,537
2.621
18.654 r

(2)
8.186
2.609
16.563

(2)
8.061 r
2.671
15.925

718
117
15,067

721
125
14,107

740
139
13.312

768
169
12.287

335
35
1,730

281
29
1,906

286
25
1.901

289
21
2.003

Amounts (millions of dollars)
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. government checks
Postal money orders
Allother
Issues, redemptions, and exchanges of
U.S. government securities
Transfers of funds
Food stamps redeemed

220,628
93,119
22,638
2,765

138,928
81,175
16,443
2,495

77.511
75.933
14.952
2.239

17.697
71.011
14.606
2,109

511,044
6,323
8,514,670

439,907
5,534
7,111.254

416.386
5.661
5.499,856

399.468
6.305
4.645.069

8,278,846
64,231,109
7,779

8,036.749
50,482,656
7,251

8.835,730
43.165.467
7.422

7.051.978
35.617.756
7.883

1. Packaged items handled as a single item are counted as one piece.
2. Number handled (in thousands): 1979, 38; 1978. 31: 1977, 12: and 1976. 4.
r
Revised.




324

Tables

10. Principal Operations of Federal Reserve Banks—Expense, Ratio of Expense
for Each Operation to Total Expenses, and Average Number of Employees,
1976-79
Expenses in thousands of dollars; number of employees in thousands; ratios in percent
Operation and item

1979 '

1978 '

1977 '

1976

Check clearing operations
Expense
Ratio to total expenses
Average number of employees ..

279,094
36.6
6.3

259,983
36.4
6.3

246,981
36.2
6.5

135,209
20.5
6.3

Currency function
Expense
Ratio to total expenses
Average number of employees ..

180,974
23.7
1.9

187,864
26.3
2.0

182,875
26.8
2.2

114,036
17.3
2.3

Fiscal agency operations
Expense
Ratio to total expenses
Average number of employees ..

83,521
11.0
1.9

76,837
10.7
1.9

73,002
10.7
2.0

48,158
7.3
2.3

Bank supervision
Expense
Ratio to total expenses
Average number of employees ..

67,752
8.9
1.4

58,303
8.2
1.3

52,702
7.7
1.3

23,322
3.5
1.1

Other operations 3
Expense
Ratio to total expenses
Average number of employees ..

150,878
19.8
2.2

131,713
18.4
2.2

126,318
18.6
2.2

29,919
4.6
1.4

General administration and support
Expense
Ratio to total expenses
Average number of employees ..

9.4

9.8

10.1

307,806
46.8
11.1

2

Accounting
Auditing
Bank administration
Data processing
Occupancy
Personnel
Protection
Other

23,298
8,050
38,519
39,814
64,292
27,219
24,501
82,113

TOTAL EXPENSES..

762,219

714,700

681,878

658,450

Less reimbursements..

68,786

62,084

58,018

51,502

693,433

652,616

623,860

606,948

Net expenses

1. Under a new expense accounting system, certain support activities were reclassified as operations and all
general administration and support costs were allocated to operations in 1977.
2. Includes automated clearinghouse and noncash collections.
3. Includes mainly economic research and statistics, foreign operations, and lending and credit.




Tables

325

11. Number and Salaries of Officers and Employees of
Federal Reserve Banks, December 31, 1979
President

Other officers

Annual
salary
(dollars)

Number

Annual
salaries
(dollars)

Number
Full- Parttime time

Annual
salaries
(dollars)

Number

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta

84,400
Vacant
70,500
79,400
69,450
83,000

44
131
38
37
61
66

1,616,700
5,978,765
1,397,035
1,330,830
2,227,900
2,290,550

1,362 160
4,206 96
1,056 108
1,387 72
1,941 82
2,264 28

21,456,929
70,461,014
15,055,059
18,535,985
25,869,357
28,317,548

1.567
4.433
1.203
1,497
2.085
2.359

23,158.029
76,439,779
16,522.594
19.946,215
28,166,707
30,691.098

Chicago
St Louis
Minneapolis
Kansas City
Dallas
San Francisco

94,950
74,500
60,875
60,700
66,600
94,950

58
39
32
54
37
76

2,176,455
1,386,350
1,178,400
1,779,915
1,226,540
2,782,468

2,789 156
1,212 90
881
3
1.553 79
1,248 26
1,856 77

38,031,779
16,020,564
11,972,700
19,930,218
15,520,901
27,739,596

3.004
1,342
917
1.687
1.312
2.010

40,303,184
17,481,414
13,209.975
21,770,833
16.814,041
30,617,014

839,325

673

25,371,908

21,755 977

Federal Reserve
Bank (including
branches)

TOTAL

Employees

Total
Annual
salaries
(dollars)

308,911,650 23,416 335,120.883

12. Federal Reserve Bank Interest Rates, December 31, 1979
Per cent per annum
Loans to member banks
Federal Reserve
Bank

Loans to all others
under last paragraph
of sec. 13 4

Under
sec. 10(b) 2

Under
sees. 13 and 13a '

Regular rate

Special rate3

12'/2

Boston
New York

13

12'/!

13

Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco . . .

\

12

15

1. This rate applies to discounts of eligible paper and advances secured by such paper or by U.S. government obligations or any other obligations eligible for purchase by a Federal Reserve Bank.
2. This rate applies to advances secured to the satisfaction of the Federal Reserve Bank. Advances secured
by mortgages on 1-to 4-family residential property are made at the section 13 rate..
3. The rate is applicable to special advances described in section 201.2(e)(2) of Regulation A.
4. This rate applies to advances to individuals, partnerships, or corporations other than member banks that
are secured by direct obligations of, or obligations fully guaranteed as to principal and interest by, the U.S.
government or any of its agencies.




326

Tables

13. Member Bank Reserve Requirements
Percent of deposits
Through July 13, 1966
Net demand deposits2
Effective date1

Central reserve
city banks

Reserve city
banks

10
15
17te

13

1917—June 21
1936—Aug. 16
1937—Mar. 1
May 1
1938—Apr. 16
1941—Nov. 1
1942—Aug. 20
Sept. 14
Oct. 3
1948—Feb. 27
June 11
Sept. 24, 16 . . . .
1949—May 5 , 1
June 30, July 1 .
Aug. 1
11, 16 . . . .
18
25
Sept. 1
1951—Jan. 11,16
25, Feb. 1 .
1953—July 9, 1
1954—June 24, 16
July 29, Aug. 1 .
1958—Feb. 27, Mar. 1 .
Mar. 20, Apr. 1 .
Apr. 17
24
1960—Sept. 1
Nov. 24
Dec. 1
1962—July 28
Oct. 25, Nov. 1 .

19te
3

22 /4
26
223/4
26
24
22
20
22
24
26
24

7
\0l/2

IVA
14
12
14

22
21
20

19te
19
18te
18
19
20
19

23
2214
22
23
24
22
21
20

19

VA
7
6

13
14
13

18
W/i
17

19te

5'/4
6
5
6

16
15
14
13
12

20
17te
20

23te

Time deposits
(all classes
of banks)

Country
banks

12
llfc

11

18te
16te

18

17te
12

16te
3

July 14, 1966, through Nov. 8, 1972 (deposit intervals in millions of dollars)
Time deposits4
(all classes of banks)

Net demand
deposits2
Reserve
city banks

Effective date1

Over
5

0-5
i6te5

1966—July 14, 21 .
Sept. 8, 15

Country
banks
Over
5

0-5

Other
time

Savings

0-5

Over
5

125

1967—Mar. 2 . . .
16 . . .
1968—Jan. 11, 18 .
1969—Apr. 17
1970-Oct. 1 . . . .

17

17
17te

i2te
13

1. Reserves required during the period from inception of the Federal Reserve System until June 20, 1917, were
not strictly comparable with later requirements; they were based on aggregate amounts of deposits, and reserve
balances with the Reserve Banks were increased in stages.
When two dates are shown, the first applies to the change at central reserve orreservecity banks and the second to
the change at country banks.
2. Demand deposits subject to reserve requirements, beginning Aug. 23, 1935, have been total demand deposits
minus cash items in process of collection and demand balances due from domestic banks (also minus war loan and
Series E bond accounts during the period Apr. 13, 1943-June 30, 1947).
Allrequiredreserveswere held on deposit with Federal Reserve Banks from June 21,1917, until late 1959. Since
then, member banks have also been allowed to count vault cash as reserves, as follows: country banks—in excess of
4 and 2te percent of net demand deposits effective Dec. 1, 1959, and Aug. 25, 1960, respectively; central reserve
city and reserve city banks—in excess of 2 and 1 percent effective Dec. 3,1959, and Sept. 1,1960, respectively; all
member banks were allowed to count all vault cash as reserves effective Nov. 24, 1960.
In graduated requirement schedules, each deposit interval applies to that part of the deposits of each bank.




Tables

327

Continued

Beginning Nov. 9, 1972 (deposit intervals in millions of dollars)
Net demand deposits26

Time and savings deposits4
Time7

Effecti\ edate
0-2

2-10

10100

100400

Over
400

0-5, by
maturity

Savings
30179
days

1972—Nov

9
16
1973—July 19
1974—Dec 12
1975_Feb. 13
Oct. 30
1976—Jan. 8
Dec. 30
In effect Da;. 31,1979

8

10

12

YlVi

35

Over 5, by
maturity

180 4 yrs.
days
or
to
more
4 yrs.

30179
days

35

180
days
to
4 yrs.

4 yrs.
or
more

55

13
W/2
V/2

7
7

IV/2

10

12

l

9A
9Vi

13

18
17Vi
Wh

6
V/29

3
IP/4
IP/4

Legal limits—Dec. 31, 1979
Net demand deposits
Reserve city banks
Other banks
Borrowings from foreign banks
Time deposits

12 3 /4
12 3 /4

16'/4
16l/4

3

|9

3

3

V/29

I9

6

V/29

I9

J9-

Minimum Maximum
10
7
0
3

22
14
22
10

Beginning Oct. 16, 1969, Regulation M required reserves against (a) net balances due from domestic offices to their foreign
branches and (b) foreign-branch loans to U.S. residents; Regulation D imposed a similar requirement against (c) borrowings from
foreign banks by domestic offices of a member bank. Limited reserve-free base amounts were originally permitted under Regulation
M but were eliminated for (b) effective June 21, 1973, and were lowered in steps for (a) and (c) until eliminated effective Mar. 14.
1974. Beginning June 21, 1973, loans aggregating $100,000 or less to any U.S. resident have been excluded from computations, as
have total loans of a bank to U.S. residents if not exceeding $1 million. The applicable reserve percentage, which was originally 10
percent, was increased to 20 percent on Jan. 7, 1971; reduced to 8 percent on June 21, 1973. to 4 percent on May 22. 1975. and to
zero on Aug. 24, 1978. Effective Dec. I, 1977, the reserve required against deposits that foreign branches of U.S. banks use for
lending to U.S. residents was reduced to 1 percent, and on Aug. 24, 1978, it was reduced to zero. For details see Regulations D and
M as described in "Record of Policy Actions of the Board of Governors," in previous ANNUAL REPORTS.
3. Authority of the Board of Governors to classify or reclassify cities as centralreservecities was terminated effective July 28. 1962.
4. Time deposits such as Christmas and vacation club accounts became subject to the same requirements as savings deposits, effective Jan.
5, 1967. Negotiable order of withdrawal (NOW) accounts were defined in the Board's Regulation Q as savings deposits beginning Jan. 1.
1974.
The last three paragraphs of note 2 above are also relevant to time deposits.
5. This rate had been established in the earlier structure. It remained the same in the new structure established this date.
6. Effective Nov. 9. 1972, a new criterion was adopted to designatereservecities, and on the same date requirements for reserves against
net demand deposits of member banks wererestructuredto provide that each member bank will maintain reserves related to the size of its net
demand deposits. The new reserve city designations are as follows: A bank having net demand deposits of more than $400 million is
considered to have the character of business of areservecity bank, and the presence of the head office of such a bank constitutes designation of
that place as areservecity. Cities in which there are Federal Reserve Banks or branches are alsoreservecities. Any bank, wherever located,
having net demand deposits of $400 million or less is considered to have the character of business of banks outside of reserve cities and is
permitted to maintain reserves at ratios set for banks not inreservecities.
7. Beginning Nov. 2, 1978, a supplementaryreserverequirementof 2 percent was added to the existing requirements for time deposits of
$100,000 or more and for certain other liabilities.
From June 21, 1973, through Dec. 11, 1974, member banks, except as noted below, were subject to a marginalreserverequirementagainst
increases in the aggregate of the following types of obligations: (a) outstanding time deposits of $100,000 or more, (b) outstanding funds
obtained by the bank through issuance by a bank's affiliate of obligations subject to the existingreserverequirements on time deposits, and (c)
beginning July 12, 1973, funds from sales of finance bills. For the period June 21 through Aug. 29. 1973. (a) included only single-maturity
time deposits. The requirement applied to balances above a specified base, but was not applicable to banks having obligations of these types
aggregating less than $10 million. Including the basic requirement (S percent during the entire period),requirementswere as follows: 8 percent
for (a) and (b) from June 21 through Oct. 3, 1973, and for (c) from July 12 through Oct. 3, 1973; 11 percent from Oct. 4 through Dec. 26.
1973; and 8 percent from Dec. 27, 1973, through Sept. 18, 1974. Beginning Sept. 19. the 8 percentrequirementapplied only to those
obligations in (a), (b) and (c) with initial maturities of less than 120 days, and effective Dec. 12. 1974. theremainingmarginal reserve was
removed on this type of obligation issued to mature in less than 4 months. For details, see "Record of Policy Actions of the Board of
Governors" in 1973 and 1974 ANNUAL REPORTS.

Effective with thereservemaintenance period beginning Oct. 25. 1979. a marginal reserverequirementof 8 percent was added to managed
liabilities in excess of a base amount. Managed liabilities are defined as large time deposits. Eurodollar borrowings,repurchaseagreements
against U.S. government and federal agency securities, federal funds borrowings from nonmember institutions, and certain other obligations.
In general, the base for the marginal reserve requirement is $100 million or the average amount of the managed liabilities held by a member
bank, Edge corporation, or family of U.S. branches and agencies of a foreign bank for the two statement weeks ending Sept. 26. 1979.
8. The 16Vi percent requirement applied only for 1 week and solely to former reserve city banks. For other banks, the 13 percent
requirement was continued in this deposit interval.
9. The average of reserves on savings and other time deposits must be at least 3 percent, the legal minimum.




328
14.

Tables
Maximum Interest Rates Payable on Time and Savings Deposits
Percent per annum
Nov. 1, 1933—July 19, 1966
Effective date
Type of deposit

Savings deposits
12 months or more
Less than 12 months
Postal savings deposits'
12 months or more
Less than 12 months
Other time deposits 2
12 months or more
6-12 months
90 days to 6 months
Less than 90 days
(30-89 days)

Nov. 1, Feb. 1,
1933
1935

Jan. 1, July 17, Nov. 24, Dec. 6,
1962
1964
1963
1965

™

3

2

»

3

%A

4

2

}3
}

Jan. 1,
1957

Jan. 1,
1936

™

3

%A

3to }

*

} 3

2*ft

iVt

3

Jfc 1

2lA
2Vi

3
3

}4

m

2
1

2lA
1

2lA J
1

4

4

4

4^

4

1

4

5V4

July 20, 1966—June 30, 1973
Effective date
July 20,
1966

Savings deposits
Other time deposits 23
Multiple maturity
30-89days
90 days to 1 year
1-2 years
2 years or more
Single-maturity
Less than $100,000
30 days to 1 year
1-2 years
2 years or more
$100,000 or more
30-59days
60-89days
9O-179days
180 days to 1 year
1 year or more

Sept. 26,
1966

Apr. 19
1968

Jan. 21,
1970

4

4

4

4VS

4

4

4

5

Type of deposit

5

5

4lA
5
5V4
53/4

|

5VL

5

5

5
5fc
53/4

5
5V4

514

5»/2

}

6
6V4

<J)

0
04
0)
(

1. Closing date for the Postal Savings System was Mar. 28, 1966.
2. For exceptions with respect to foreign time deposits, see ANNUAL REPORT for 1962, p. 129; 1965, p. 233;
1968, p. 69.
3. Multiple-maturity time deposits include deposits that are automatically renewable at maturity without action
by the depositor and deposits that are payable after written notice of withdrawal.
4. The limit on rates on single-maturity time deposits of $100,000 or more has been suspended. The maximum
rates that became effective Jan. 21, 1970, and the dates when they were suspended are as follows:
30-59 days
6Vi percent \
~A 1O7n
Tl
June 24 1 9 7 0
60-89 days
6fc percent, \
'
90-179 days
6^4 percent)
180 days to 1 year
7x percent
May 16, 1973
1 year or more
l h percent J
Rates on multiple-maturity time deposits in denominations of $100,000 or more were suspended July 16,1973,
when the distinction between single- and multiple-maturity deposits was eliminated.
5. For authorized states only, federally insured commercial banks, savings and loan associations, cooperative
banks, and mutual savings banks in Massachusetts and New Hampshire were first permitted to offer negotiable




Tables

329

Beginning July 1, 1973
Effective date
Type of deposit

Savings deposits
Negotiable order of withdrawal
accounts 5
Other time deposits (multiple- and singlematurity) 2> 3
Less than $100,000
30-89 days.
90 days to 1 year
l-2!/2 years
21/2-4 years
4-6 years 7
6-8 years 7 . . . ,
8 years or more 7
Governmental units
Individual retirement accounts and
Keogh (H.R. 10) plans l0
Money market time deposits '
Variable ceiling—4 years or more
$100,000 or more

July 1,
1973

Nov. 1, Nov. 23, Dec. 23, July 6,
1973
1974
1974
1977

June 1.
1978

July 1,
1979
5!/4

5

5
5>/2

6
61/2

6
6*/2

5
51/2
6
61/2
7>/4
V/2

5
5Vi
6
6'/2
VA
V/2

5
5Vi
6
6!/2
VA
V/2

VA

5

5'/4 6
51/2
6
6'/2

VA
VA

5!/2

6
6l/2

VA
VA
VA

VA
VA

02)
3

order of withdrawal (NOW) accounts on Jan. 1, 1974. Authorization to issue NOW accounts was extended to
similar institutions throughout New England on Feb. 27, 1976, in New York State on Nov. 10, 1978, and in New
Jersey on Dec. 28, 1979.
6. Effective Aug. 1, 1979.
7. Until July 1, 1979, minimum denomination was $1,000 except for deposits representing funds contributed
to an individual retirement account (IRA) or a Keogh (H.R. 10) plan established pursuant to the Internal
Revenue Code. The $1,000 minimum requirement was removed for such accounts in December 1975 and
November 1976 respectively.
8. Between July 1, and Oct. 31, 1973, there was no ceiling for certificates maturing in 4 years or more with
minimum denominations of $1,000. The amount of such certificates that a bank could issue was limited to 5
percent of its total time and savings deposits. Sales in excess of that amount were subject to the 6!/2 percent
ceiling that applies to time deposits maturing in 2!/2 years or more.
Effective Nov. 1, 1973, a ceiling rate of 7'/4 percent was imposed on certificates maturing in 4 years or more
with minimum denominations of $1,000. There is no limitation on the amount of these certificates that banks
may issue.
9. Before Nov. 27, 1974, no distinction was made between the time deposits of governmental units and of
other holders insofar as Regulation Q ceilings on rates payable were concerned. Effective Nov. 27, 1974,
governmental units were permitted to hold savings deposits and could receive interest rates on time deposits
with denominations of less than $100,000, irrespective of maturity, as high as the maximum rate permitted on
such deposits at any federally insured depositary institution. Effective June 1, 1978, the maximum rate on such
governmental-unit time deposits was set as high as the maximum permitted on such deposits maturing in more
than 6 months (26 weeks) at any federally insured commercial bank, mutual savings bank, or savings and loan
association.
10. Three-year minimum maturity.
11. These deposits must have a maturity of exactly 26 weeks and a minimum denomination of $10,000, and
must be nonnegotiable.
12. Commercial banks were authorized to offer money market time deposits effective June 1, 1978. The
ceiling rate is the discount rate on most recently issued 6-month U.S. Treasury bills. The most recent rates and
effective dates are published monthly in the Federal Reserve Bulletin, p. A10.
13. Effective July 1, 1979, member banks are authorized to offer variable-ceiling accounts with no required
minimum denomination and with maturities of 4 years or more. The maximum rate for member banks is VA
percentage points below the average yield on 4-year U.S. Treasury securities. The most recent rates and effective
dates are published monthly in the Federal Reserve Bulletin, p. A10.
NOTE. Maximum rates that may be paid by member banks are established by the Board of Governors under
provisions of Regulation Q; however, a member bank may not pay a rate in excess of the maximum rate payable by
state banks or trust companies on like deposits under the laws of the state in which the member bank is located
Beginning Feb. 1, 1936, maximum rates that may be paid by nonmember insured commercial banks, as established
by the Federal Deposit Insurance Corporation, have been the same as those in effect for member banks.




330

Tables

15. Margin Requirements
Percent of market value
For credit extended under Regulation T (brokers and dealers), U (banks),
G (others than brokers, dealers, or banks), and X (borrowers)
Effective date
Margin
stocks
1934—Oct. 1
1936—Feb. 1
Apr. 1
1937—Nov. 1
1945—Feb. 5
July 5
1946—Jan. 21
1947—Feb. 1
1949—Mar. 3
1 9 5 1 _ j a n . 17
1953—Feb. 20
1955—Jan. 4
Apr. 23
1958—Jan. 16
Aug. 5
Oct. 16
I960—July 28
1962—July 10
1963—Nov. 6
1968—Mar. 11
June 8
1970—May 6
1971—Dec. 6
1972—Nov. 24
1974— Jan. 3
1977_jan. 1

25—45
25—55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
50

Convertible
bonds

50
60
50
50
50
50
50

Short sales,
Tonly

Writing options.
T only2

(3)
(3)
(3)
50
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50
50

30

1. Regulations T, U, G, and X, adopted by the Board of Governors pursuant to the Securities Exchange Act of 1934, limit
the amount of credit to purchase and carry "margin securities" and "margin stock" (as defined in the regulations) when such
credit is collateralized by securities. Margin requirements are the difference between the market value (100 percent) and the
maximum loan value of collateral as prescribed by the Board. Regulation T was adopted effective Oct. 15, 1934; Regulation
U, effective May 1, 1936; Regulation G, effective Mar. 11, 1968; and Regulation X, effective Nov. 1, 1971.
2. The margin is expressed as a percent of the current market value of the stock underlying the option.
3. The requirement was the margin "customarily required" by the brokers and dealers.




Tables
16.

331

Principal Assets and Liabilities, and Number of Insured Commercial Banks,
by Class of Bank, September 30, 1979 and 1978 •
Asset and liability items shown in millions of dollars
Insured commercial banks
Insured
nonmember
banks

Member banks

Item
Total
Total

State

National
September 30, 1979 p

Loans and investments, total.
Loans
Gross
Net
Investments
U.S. Treasury securities
Other2......
Cash assets, total

1,096,476

794,294

619,086

175,208

302.182

828,100
799,366
268,376
86,333
182,043
181,050

613,286
593,005
181,008
57,371
123,637
155,066

478,555
462,305
140,531
43,746
96,785
101,186

134,731
130,699
40,477
13,625
26,852
53,880

214,814
206.361
87,368
28,962
58,406
25,984

Deposits, total
Interbank
Other demand
Other time
Total equity capital

1,031,704
63,349
267,527
700,828
95,067
14,386

741,406
60,978
210,044
470,384
69,387
5,470

565,480
30,879
155,750
378,851
53,240
4,480

175,925
30,098
54,294
91,533
16,147
990

290,298
2,371
57,484
230,444
25.680
8.916

974,032

707,461

549,138

158,323

266.571

717,087
692,639
256,945
90,879
166,066
158,340

532,844
515,593
174,617
61,673
112,944
134,960

414,263
400,375
134,875
46,534
88,341
91,229

118,581
115.218
39,742
15,139
24,603
43,730

184.243
177,046
82.328
29,206
53,122
23.380

960,693
58,005
320,714
581,974
85,539
14,390

701,254
55,366
235,943
409,945
63,178
5,594

533,118
28,796
179,783
324,538
48,292
4,597

168,136
26,570
56,160
85,406
14.886
997

259.439
2.639
84,771
172,030
22,361
8.7%

Number of banks

September 30, 1978
Loans and investments, total.
Loans
Gross
Net
Investments
U.S. Treasury securities
Other 2
Cash assets, total
Deposits, total
Interbank
Other demand
Other time

Total equity capital
Number of banks

1. All insured commercial banks in the United States.
2. Includes trading accounts for banks with assets less than $100 million.
p
Preliminary data.
NOTE. Details may not add to totals because of rounding.




332

Tables

17. Member Bank Reserves I'LN.O;*'

< -M . . HdUK M e

L and Related

Items—Year-End, 19 • S- 79 and M mtn-^id, 1979
Millions of dollars
Factors supplying reserve funds
Federal Reserve Ban*. credit outstanding
U.S . government
securities
Period

1918...
1919...

239
300

239
300

Held
under
repurchase
agreement
0
0

1920...
1921...
1922...
1923...
1924...

287
234
436
134
540

287
234
436
80
536

1925...
1926...
1927..,
1928...
1929...

375
315
617
228
511

1930...
1931...
1932...
1933...
1934...

Total

Bought
outright

Loans

Float1

All
other2

Other
Federal
Reserve
assets3

Total

Gold
stock4

Special
drawing
rights
certificate
accounts

Treasury
currency
outstand•

ing

5

1,766
2,215

199
201

294
575

0
0

2.498
3,292

2,873
2.707

0
0

1,795
1.707

0
0
0
54
4

2,687
1,144
618
723
320

119
40
78
27
52

262
146

0

273
355
390

0
0
0
0

3,355
,563
,405
,238
,302

2.639
3.373
3.642
3.957
4.212

0
0
0
0
0

1.709
1,842
1.958
2,009
2,025

367
312
560
197
488

8
3
57
31
23

643
637
582
1,056
632

63
45
63
24
34

378
384
393
500
405

0
0
0
0
0

,459
.381
,655
,809
,583

4.112
4.205
4.092
3.854
3,997

0
0
0
0
0

1.977
1,991
2.006
2,012
2,022

729
817
1,855
2,437
2,430

686
775
1,851
2,435
2,430

43
42
4

251
638
235

372
378
41

0
0

2
0

98
7

21
20
14
15
5

137
21

0
0
0

,373
,853
2,145
2.688
2.463

4.306
4.173
4.226
4.036
8.238

0
0
0
0
0

2.027
2.035
2.204
2,303
2.511

1935...
1936...
1937...
1938...
1939...

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

0
0
0
0
0

2,486
2,500
2,612
2,601
2.593

10,125
11,258
12.760
14.512
17.644

0
0
0
0
0

2.476
2,532
2,637
2,798
2,963

1940...
1941...
1942...
1943...
1944...

2,184
2,254
6,189
11,543
18,846

2,184
2,254
6,189
11,543
18,846

0
0
0
0
0

3

3
6
5
80

80
94
471
681
815

8
10
14
10
4

0
0
0
0
0

2,274
2.361
6.679
12,239
19,745

21.995
22.737
22.726
21.938
20.619

0
0
0
0
0

3.087
3.247
3.648
4.094
4.131

1945...
1946...
1947...
1948...
1949...

24,262
23,350
22,559
23,333
18,885

24,262
23,350
22,559
23,333
18,885

0
0

249
163
85
223
78

578
580

2

1
2

0
0
0
0
0

15.091
24.093
23.181
24.097
19.499

20.065
20.529
22.754
24.244
24.427

0
0
0
0
0

4,339
4,562
4,562
4.589
4.598

1950...
1951...
1952...
1953...
1954...

20,778
23,801
24,697
25,916
24,932

20,725
23,605
24,034
25,318
24,888

53
196
663
598
44

67
19
156
28
143

1,368
1,184
967
935
808

3
5
4
2
1

0
0
0
0
0

22.216
25.009
25,825
26.880
25.885

22.706
22.695
23.187
22.030
21.713

0
0
0
0
0

4.636
4.709
4,812
4.894
4,985

1955...
1956...
1957...
1958...
1959...

24,785
24,915
24,238
26,347
26,648

24,391
24,610
23,719
26,252
26,607

394
305
519
95
41

108
50
55
64
458

1.585
1,665
1,424
1.296
1.590

29
70
66
49
75

0
0
0
0
0

26.507
26.699
25.784
27.755
28.771

21.690
21.949
22.781
20.534
19.456

0
0
0
0
0

5,008
5,066
5.146
5,234
5,311

1960...
1961...
1962...
1963...
1964...

27,384
28,881
30,820
33,593
37,044

26,984
30,478
28,722
33,582
36,506

400
159
342
11
538

33
130
38
63
186

.847
2,300
2,903
2.600
2,606

74
51
110
162
94

0
0
0
0
0

29.338
31.362
33,871
36.418
39,930

17.767
16.889
15.978
15.513
15.388

0
0
0
0
0

5.398
5.585
5.567
5.578
5.405

0
0
0

For notes see last two pages of table.




535
541
534

I
1

Tables

333

17.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Treasury
cash
holdings 6

Deposits, other
than member bank
reserves, with
Federal Reserve Banks

Treasury

Foreign

Other
Federal
Reserve
accounts 3

Other

Other
Federal
Reserve
liabilities
and
capital 3

Member bank
reserves

With
Federal
Reserve
Banks

Currency

ad
n

Re-

quired8

Ex-

coin7

4,951
5,091

288
385

51
31

96
73

25
28

118
208

0
0

.636
,890

0
0

1.585
1.822

51
68

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
1
1
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

0
0
0
0
0

.781
,753
,934
,898
2,220

0
0
0
0
0

0
1.654
0
1.884
2,161

0
99
0
14
59

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

8
46
5
6
6

21
19
21
21
24

272
293
301
348
393

0
0
0
0
0

2,212
2,194
2,487
2,389
2,355

0
0
0
0
0

2.256
2,250
2.424
2.430
2.428

-44
-56
63
-41
-73

4,603
5,360
5,388
5,519
5,536

211
222
272
284
3,029

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

375
354
355
360
241

0
0
0
0
0

2,471
1,961
2.509
2,729
4,096

0
0
0
0
0

2.375
1.994
1.933
1.870
2.282

96
-33
576
859
1.814

5,882
6,543
6,550
6,856
7,598

2,566
2,376
3,619
2,706
2,409

544
244
142
923
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

0
0
0
0
0

5.587
6.606
7,027
8,724
11.653

0
0
0
0

2.743
4.622
5.815
5.519
6.444

2.844
1.984
1.212
3.205
5.209

8,732
11,160
15,410
20,449
25,307

2,213
2,215
2,193
2,303
2,375

368
867
799
579
440

1,133
774
793
1,360
1,204

599
586
485
356
394

284
291
256
339
402

0
0
0
0
0

14,026
12,450
13,117
12,886
14.373

0 7.411
0 9.365
0 11.129
0 11.650
0 12.748

6.615
3.085
1.988
1.236
1.625

28,515
28,952
28,868
28,224
27,600

2,287
2,272
1,336
1,325
1,312

977
393
870
1,123
821

862
508
392
642
767

446
314
569
547
750

495
607
563
590
706

0
0
0
0
0

15,915
16,139
17.899
20,479
16,568

0
0
0
0
0

14.457
15.577
16,400
19.277
15.550

1.458
562
1.499
1.202
1.018

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
111
839
907

0
0
0
0
0

17.681
20,056
19,950
20.160
18,876

0
0
0
0
0

16.509
19.667
20.520
19.397
18.618

1.172
389
-570
763
258

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

0
0
0
0
0

19,005
19,059
19.034
18,504
18,174

0
0
0
0
310

18,903
19.089
19,091
18,574
18.619

102
-30
-57
-70
- 135

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

941
1.044
1,007
1,065
1.036

0

17.081
17.387
17.454
17.049
18.086

2.544
2,823
3.262
4,099
4.151

18.988
20.114
20.071
20.677
21.663

637
96
645
471
574

For notes see last two pages of table.




0
0
0
0

334

Tables
Member Bank Reserves.
Items—Year-End. 191S-"

U. and Related
Continue J

Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit <
outstanding
U.S government
<
ecurities9
Period

Total

Held
under
repurchase
agreement

Bought
outright10

Loans

Float1

All
other2

Other
Federal
Reserve
assets

Total

Gold
stock4

Special
Treasdrawury
ing
currights rency
certifouticate standacing5
counts

290
661
170
0
0

137
173
141
186
183

2,248
2,495
2,576
3,443
3,440

187
193
164
58
64

0
0
0
0
2,743

43,340
47,177
52,031
56,624
63,584

13,733
13,159
11,982
10,367
10,367

0
0
0
0
0

5,575
6,317
6,784
6,795
6,852

62,142
69,481
71,119
80,395
84,760
92,789
100,062
108,922
117,374
124,507

0
1,323
111
100
954
1,335
4,031
2,352
1,217
1,660

335
39
1,981
1,258
299
211
25
265
1,174
1,454

4,261
4,343
3,974
3,099
2,001
3,688
2,601
3,810
6,432
6,767

57
261
106
68
999
1,126
991
954
587
704

1,123
1,068
1,260
1,152
3,195
3,312
3,182
2,442
4,543
5,613

67,918
76,515
78,551
86,072
92,208
102,461
110,892
118,745
131,327
140,705

10,732
10,132
10,410
11,567
11,652
11,599
11,598
11,718
11,671
11,112

400
400
400
400
400
500
.200
,250
,300
.800

7,149
7,710
8,313
8,716
9,253
10,218
10,810
11,331
11,831
12,947

1979
Jan.. 108,786 108,786
Feb.. 110,973 110,973
Mar. 118,772 116,724
116,201 114,751
May' 113,608 113,608
June 118,324 114,193
July . 120,326 117,609
Aug 121,422 120,877
Sept 124,781 122,820
Oct 22 122,858 122,676
Nov 127,281 125,749
Dec 2 126,167 124,507

0
0
2,048
1,450
0
4,131
2,717
545
1,961
182
1,532
1,660

4,366
1,603
963
1,256
1,330
1,558
852
1,572
1,156
2,672
2,034
1,454

6,578
8,631
4,337
7,361
8,518
3,924
3,896
4,209
2,654
4,685
3,729
6,767

C
C
204
252
C
l,40C
1,155
475
1,053
311
269
104

5,676
4,571
6,405
7,105
6,277
5,766
5,241
4,621
5,349
4,473
4,695
5,613

125,406
125,778
130,681
132,175
129,733
130,972
131,474
132,299
134,993
135,005
138,008
140,705

11,592
11,544
11,479
11,416
11,354
11,323
11,290
11,259
11,228
11,194
11,112
11,112

.300
1,300
1,300
,300
.800
1,800
1,800
,800
,800
1.800
1,800
1,800

11,912
12,018
12,114
12,242
12,362
12,525
12,599
12,724
12,825
12,937
13,020
12,947

1965...
1966...
1967...
1968...
1969...

40,768
44,316
49,150
52,937
57,154

40,478
43,655
48,980
52,937
57,154

1970...
1971...
1972...
1973...
1974...
1975...
1976...
1977...
1978...
1979 p .

62,142
70,804
71,230
80,495
85,714
94,124
104,093
111,274
118,591
126,167

0

1. Beginning with 1960, figures reflect a minor change in concept; see Federal Reserve Bulletin, vol. 47
(Feb. 1961), p. 164.
2. Data consist principally of acceptances and, until Aug. 21, 1959, industrial loans, authority for which
expired on that date.
3. Before Apr. 16, 1969, this category includes the total of Federal Reserve Bank capital paid in, surplus,
other capital accounts, and other liabilities and accrued dividends less the sum of bank premises and other
assets, and was reported as "Other Federal Reserve accounts"; thereafter, "Other Federal Reserve assets" and
"Other Federal Reserve liabilities and capital" are shown separately.
4. Before Jan. 30, 1934, data include gold held in Federal Reserve Banks and in circulation.
5. These figures include currency and coin (other than gold) issued directly by the Treasury. The largest
components are fractional and dollar coins. For details see the regular table, "Currency and Coin in Circulation," in the Treasury Bulletin.
6. This category consists of the coin and paper currency held by the Treasury, as well as any gold in excess
of the gold certificates issued to the Reserve Bank.
7. Between Dec. 1, 1959, and Nov. 23, 1960, part of the amount was allowed as reserves; thereafter all was
allowed.
8. These figures are estimated through 1958. Before 1929, they were available only on call dates (in 1920
and 1922, the call dates were Dec. 29). Beginning Sept. 12, 1968, the amount is based on close-of-business
figures for the reserve period 2 weeks previous to the report date.
9. Beginning Dec. 1, 1966, these securities include federal agency obligations held under repurchase agreements and beginning Sept. 29, 1971, federal agency issues bought outright.




Tables

335

17—Continued

Factors absorbing reserve funds

Currency
in
circulation

42,056
44,663
47,226
50,961
53,950

Treasury
cash
holdings6

760
1,176
1,344
695
596

Deposits, other
than member bank
reserves, with
Federal Reserve Banks

Treasury

Foreign

Other2

Reserve accounts"

Other
Federal
Reserve
accounts3

Other
Federal
Reserve
liabilities
and
capital3

211
-147
-773
-1,3530

0
0
0
0
1,919

18,447
19,779
21,092
21,818
22,085

4,163
4,310
4,631
4.921
5,187

22,848
24,321
25,905
27,439
28,173

-238
-232
-182
-700
-901

30,033
32.496
32,044
35,268
37,011
35,197
35,461
37,615

-460
1,035 l2
98
-1,360
-3,798 14
-1.103
-1,535
-1,265

With
Federal
Reserve
Banks

Currency
and
coin7

Required8

Excess8' l2

668
416
1,123
703
1,312

150
174
135
216
134

355
588
653
747
807

57,093
61,068
66,516
72,497
79,743
86,547
93,717
103,811

431 1,156
460 2,020
345 1,855
317 2,542
185 3,113
483 7,285
460 10,393
392 7,114

148
294
325
251
418
353
352
379

,233
999
840
,41913
,27513
,090
,357
,187

0
0
0
0
0
0
0
0

1,986
2,131
2,143
2,669
2,935
2,968
3,063
3,292

24,150
27,788
25,647
27,060
25,843
26,052
25,158
26,870

5,423
5,743
6,216
6.781
7,370
8,036
8,628
9,421

114,645
125,473

240
426

4,196
4,075

368
429

,256
,412

0
0

4,275
4,957

31,152
29,792

10,538
11.429

42,694 -893
44,217 -2,835

110,662
111,334
111,988
113,234
115,335
116,575
117,896
118,914
118,716
120,125
122,082
125,473

289
339
385
370
364
370
262
268
337
394
427
426

3,522
3,443
5,726
3,100
1,974
3,290
2,765
3,542
6,489
2,209
2,590
4,075

339
343
303
388
407
326
373
325
348
352
490
429

874
779
708
813
852
813
636
663
780
286
352
1 ,412

0
0
0
0
0
0
0
0
0
0
0
0

4,594
4,679
4,750
4,641
4,715
4,836
4,951
4,876
5,086
5,011
5,378
4,957

29,931
29,723
31,714
34,587
31,602
30,407
30,279
29,493
29,089
32,561
32,617
29,792

11.001
9.737
9,776
9,963
10,153
10,439
10,804
10,596
10.954
10,891
11,038
11,429

42,267 -1,194
39,637 -434
40,042 1,583
41,661 3,023
39,305 2,578
40,802
165
40,856
384
40,489 -243
41,769 -1,582
43,285
310
43,379
416
44,217 -2,835

10. Includes, beginning 1969, securities loaned—fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes (if any) securities sold and scheduled to be bought back under
matched sale-purchase transactions.
11. Beginning November 1979, includes reserves of member banks, Edge Act corporations, and U.S. agencies
and branches of foreign banks.
12. Beginning with the week ending Nov. 15, 1972, figures include $450 million of reserve deficiencies on
which Federal Reserve Banks are allowed to waive penalties for a transition period in connection with bank
adaptation to Regulation J as amended, effective Nov. 9, 1972. Allowable deficiencies (beginning with first
statement week of quarter) included are (in millions): 1973—Ql, $279; Q2, $172; Q3, $112; Q4. $84; and
1974—Ql, $67, and Q2, $58. The transition period ended after the second quarter of 1974.
13. Beginning July 1973, this item includes certain deposits of domestic nonmember banks and foreignowned banking institutions held with member banks and redeposited in full with Federal Reserve Banks in
connection with voluntary participation by nonmember institutions in the Federal Reserve System's program of
credit restraint.
As of Dec. 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch deposits at
Federal Reserve Banks that are associated with marginal reserves are no longer reported. However, two
amounts are reported: (1) deposits voluntarily held as reserves by agencies and branches of foreign banks
operating in the United States, and (2) Eurodollar liabilities.
14. Beginning with the week ending Nov. 19, 1975, figures are adjusted to include waivers of penalties for
reserve deficiences, in accordance with change in Board policy that became effective Nov. 19. 1975.
NOTE. For a description of figures and discussion of their significance, see "Member Bank Reserves and
Related Items," Section 10 of Banking and Monetary Statistics, 1941-1970 (Board of Governors of the Federal
Reserve System, September 1, 1976), pp. 507-23. '




336

Tables

18. Changes in Number of Banking Offices in the United States during 1979

Type of office
and change

Commercial banks (including stock savings
banks and nondeposit trust companies)
All
banks

Member
Total

Mutual
savings
banks

Nonmember

Total

National

State

Banks, Dec. 3 1 , 1 9 7 8 . . . . 15,177 14,712
Changes during 1979
New banks
239
237
Voluntary liquidations..
-2
-2
Ceased banking
operations
-6
-6
Banks converted
into branches
-221
-217
Other
-16
-16
Interclass changes
Nonmember to
national
Nonmember to
state member...
State member to
nonmember
National to nonmember
Noninsured non-mem:
ber to state member
Noninsured to insured
Noninsured mutual to
insured mutual .
-4
-6
Net change....

5,564

4,564

1,000

8,815

333

325

73

42

31

131

33
-2

2

-2

-4

-139

-116

14,708

5,425

4,448

Dec. 31,1979

15,171

-128
-10

-97
-9

NonInsured insured Insured

-31
-1

1
6

-29

29
53

1

-1
2

-2

-23

HI

24

-1

-1

977

8,926

357

324

139

51

2,191

349

1

Branches and additional
offices, Dec. 31,
1978 2
36,930 34,390 22,685 17,974 4,711 11,654
Changes during 1979
161 1,009
1,051
890
2,415 2,061
De novo
41
134
175
40
215
219
Banks converted
-207
-46
-161
-308
-282
Discontinued
-74
-1
2
-3
Sale of branch
Interclass changes
Nonmember to
104
104
-104
national
Nonmember to
60
60
-60
state member
State member to
84
-84
national
State member to
79
-79
-79
non member
National to state
95
-95
member
National to non270
-270 -270
member
Noninsured mutual to
c
insured mutual
Facilities reclassi1
1
1
fied as branches
8
-6
16
24
18
20
Other
158 1,155
700
858
Net change.... 2,347 2,013
Dec.31,1979 2
Banking facilities,
Dec. 31, 19783
Changes during 1979
FctahiicheH

39,277 36,403 23,543 18,674
168

168

145

134

2
-3

2
-3

2
-3

Net change....
T%nr 1 1 1 4 7 4 ^

4,869 12,809
11

1

342

-1

12

4
-1

-25

1

-1

-1

2
324
51

10

2,515

359

23

2
-3

Interclass changes
National to
Facilities reclassi-

-4

-6

-53

1

140

-1
6

-29
-53

-89
-6

Noninsured

-2
1

2
2
13

-2

-2

-2

1
-4

166

166

143

130

23

1. As of Dec. 31, 1979, 13 state member noninsured trust companies are included.

 exclude banking facilities.
2. Figures
3. Data include
http://fraser.stlouisfed.org/ facilities provided at military and other government establishments through arrangements made
bv the Treasurv.
Federal Reserve Bank of St. Louis

Tables

337

->t Par and Nonpar Banking Offices, December 3 1 .
Par

Nonpar
(nonmember)

'JY.tal

Member

Total

Nonmember

Area
Banks

Branches
and
offices

Banks

Branches
and
offices

Banks

Branches
and
offices

Banks

Branches
and
offices

Banks

Branches
and
offices

Federal Reserve district
357
453
363
680
721
1,844

2,175
4,873
2,394
3,125
4,872
4,013

357
453
363
680
721
1,838

2,175
4,873
2,394
3,125
4,872
4,009

170
234
224
393
373
579

1,087
4,055
1,443
2,514
2,983
2,057

187
219
139
287
348
1,259

1,088
818
951
611
1,889
1,952

2,780
Chicago
1,445
St. Louis
Minneapolis. . 1,424
Kansas City . . 2,293
1,586
Dallas
587
San Francisco

4,165
1,896
711
1,134
512
6,948

2,780
1,445
1,424
2,293
1,585
587

4,165
1,896
711
1,134
512
6,948

898
394
511
801
708
140

2,461
859
383
679
195
5,020

1,882
1,051
913
1,492
877
447

1,704
1,037
328
455
317
1,928

36,818 14,526

36,814

5,425

23,736

9,101

13,078

Boston
New York . . .
Philadelphia..
Cleveland . . .
Richmond . . .
Atlanta

TOTAL 14,533

6

4

1
7

4

State
Alabama . . . .
Alaska
Arizona
Arkansas . . . .
California . . .
Colorado . . . .
Connecticut..
Delaware....
District of
Columbia
Florida

317
12
22
259
242
307
65
18

575
109
505
392
4,082
97
593
147

317
12
22
259
242
307
65
18

575
109
505
392
4,082
97
593
147

123
6
3
74
49
166
21
6

383
82
335
203
3,093
64
287
5

194
6
19
185
193
141
44
12

192
27
170
189
9891
33
306
142

17
575

140
945

17
575

140
945

16
249

138
462

1
326

2
483

Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky....
Louisiana. . . .
Maine

439
9
27
1,282
405
656
617
343
262
41

830
160
236
452
1,082
538
254
696
764
300

439
9
27
1,282
405
656
617
343
255
41

830
160
236
452
1,082
538
254
696
760
300

72
3
472
159
139
167
88
61
17

443
11
190
238
561
182
131
356
344
148

367
6
16
810
246
517
450
255
194
24

387
149
46
214
521
356
123
340
416
152

Maryland....
Massachusetts
Michigan....
Minnesota . . .
Mississippi . .
Missouri . . . .
Montana . . . .
Nebraska
Nevada
New Hampshire . . . .

102
148
372
760
182
721
162
454
9

903
937
2,001
227
667
415
28
236
135

102
148
372
760
182
721
162
454
9

903
937
2,001
227
667
415
28
236
135

36
78
202
237
43
145
101
125
5

463
491
1,485
118
282
107
18
175
126

66
70
170
523
139
576
61
329
4

440
446
516
109
385
308
10
61
9

77

146

77

146

40

97

37

49

New Jersey . .
New Mexico .
New York . . .
North
Carolina
North
Dakota. .
Ohio
Oklahoma . . .
Oregon
Pennsylvania
Rhode Island .

176
86
295

1,555
238
3,388

176
86
295

1,555
238
3,388

108
46
162

1,208
137
3,096

68
40
133

347
101
'292

82

1,723

82

1,723

28

841

54

882

173
408
494
79
375
16

123
2,105
247
551
2,479
230

173
408
494
79
375
16

123
2,105
247
551
2,479
230

44
270
207
11
235
5

47
1,807
188
340
1,621
117

129
138
287
68
140
11

76
298
59
211
858
113




'.'.'.'.'.

7

..

..

4

338
19.

Tables
N u m b e r of P a r a n d N o n p a r r - a i s k i i n : O i ' i i c c - > . D e c e m b e r 3 1 , 1 9 7 9 — C o n t .

Par
Total

Total
Area
Banks

Member

Nonmember

Nonpar
(nonmember)

Branches
Branches
Branches
Branches
Branches
and
and
and
and
Banks
Banks
Banks
and
Banks
offices
offices
offices
offices
offices
State—Continued

South
Carolina
85
154
South Dakota
Tennessee . . .
351
1,427
Texas
74
Utah
29
Vermont
233
Virginia
109
Washington..
233
West Virginia
Wisconsin . . .
631
Wyoming
94

688
158
991
233
272
159
1,371
884
59
500
3

688
158
991
233
272
159
1,371
884
59
500
3

85
154
351
1,427
74
29
233
109
233
631
94

25
60
79
656
27
13

359
114
460

150
25

1,154
619
35
185

136
158
66

329
44
531
163
54

1

60
94
272
771
47
16
83
84
97
473
28

1
7
204

70
218
44

115
217

265
24
315

Other area
American 2
Samoa
Guam 2
Puerto Rico 3
Virgin
Islands 3

1
3
17

1

1

13
229
26

13
229

6

1
3

25

17

26

26

6

1
3
17

1. Includes 1 Los Angeles branch and 18 New York City branches of 3 insured nonmember Puerto Rican banks.
2. American Samoa and Guam assigned to the San Francisco District for check-clearing and collection purposes.
All member branches in Guam are branches of California and New York banks.
3. Puerto Rico and the Virgin Islands assigned to the New York District for check-clearing and collection
purposes. All member branches in Puerto Rico and the Virgin Islands are branches of banks located in California,
New York, and Pennsylvania. Certain branches of Canadian banks (1 in Puerto Rico and 5 in the Virgin Islands) are
included above as nonmember banks; and nonmember branches in Puerto Rico include 8 other branches of Canadian
banks.
NOTE. Comprises all commercial banking offices on which checks are drawn, including 166 banking facilities.
Number of banks and branches differs from that in table 18 because this table includes banks in Guam, Puerto Rico,
and the Virgin Islands but excludes banks and trust companies on which no checks are drawn.




Tables

339

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979
Number of
banking offices
Name of bank, type of transaction,
and other banks involved '

Bank of Virginia—Central Valley,
Verona, Va.
Merger
Community Bank and Trust Company of
Augusta County, Verona, Va.

Page for
Attorney
General's
and
Board's
actions

Assets
(millions
of dollars)

In
operation

To be
operated

352

(2)

(2)

2
8

2

Central Bank of Norther Virginia, Bailey's
Crossroads, Va.
Merger
First Manassas Bank and Trust Company,
Manassas, Va.

57

8

26

4

Central Fidelity Bank, Bailey's
Crossroads, Va.
Merger
Central Fidelity Bank, NA, Herndon, Va.

90

14

12

351
1 O

lo

31

4

100

10

55

Central Trust Company, Reynoldsburg, Ohio
Merger
Central Trust Company of Zanesville,
Zanesville, Ohio
Colonial American Bank, Lynchburg, Va.
Merger
Metropolitan Bank of Central
Virginia, Lynchburg, Va.

343
11

6

344
16

1

(2)

(2)
7

1

Commercial Trust Company of New
Jersey, Jersey City, N.J.
Acquisition of certain assets and assumption
of certain liabilities of
Community State Bank and Trust
Company, Linden, N.J.

346

18

163

11

Cortland Savings and Banking Company,
Cortland, Ohio
Merger
Western Reserve Bank of Portage County,
Windham, Ohio

108

4

12

2

Elliott State Bank, Jacksonville, 111.
Merger
First National Bank of Jacksonville, Jacksonville, 111.

122

Exchange Bank of Temple Terrace,
Temple Terrace, Fla.
Merger
Exchange National Bank of Tampa,
Tampa, Fla.



51

4

393

6

347
1

j
346
29

350
6

3 )

345
3

41

2
)

353
10

340

Tables

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
Number of
banking offices
Name of bank, type of transaction,
and other banks involved '

FM State Bank, Sebewaing, Mich.
Merger
Farmers and Merchants State Bank
of Sebewaing, Sebewaing, Mich.

Assets
(millions
of dollars)

To be
operated

operation

Page for
Attorney
General's
and
Board's
actions

355
30

Fidelity American Bank, Norfolk, Va.
Merger
Fidelity American Bank, Eastern Shore,
Parksley, Va.

296
19

3

Fidelity American Bank, Norfolk, Va.
Merger
First National Bank of Yorktown,
Yorktown, Va.

315

36

Fidelity Union Trust Company,
Newark, N.J.
Acquisition of certain assets and assumption
of certain liabilities of
Livingston State Bank, Livingston, N.J.
First City Bank of Dallas, Dallas, Tex.
Merger
United National Bank, Dallas, Tex.
Jefferson Bank of the Valley,
Fisherville, Va.
Acquisition of certain assets and assumption
of certain liabilities of
Three branches of National Bank and
Trust Company, Charlottesville, Va.
MCB Bank, Dundee, Mich.
Merger
Monroe County Bank, Dundee, Mich.

343

33

36

348
40

19

4

1,154

33

352
35

15

2

537

1

103

1

347

349

16

354
22

3

Midwest Bank & Trust Company,
Cleveland, Ohio
Merger
Firelands Community Bank,
Huron, Ohio

103

3

48

3

Midwest Bank & Trust Company,
Cleveland, Ohio
Merger
Midwest Bank & Trust Company of
Portage County, Aurora, Ohio

103

5

10

2

For notes see p. 342.




354

345

Tables

341

20.—Continued

Number of
banking offices
Name of bank, type of transaction,
and other banks involved '

NB State Bank, Keysville, Va.

Assets
(millions
of dollars)

To be
operated

In
operation

348

(2)

(2)

n n 4} ••ftfi W*

Merger
State Bank of Keysville, Keysville, Va.
Naumkeag Trust Company,
Salem, Mass.
Merger
Merchants National Bank of Newburyport,
Newburyport, Mass.
New Citizens Bank, Baytown, Tex.
Merger
Citizens Bank and Trust Company
of Baytown, Baytown, Tex.
Ohio Citizens Trust Company, Toledo, Ohio
Merger
Peoples State Bank, Wauseon, Ohio
SBT Bank, Petoskey, Mich.
Consolidation
State Bank and Trust Company of
Petoskey, Petoskey, Mich.

Page for
Attorney
General's
and
Board's
actions

17

1

47

8

11

I

3

349

107

1

522

20

33

n

I •

346

2

68

5

Southern Bank, Richmond, Va.
Merger
NB Bank of Richmond, Henrico
County, Va.

245

18

19

6

Union Bank, Los Angeles, Calif.
Consolidation
Chartered Bank of London, San
Francisco, Calif.

5,412

26

679

33

64

13,191

296

66
13,157

272

354

7

United California Bank, Los Angeles, Calif.
Merger
Sierra National Bank, Petaluma, Calif.

i•
ii-

348

1

United California Bank, Los Angeles, Calif.
Merger
Gavilan Bank, Gilroy, Calif.

22

5

16

1

Union Savings Bank and Trust Company,
Steubenville, Ohio
Merger
Scio Bank Company, Scio, Ohio

For notes see p. 342.




352

345

350
6

34

353
303

I

278

344

342

Tables

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
Number of
banking offices
Name of bank, type of transaction,
and other banks involved '

Assets
(millions
of dollars)

In
operation

To be
operated

43

1

United Jersey Bank, Hackensack, N.J.
Merger
United Jersey Bank/Par-Troy,
Parsippany, N.J.

1,511

33

2

1,478

40

]

350

j

United Jersey Bank, Hackensack, N.J.
Merger
United Jersey Bank/South Bergen,
Carlstadt, N.J.

Page for
Attorney
General's
and
Board's
actions

United Virginia Bank/Commonwealth,
Richmond, Va.

33

3

45

343
43

1

(2)

(2)

352

Merger
United Virginia Bank, Richmond, Va.
United Virginia Bank of Charlottesville,
Charlottesville, Va.
United Virginia Bank of Gloucester,
Gloucester, Va.
United Virginia Bank of Roanoke, N.A.,
Roanoke County, Va.
United Virginia Bank of Spotsylvania,
Spotsylvania Court House, Va.
United Virginia Bank of Williamsburg,
Williamsburg, Va.
United Virginia Bank/Citizens & Marine,
Newport News, Va.
United Virginia Bank/Citizens of South
Boston, South Boston, Va.
United Virginia Bank/First National,
Lynchburg, Va.
United Virginia Bank/National,
Vienna, Va.
United Virginia Bank/National Valley,
Staunton, Va.
United Virginia Bank/Peoples of
Gretna, Gretna, Va.
United Virginia Bank/Rockbridge,
Lexington, Va.
United Virginia Bank/Seaboard National,
Norfolk, Va.
United Virginia Bank/Spots wood,
Rockingham County, Va.

960
20

34
3

48

2

61

7

12

3

80

7

164

14

31

2

136

8

619

38

52

4

26

1

29

3

444

31

54

3

Walker Bank and Trust Company, Salt
Lake City, Utah
Merger
Milford State Bank, Milford, Utah

673

29

1

18

3

J

160

351
32

1. Each proposed transaction was to be effected under the charter of the first-named bank. This table is in
alphabetical order; the notes appear in chronological order of approval.
2. This
FRASER is a newly organized bank, not in operation.

Digitized for


Tables

343

United Jersey Bank, Hackensack, N.J., to merge with United Jersey Bank/South
Bergen, Carlstadt, N.J.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (1-5-79)

The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (1-9-79)
United Jersey Bank, with deposits of $1.1 billion, and United Jersey Bank/South
Bergen, with deposits of $30 million, have requested approval to merge. Both banks are
wholly owned subsidiaries of United Jersey Banks, Princeton, New Jersey. This holding
company is the second largest banking organization in the state, and has consolidated
assets of $2.3 billion.
The proposed merger would have no adverse competitive effects, and banking factors
are consistent with approval. The merger should produce certain operating efficiencies.
and a broader range of services would be available at the offices now operated by the
smaller bank. Thus, the convenience and needs factor lends slight weight to approval.
Central Bank of Northern Virginia, Bailey's Crossroads, Va., to merge with
First Manassas Bank and Trust Company, Manassas, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (1-5-79)
The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (1-15-79)
Central Bank of Northern Virginia, with deposits of about $55 million, and First Manassas Bank and Trust Company, with deposits of about $22 million, have requested
approval to merge. Both are wholly owned subsidiaries of Central National Corporation,
Richmond, Virginia. On October 31, 1978, the Board approved the merger of Central
National Corporation with Fidelity American Bankshares, Inc. Upon consummation, the
resulting holding company will be the sixth largest banking organization in Virginia,
with 7.8 percent of the total commercial bank deposits in the state.
The proposed merger would have no adverse competitive effects, and the banking
factors are satisfactory. The proposed merger should result in more efficient operations
and enable the resulting bank to make larger loans without participations.
Fidelity American Bank, Norfolk, Va., to merge with Fidelity American Bank,
Eastern Shore, Parksley, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (1-5-79)
The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (1-25-79)
Fidelity American Bank, Norfolk, with deposits of $217 million, and Fidelity American
Bank, Eastern Shore, with deposits of $16 million, are requesting approval to merge.
Both banks are subsidiaries of Commonwealth Banks, Inc., Richmond, Virginia, and.
therefore, the transaction would have no adverse competitive effects.




344

Tables

20. Mergers, Consolidations, Acquisitions o\ Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
The financial and managerial resources and prospects of the banks proposing to merge
and of the resulting institution are consistent with approval of the application. So, too. is
the convenience and needs factor, as the resulting bank would have an increased lending
base, fewer overlapping services and functions, and its organization would permit more
efficient operation.
The Central Trust Company, Reynoldsburg, Ohio, to merge with The Central
Trust Company of Zanesville, Zanesville, Ohio
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (1-5-79)

The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2-14-79)

The Central Trust Company, with deposits of $85 million, and The Central Trust
Company of Zanesville, with deposits of $49 million, are requesting approval to merge.
The banks are subsidiaries of The Central Bancorporation, Inc.. Cincinnati. Ohio. and.
thus, the transaction would have no adverse competitive effects.
Both banks are in satisfactory condition, and the financial and managerial considerations, as well as the convenience and needs factor, are consistent with approval.
United California Bank, Los Angeles, Calif., to merge with Sierra National Bank,
Petaluma, Calif.
SUMMARY REPORT BY THE ATTORNEY GENERAL (3-30-79)
We have reviewed this proposed transaction and conclude that it would not have any
adverse effect upon competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (2-22-79)

United California Bank (Applicant), with deposits of $7.7 billion, proposes to merge
with the Sierra National Bank (Sierra), with deposits of $32 million. Applicant, a
subsidiary of Western Bancorporation, is the fifth largest bank in California, with 7.2
percent of the total commercial bank deposits.
Applicant operates throughout the state, with the largest number of offices being in
southern California. Sierra operates six offices in California, five in the San Francisco
and one in the Santa Rosa metropolitan banking market; Applicant operates in both
markets. In the San Francisco metropolitan banking market, the nearest offices of
proponents are four miles apart; in the Santa Rosa market, nine miles apart. In the San
Francisco market. Applicant holds 2.96 percent of the total deposits and Sierra only 0.08
percent. In the Santa Rosa market, Applicant holds 2.4 percent of the deposits to Sierra's
1 percent. While the proposal to merge would eliminate a small amount of competition,
numerous alternatives will remain, and the resulting bank will still hold only a small
share of the deposits in the two relevant markets. The overall competitive effect is
viewed as slightly adverse.
If the merger is approved, Applicant, with its larger resources and lending limits,
would offer a wider range of services to Sierra's customers. A somewhat weak competitor would be replaced by a strong one. In Marin County especially, large credits are
needed to finance the development of ongoing residential tracts, as well as industrial
projects. Applicant also would introduce specialized services, such as bank cards and
trust services and the instantaneous verification of customers' demand and savings
accounts between branches bv the use of computers at tellers' stations, and would



Tables

345

continue the convenient banking hours that were established by Sierra while conducting
a study to determine whether automatic tellers would be as effective as longer banking
hours. The convenience and needs factor thus appears sufficiently substantive to outweigh a small negative impact on competition.
Applicant's capital position is viewed as less than satisfactory although it is not of
serious concern in view of the bank's strength of management and history of earnings.
But, because consummation of the proposed merger would have little, if any, effect on
Applicant's condition, it is believed that the banking factors are consistent with approval.
Elliott State Bank, Jacksonville, 111., to merge with First National Bank of
Jacksonville, Jacksonville, 111.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (2-26-79)

We have reviewed this proposed transaction and conclude that it would not have a
substantial competitive impact.
B A S I S F O R A P P R O V A L B Y T H E B O A R D O F G O V E R N O R S (3-2-79)

In view of the financial condition of First National Bank of Jacksonville and on the basis
of information before the Board, it is apparent that a situation exists that requires
expeditious action pursuant to section 1828(c) of the Bank Merger Act in order to
safeguard the depositors of this bank.
While the Board would prefer a less anticompetitive merger, it appears that one is not
readily available. Thus, banking factors and convenience and needs considerations lend
such significant weight toward approval as to clearly outweigh, in the public interest, the
substantially adverse effects. It is the Board's judgment that any disposition of the
application other than approval would be inconsistent with the public interest.
Union Bank, Los Angeles, Calif., to consolidate with The Chartered Bank of
London, San Francisco, Calif.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (1-5-79)

We have reviewed this proposed transaction and conclude that it would not have a
substantial competitive impact.
BASIS FOR APPROVAL BY THE BOARD O F GOVERNORS (3-16-79)

The proposal is a transaction to facilitate the acquisition of Union Bank by Standard
Chartered Limited and Standard Chartered Overseas Holdings Limited, both of London,
England, and Standard Chartered Bancorp, San Francisco (California), all bank holding companies.
The proposed merger of Union Bank and The Chartered Bank of London would, in
itself, have no adverse competitive effects. The financial and convenience and needs
factors are consistent with approval of the application.
The Midwest Bank & Trust Company, Cleveland, Ohio, to merge with
The Midwest Bank & Trust Company of Portage County, Aurora, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL (2-9-79)
The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.




346

Tables

20. Mergers, Consolidations. Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Com.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (3-23-79)

The Midwest Bank & Trust Company, with deposits of $78 million, proposes to merge
with The Midwest Bank & Trust Company of Portage County, which has deposits of $9
million. Both banks are subsidiaries of Midwest Bancorporation, Inc., Cleveland. Ohio.
Consummation of the transaction would have no adverse competitive effects. Banking
factors and the convenience and needs factors are consistent with approval of the application.
New Citizens Bank, Baytown, Tex., to merge with Citizens Bank and Trust
Company of Baytown, Baytown, Tex.
SUMMARY REPORT BY THE ATTORNEY GENERAL

(No report received.)
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (3-30-79)

The proposal is a transaction to facilitate the acquisition of Citizens Bank and Trust
Company of Baytown by Citizens Bankers, Inc., Baytown, Texas, a bank holding
company.
The proposed merger with New Citizens Bank would, in itself, have no adverse
competitive effects. The financial and convenience and needs factors are consistent with
approval of the application.
Commercial Trust Company of New Jersey, Jersey City, N.J., to acquire certain
assets and assume certain liabilites of Community State Bank and Trust Company,
Linden, N.J.
SUMMARY REPORT BY THE ATTORNEY GENERAL (3-30-79)

We have reviewed this proposed transaction and conclude that it would not have a
significantly adverse effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (4-6-79)

The proposed acquisition involves Commercial Trust Company of New Jersey (Applicant), with deposits of $300 million, and Community State Bank and Trust Company
(Bank), with deposits of $148 million. Applicant is the twenty-sixth largest banking
organization in the state, with 1 percent of the total commercial banking deposits.
Applicant, which operates 18 offices, derives 91 percent of its deposits from the metropolitan New York market, and is also represented in the Plainfield, Paterson, and
Greater Newark markets. Bank is the thirty-fourth largest commercial banking organization in the state. It has six branch offices in the Greater Newark market, where it
ranks eleventh, with 1.9 percent of the deposits; and operates four branch offices and
one regional loan production office in the Asbury Park market.
Applicant operates one office that holds less than 1 percent of the deposits in the
Greater Newark market, and operates no offices in the Asbury Park market. The nearest
offices of the merging banks are approximately 18 miles apart. While the proposed
acquisition would foreclose the possibility of some increased future competition between
these banks, many of the state's largest banking organizations are already represented in
these markets. The overall competitive effect of the proposed acquisition would be
slightly adverse.
The financial and managerial resources and future prospects of Applicant and Bank
are satisfactory, as they also are for the resulting institution. Thus, considerations relating to such factors are regarded as being consistent with approval of the application.



Tables

347

20,—Continued

The convenience and needs factor also lends some weight to approval. Applicant has
indicated that it will increase the interest rate on passbook savings accounts at Bank's
offices from 4!/2 to 5 percent and will offer trust services, automatic teller devices, and
other customer computer services in the offices that are currently operated by Bank.
First City Bank of Dallas, Dallas, Tex., to merge with United National Bank,
Dallas, Tex.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (9-21-78)

We have reviewed this proposed transaction and conclude that it would not have a
significantly adverse effect upon competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS

(5-2-79)

Although the physical plant of United National Bank limits its ability to provide the
services expected of a full-service bank, and consequently limits its potential to become
a full-service competitor within the Dallas banking market, it appears that approval of
this application would result in a slight increase in the concentration of banking resources within the pertinent banking market and would remove one independent competitor. Therefore, because of such a negative effect, the Board concludes that competitive considerations are slightly adverse.
The Board has examined the information of record concerning the financial and
managerial resources of First City Bank of Dallas (Applicant), United National Bank
(Bank), and First City Bancorporation of Texas, Inc., the parent holding company of
Applicant, and concludes that the financial and managerial resources and future prospects of the institutions involved are satisfactory.
In its submissions on the convenience and needs of the community to be served.
Applicant has stated that, although Bank must cease operation after consummation of the
merger, as required by State law, it intends to maintain a trust office at Bank's location
and will offer Bank's customers the following services in addition to those that it
currently offers: an increased lending capacity, specialized lending services, trust services, electronic data processing, investment services, and improved facilities. Applicant
will provide these services either directly, or indirectly through First City Bancorporation of Texas, Inc., and its other subsidiaries. Therefore, because more banking service
alternatives will be available to the community, the Board finds that considerations
relating to the convenience and needs of the community to be served are consistent with
approval.
After considering the competitive effects, the financial and managerial resources and
future prospects of the existing and proposed institutions, and the convenience and needs
of the community to be served, the Board finds that consummation of the proposal would
be consistent with the public interest.
Colonial American Bank, Lynchburg, Va., to merge with Metropolitan Bank of
Central Virginia, Lynchburg, Va.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (4-20-79)

The proposed merger is part of a plan through which Metropolitan Bank of Central
Virginia, Lynchburg, would become a subsidiary of Colonial American Bankshares
Corporation, a bank holding company. The instant merger, however, would merely
combine an existing bank with a nonoperating institution [Colonial American Bankl; as
such, and without regard to the acquisition of the surviving bank by Colonial American
Bankshares Corporation, it would have no effect on competition.



348

Tables

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (5-14-79)

The proposal is a transaction to facilitate the acquisition of Metropolitan Bank of Central
Virginia by Colonial American Bankshares Corporation.
The proposed merger would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.
NB State Bank, Keysville, Va., to merge with State Bank of Keysville,
Keysville, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (4-20-79)

The proposed merger is part of a plan through which State Bank of Keysville would
become a subsidiary of NB Corporation, a bank holding company. The instant merger,
however, would merely combine an existing bank with a nonoperating institution |NB
State Bank]; as such, and without regard to the acquisition of the surviving bank by NB
Corporation, it would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (5-24-79)

The proposal is a transaction to facilitate the acquisition of State Bank of Keysville by
NB Corporation, Charlottesville.
The proposed merger would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.
Fidelity American Bank, Norfolk, Va., to merge with The First National Bank of
Yorktown, Yorktown, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (Undated)
The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (5-30-79)
Fidelity American Bank (Applicant) and The First National Bank of Yorktown are
wholly owned subsidiaries of Commonwealth Banks, Inc., Richmond, Virginia. The
holding company is the sixth largest financial institution in Virginia, with 7.6 percent of
the total commercial bank deposits in the state. There are no competitive considerations
involved. The financial and managerial resources and future prospects of Applicant are
considered good. Considerations of the convenience and needs of the communities to be
served are consistent with approval.
The Ohio Citizens Trust Company, Toledo, Ohio, to merge with The Peoples State
Bank, Wauseon, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL (5-1 -79)

We have reviewed this proposed transaction and conclude that it would not have a
significantly adverse effect upon competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (5-31-79)

The Ohio Citizens Trust Company (Applicant), with deposits of $392 million, proposes to merge The Peoples State Bank (Bank).




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349

Bank is the second largest banking organization in the Fulton County banking market,
with 16.2 percent of the deposits. Since proponents are located in separate banking
markets, no significant competition would be eliminated by consummation of the proposal to merge. The Fulton County banking market does not appear attractive for entry
by de novo branching.
The financial and managerial resources and future prospects of Applicant are regarded
as satisfactory, and those of Bank, as generally satisfactory. The financial and managerial resources of the resulting institution also would be satisfactory.
With respect to the convenience and needs factor. Bank's customers would have
access to Applicant's higher lending limit, thereby enabling Bank to meet the credit
needs of its large commercial and agricultural customers. In addition. Applicant would
offer a number of new and expanded services, including trust services, leasing, cash
management, payroll and account reconciliation services, and financing for mobile
homes, and indirect installment lending.
Jefferson Bank of the Valley, Fishersville, Va., to acquire certain assets and assume
certain liabilities of three branches of National Bank and Trust Company,
Charlottesville, Va.
S U M M A R Y R E P O R T BY T H E A T T O R N E Y G E N E R A L (5-22-79)

This proposed transaction is essentially a corporate reorganization and would have no
effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (6-21-79)

The proposed transaction constitutes an internal corporate reorganization by NB Corporation, under which the three Augusta County branches of its wholly owned subsidiary
National Bank and Trust Company would be spun off into Jefferson Bank of the Valley,
a de novo bank that the holding company proposes to acquire.
The proposed transaction would result in no change in the holding company's relative
position in Virginia or in Augusta County, and would have no adverse effects on existing
or potential competition in any relevant geographic market.
The financial and managerial resources and future prospects of the institutions involved have been considered and are consistent with approval of the application. Considerations relating to the convenience and needs of the communities to be served are
likewise consistent with approval.
Naumkeag Trust Company, Salem, Mass., to merge with The Merchants National
Bank of Newburyport, Newburyport, Mass.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (10-26-79)

We have reviewed this proposed transaction and conclude that it would not have an
adverse effect upon competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (7-17-79)

Naumkeag Trust Company, with deposits of $36 million, proposes to merge with The
Merchants National Bank of Newburyport (Merchants National), with total deposits of
about $9 million. The nearest offices of the banks are 21 miles apart, and there would
appear to be little competition between them. Both operate in the Boston banking
market, and the resulting bank will hold 0.4 percent of the deposits in that market.
The banking factors are consistent with approval of the application. The resulting
bank will offer new services at the offices of Merchants National, and the convenience
and needs factor lends some weight to approval.



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Tables

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board oi Governors during 1979—Cont.
United Jersey Bank, Hackensack, N.J., to merge with United Jersey
Bank/Par-Troy, Parsippany, N.J.
SUMMARY REPORT BY THE ATTORNEY GENERAL (6-27-79)

The merging banks are both subsidiaries of the same bank holding company. As such,
their proposed merger is essentially a corporate reorganization and would have no effect
on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (7-17-79)

United Jersey Bank proposes to merge with United Jersey Bank/Par-Troy. Both banks
are subsidiaries of United Jersey Banks, Princeton, New Jersey.
The proposal would have no adverse competitive effects, and the banking and convenience and needs factors are consistent with approval of the application.
The Cortland Savings and Banking Company, Cortland, Ohio, to merge with
Western Reserve Bank of Portage County, Wind ham, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-19-79)

We have reviewed this proposed transaction and conclude that it would not have a
substantial competitive impact.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (8-14-79)

The proposed merger involves The Cortland Savings and Banking Company (Applicant), with deposits of $84 million, and Western Reserve Bank of Portage County
(Bank), with deposits of $11 million. Applicant operates its four offices throughout
Trumbull County, and Bank operates two offices in Portage County, which adjoins
Trumbull County; these areas are situated in northeastern Ohio, in the vicinity of Warren. The nearest offices of the banks are approximately 20 miles apart. Applicant and
Bank operate in contiguous but separate banking markets. Bank, with approximately 25
percent of the market deposits, is the smallest of three banking organizations operating in
its market.
Although Applicant could enter the Windham market by de novo branching, the
market does not appear attractive. Bank similarly could enter the market served by
Applicant, but does not appear likely to do so in the near future.
Applicant is considered in sound financial condition. Bank has a problem with management succession, as its officers are approaching retirement age and there is no one
who could provide continuity of management.
The convenience and needs factor lends some weight to approval of the proposal.
Applicant has indicated that it will offer more services, including a wider range of
deposit accounts, additional types of credit, trust services, and data processing facilities,
to the community served by Bank.
Union Savings Bank and Trust Company, Steubenville, Ohio, to merge with
Scio Bank Company, Scio, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-19-79)

The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.




Tables

351

BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (8-27-79)

Union Savings Bank and Trust Company (Applicant), with deposits of $58 million,
proposes to merge with Scio Bank Company (Bank), with deposits of $4 million. Both
banks involved are subsidiaries of CleveTrust Corporation, Cleveland, Ohio.
The proposal would have no adverse competitive effects. Convenience and needs
considerations, including those relating to the Community Reinvestment Act. and the
banking factors are consistent with approval of the application. Applicant will offer
some additional services in Bank's service area, including trust services, "floor-plan"
lending, and automatic transfers between accounts.
Central Fidelity Bank, Bailey's Crossroads, Va., to merge with Central Fidelity
Bank, NA, Herndon, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-19-79)
The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9-7-79)

Central Fidelity Bank, with deposits of $68 million, proposes to merge with Central
Fidelity Bank, NA, with deposits of $25 million. Both banks are subsidiaries of Central
National Corporation, Richmond, Virginia.
The proposed merger would have no adverse competitive effects. It should result in
more efficient operations and enable the resulting bank to make larger loans without
participations. At present, the general condition of each bank is satisfactory.
Walker Bank and Trust Company, Salt Lake City, Utah, to merge with
Milford State Bank, Milford, Utah
SUMMARY REPORT BY THE ATTORNEY GENERAL

(No report received.)
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (9-14-79)

Walker Bank and Trust Company (Applicant), the third largest bank in Utah, controls
12.1 percent of the total commercial bank deposits in the state. Since Milford State Bank
(Milford Bank) holds only 0.4 percent of such deposits, the proposal to merge would
have no appreciable effect on the concentration of banking resources in Utah.
Milford Bank is the only bank in the relevant banking market, which is approximated
by Beaver County, Utah. No significant competition exists between the banks because
none of Applicant's banking offices is located in this market; the closest office is 48
miles away. It also appears unlikely that any significant competition would develop in
the future because Applicant is prevented, under the state's home office protection laws,
from establishing a branch in Beaver County. Thus, consummation of the transaction
would have no significant adverse effects on competition.
After examining the information of record concerning the financial and managerial
resources of Applicant and Milford Bank, the Board concludes that such resources and
future prospects of both institutions involved are satisfactory. The same would be true of
the resulting institution. Affiliation with Applicant would give Milford Bank access to
Applicant's financial and managerial resources and would provide an expanded line of
banking services. Therefore, considerations relating to the convenience and needs of the
community to be served lend some weight toward approval of the application. Based




352

Tables

20. Mergers, Consolidations. Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
upon the foregoing and other considerations reflected in the record, it is the Board's
judgment that the proposed acquisition is in the public interest and should be approved.
Bank of Virginia—Central Valley, Verona, Va., to merge with Community Bank
and Trust Company of Augusta County, Verona, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (8-13-79)

The proposed merger is part of a plan through which Community Bank and Trust
Company of Augusta County would become a subsidiary of Bank of Virginia Company,
a bank holding company. The instant merger, however, would merely combine an
existing bank with a nonoperating institution [Bank of Virginia—Central Valley]; as
such, and without regard to the acquisition of the surviving bank by Bank of Virginia
Company, it would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9-26-79)

The proposal is a transaction to facilitate the acquisition of Community Bank and Trust
Company of Augusta County, by Bank of Virginia Company.
The proposed merger would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.
United Virginia Bank/Commonwealth, Richmond, Va., to merge with 15 banking
subsidiaries of United Virginia Bankshares Incorporated, Richmond, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL

(No report received.)
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (9-27-79)

All banks involved in this proposal are subsidiaries of the same bank holding company.
The proposed transaction is essentially a corporate reorganization and would have no
effect on competition. The financial and convenience and needs factors are consistent
with approval of the application.
Fidelity Union Trust Company, Newark, N.J., to acquire certain assets and assume
certain liabilities 0/Livingston State Bank, Livingston, N.J.
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 Federal Reserve Bank to act
immediately in order to safeguard depositors of Livingston State Bank.)
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10-2-79)

On the basis of information before the Federal Reserve Bank, it is apparent that an
emergency situation exists so as to require immediate action pursuant to the provisions of
the Bank Merger Act, in order to safeguard depositors of Livingston State Bank.
Southern Bank, Richmond, Va., to merge with NB Bank of Richmond, Henrico
County, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (9-19-79)
We have reviewed this proposed transaction and conclude that it would not have a
significantly adverse effect upon competition.



Tables

353

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10-22-79)

The proposal by Southern Bank to merge with NB Bank of Richmond merely represents
a corporate reorganization of subsidiaries of Jefferson Bankshares, Inc., Charlottesville,
Virginia.
The proposed merger would have no adverse competitive effects. The financial and
convenience and needs factors are consistent with approval of the application.

The Exchange Bank of Temple Terrace, Temple Terrace, Fla., to merge with The
Exchange National Bank of Tampa, Tampa, Fla.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (9-19-79)

The merging banks are both subsidiaries of the same bank holding company. As such,
their proposed merger is essentially a corporate reorganization and would have no effect
on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (10-26-79)

Because The Exchange Bank of Temple Terrace (Applicant) and The Exchange National
Bank (Other Bank) are subsidiaries of the same bank holding company, the proposed
transaction is essentially a corporate reorganization and would have no effect on competition.
The financial condition and managerial resources of the banks are consistent with
approval of the application. Future prospects also appear favorable. Since applicant
proposes to provide additional trust services to the customers of both banks, the convenience and needs aspects are consistent with approval.
United California Bank, Los Angeles, Calif., to merge with Gavilan Bank,
Gilroy, Calif.
S U M M A R Y R E P O R T B Y T H E A T T O R N E Y G E N E R A L (10-26-79)

We have reviewed this proposed transaction and conclude that it would not have an
adverse effect on competition.
BASIS FOR APPROVAL BY THE SECRETARY, BOARD OF GOVERNORS (11-7-79)

United California Bank (Applicant), with deposits of $7.8 billion, proposes to merge
with Gavilan Bank (Gavilan), with deposits of $51 million. Applicant, a subsidiary of
Western Bancorporation, is the fifth largest bank in California, holding 7 percent of the
commercial bank deposits in the state. Gavilan operates seven offices in the San Francisco area; four are in the San Francisco-Oakland-San Jose metropolitan banking
market and hold less than 1 percent of the deposits there. Applicant also operates in
this market, and holds about 2 percent of such deposits. The nearest offices of the
merging banks in this market are four miles apart, which makes it appear that there
is a small amount of competition. Gavilan operates three offices in two other markets, holding 2 percent of the deposits in one and 6 percent in the other. Applicant is
not represented in either market.
The condition of the resulting bank would be generally satisfactory, and the banking
factors are consistent with approval of the application. With its larger resources and
lending limits, Applicant would offer a wider range of services to Gavilan's customers.
Thus, the convenience and needs factor also lends slight weight to approval.




354

Tables

20. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1979—Cont.
MCB Bank, Dundee, Mich., to merge with Monroe County Bank, Dundee, Mich.
SUMMARY REPORT B Y THE ATTORNEY GENERAL (11-19-79)

The proposed merger is part of a plan through which Monroe County Bank would
become a subsidiary of National Ann Arbor Corporation, a bank holding company. The
instant merger, however, would merely combine an existing bank with a nonoperating
institution [MCB Bank]; as such, and without regard to the acquisition of the surviving
bank by National Ann Arbor Corporation, it would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11-19-79)

The proposal is a transaction to facilitate the acquisition of Monroe County Bank by
National Ann Arbor Corporation, Ann Arbor, Michigan.
The proposed merger would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.
SBT Bank, Petoskey, Mich., to consolidate with State Bank and Trust Company of
Petoskey, Petoskey, Mich.
SUMMARY REPORT B Y THE ATTORNEY GENERAL (10-26-79)

The proposed merger is part of a plan through which State Bank and Trust Company
would become a subsidiary of Old Kent Financial Corporation, a bank holding company.
The instant merger, however, would merely combine an existing bank with a nonoperating institution [SBT Bank]; as such, and without regard to the acquisition of the surviving bank by Old Kent Financial Corporation, it would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (11-29-79)

The proposal is a transaction to facilitate the acquisition of State Bank and Trust Company of Petoskey by Old Kent Financial Corporation, Grand Rapids, Michigan.
The proposed consolidation would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.
The Midwest Bank & Trust Company, Cleveland, Ohio, to merge with
The Firelands Community Bank, Huron, Ohio
S U M M A R Y REPORT B Y THE ATTORNEY GENERAL (11-19-79)

The merging banks are both wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and
would have no effect on competition.
BASIS FOR APPROVAL BY THE FEDERAL RESERVE BANK (12-3-79)

The proposed merger involves The Midwest Bank & Trust Company, with deposits of
$82 million, and The Firelands Community Bank, with deposits of $43 million. Both are
subsidiaries of Midwest Bancorporation (of Ohio), Inc., Cleveland, Ohio. Consummation of the proposal would have no adverse competitive effects. The banks are in
generally satisfactory condition, and the banking and convenience and needs factors are
consistent with approval of the application.




Tables

355

20.—-Continued

FM State Bank, Sebewaing, Mich., to merge with Farmers and Merchants State
Bank of Sebewaing, Sebewaing, Mich.
SUMMARY REPORT BY THE ATTORNEY GENERAL (11-19-79)
The proposed merger is part of a plan through which Farmers and Merchants State Bank
of Sebewaing would become a subsidiary of First American Bank Corporation, a bank
holding company. The instant merger, however, would merely combine an existing bank
with a nonoperating institution [FM State Bank]; as such, and without regard to the
acquisition of the surviving bank by First American Bank Corporation, it would have no
effect on competition.
BASIS FOR APPROVAL BY THE SECRETARY, BOARD OF GOVERNORS (12-4-79)

The proposal is a transaction to facilitate the acquisition of Farmers and Merchants State
Bank of Sebewaing by First American Bank Corporation, Kalamazoo, Michigan.
The proposed merger would, in itself, have no adverse competitive effects. The
financial and convenience and needs factors are consistent with approval of the application.




356

The Federal Reserve System
BOUNDARIES OF FEDERAL RESERVE DISTRICTS
AND THEIR BRANCH TERRITORIES

HAWAII

@

Legend

o
®
•
•

Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
Board of Governors of the Federal Reserve System
Federal Reserve Bank Cities
Federal Reserve Branch Cities
Federal Reserve Bank Facilities




Federal Reserve
Directories and Meetings




358

Directories and Meetings

Bo(u\! :>f Governors

of the Federal Reserve

December 31,1979
PAUL A. VOLCKER, of New Jersey, Chairman *
FREDERICK H. SCHULTZ, of Florida, Vice Chairman '
HENRY C. W A L L I C H , of Connecticut
PHILIP E. COLDWELL, of Texas
J. CHARLES PARTEE, of Virginia
NANCY H. TEETERS, of Indiana
EMMETT J. RICE, of New York
OFFICE OF BOARD MEMBERS
JOSEPH R. COYNE, Asst. to the Board
JAY PAUL BRENNEMAN, Special Asst.
to the Board
FRANK O'BRIEN, JR., Special Asst. to
the Board

System
Term expires

January
January
January
January
January
January
January

31,
31,
31,
31,
31,
31,
31,

1992
1982
1988
1980
1986
1984
1990

JOSEPH S. SIMS, Special Asst. to the
Board
DONALD J. WlNN, Special Asst. to
the Board

OFFICE OF STAFF DIRECTOR FOR MONETARY AND FINANCIAL POLICY
STEPHEN H. AXILROD, Staff Director
PETER M. KEIR, Asst. to the Board
EDWARD C. ETTIN, Deputy Staff
STANLEY J. SlGEL, Asst. to the Board
Director
NORMAND R. V. BERNARD, Special
MURRAY ALTMANN, Asst. to the
Asst. to the Board
Board
OFFICE OF STAFF DIRECTOR FOR MANAGEMENT
JOHN M. DENKLER, Staff Director
JOSEPH W. DANIELS, SR., Director
EDWARD T. MULRENIN, Asst. Staff
of Equal Employment Opportunity
Director
OFFICE OF STAFF DIRECTOR FOR FEDERAL RESERVE BANK
ACTIVITIES
WILLIAM H. WALLACE, Staff Director
HARRY A. GUINTER, Asst. Director
for Contingency Planning
OFFICE OF THE SECRETARY
T H E O D O R E E . A L L I S O N , Secretary

W I L L I A M N. M C D O N O U G H ,

GRIFFITH L. GARWOOD, Deputy
Secretary

Secretary 2
RICHARD H. PUCKETT, Manager,
Regulatory Improvement Project

Asst.

LEGAL DIVISION
NEAL L. PETERSEN, General Counsel
ROBERT E. MANNION, Deputy
General Counsel
CHARLES R. MCNEILL, Asst. to
the General Counsel

J. VIRGIL MATTINGLY, Asst.
General Counsel
GILBERT T. SCHWARTZ, Asst.
General Counsel

DIVISION OF RESEARCH AND STATISTICS
JAMES L. KICHLINE, Director
JOHN H. KALCHBRENNER, ASSOC.
JOSEPH S. ZEISEL, Deputy Director
Director
1. The designations as Chairman and Vice Chairman expire on Aug. 6, 1983. and M y 27. 1983.
respectively, unless the services of these members of the Board shall have terminated sooner.
2. On loan from the Federal Reserve Bank of Boston.




Directories and Meetings

359

DIVISION OF RESEARCH AND STATISTICS—Continued
J. CORTLAND G. PERET, Deputy
MICHAEL J. PRELL, ASSOC. Director
Assoc. Director
ROBERT A. EISENBEIS, Sr. Deputy
HELMUT F. WENDEL, Deputy Assoc.
Assoc. Director
JOHN J. MINGO, Sr. Deputy Assoc.
Director
Director
ROBERT M. FISHER, Asst. Director
ELEANOR J. STOCKWELL, Sr. Deputy

Assoc. Director
JAMES M. BRUNDY, Deputy ASSOC.
Director
JARED J. ENZLER, Deputy Assoc.
Director

FREDERICK M. STRUBLE, Asst.

Director
STEPHEN P. TAYLOR, Asst. Director
LEVON H. GARABEDIAN, Asst.

Director (Administration)

DIVISION OF INTERNATIONAL FINANCE
EDWIN M. TRUMAN, Director
JEFFREY R. SHAFER, Deputy Assoc.
ROBERT F. GEMMILL, ASSOC. Director
Director
GEORGE B. HENRY, ASSOC. Director
DALE W. HENDERSON, Asst. Director
CHARLES J. SIEGMAN, ASSOC. Director LARRY J. PROMISEL, Asst. Director
SAMUEL PIZER, Staff Adviser
RALPH W. SMITH, JR. , Asst.
Director
DIVISION OF FEDERAL RESERVE BANK OPERATIONS
JAMES R. KUDLINSKI, Director
CHARLES W. BENNETT, Asst. Director
CLYDE H. FARNSWORTH, JR., Deputy
LORIN S. MEEDER, Asst. Director
Director
P. D. RING, Asst. Director
WALTER ALTHAUSEN, Asst. Director
RAYMOND L. TEED, Asst. Director
DIVISION OF BANKING SUPERVISION AND REGULATION
JOHN E. RYAN, Director
ROBERT A. JACOBSEN, Asst. Director
FREDERICK R. DAHL, ASSOC. Director
DON E. KLINE, Asst. Director
WILLIAM TAYLOR, ASSOC. Director
ROBERT S. PLOTKIN, Asst. Director
WILLIAM W. WILES, ASSOC. Director
THOMAS A. SlDMAN, Asst. Director
JACK M. EGERTSON, Asst. Director
SAMUEL H. TALLEY, Asst. Director
DIVISION OF CONSUMER AND COMMUNITY AFFAIRS
JANET O. HART, Director
JERAULD E. KLUCKMAN, ASSOC.
NATHANIEL E. BUTLER, ASSOC.
Director
Director
DIVISION OF PERSONNEL
DAVID L. SHANNON, Director
JOHN R. WEIS, Asst. Director

CHARLES W. WOOD, Asst. Director

DIVISION OF SUPPORT SERVICES
DONALD E. ANDERSON, Director
JOHN L. GRIZZARD, ASSOC. Director

WALTER W. KREIMANN, ASSOC.

OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller

Director
GEORGE E. LIVINGSTON, Asst.

Controller
DIVISION OF DATA PROCESSING
CHARLES L. HAMPTON, Director

BRUCE M. BEARDSLEY, ASSOC.



UYLESS D. BLACK, Asst. Director
GLENN L. CUMMINS, Asst. Director
DnDCDT I

r

7c\4CI

Acc-t

Piif^^t^v

360

Directories and Meetings

Federal Open Market Committee
December 31, 1979

MEMBERS
PAUL A. VOLCKER, Chairman (Board of Governors)
Vacant, Vice Chairman (elected by Federal Reserve Bank of New York)
JOHN BALLES (elected by Federal Reserve Banks of Minneapolis, Kansas City, and
San Francisco)
ROBERT BLACK (elected by Federal Reserve Banks of Boston, Philadelphia, and
Richmond)
PHILIP E. COLDWELL (Board of Governors)
MONROE KIMBREL (elected by Federal Reserve Banks of Atlanta, St. Louis, and
Dallas)
ROBERT MAYO (elected by Federal Reserve Banks of Cleveland and Chicago)
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
MURRAY ALTMANN,

Secretary
NORMAND R. V. BERNARD,

Assistant Secretary
NEAL L. PETERSEN,

General Counsel
JAMES H . OLTMAN,

Deputy General Counsel
ROBERT E. MANNION,

Assistant General Counsel
STEPHEN H. AXILROD,

Economist
ALAN R. HOLMES,

Adviser for Market Operations
HARRY BRANDT,

Associate Economist
RICHARD G. DAVIS,

EDWARD C. ETTIN,

Associate Economist
GEORGE B. HENRY,

Associate Economist
PETER M . KEIR,

Associate Economist
MICHAEL KERAN,

Associate Economist
JAMES L. KlCHLINE,

Associate Economist
JAMES PARTHEMOS,

Associate Economist
KARL SCHELD

Associate Economist
EDWIN M. TRUMAN,

Associate Economist
JOSEPH S. ZEISEL,

Associate Economist
Associate Economist
PETER D. STERNLIGHT, Manager for Domestic Operations,
System Open Market Account
SCOTT E. PARDEE, Manager for Foreign Operations,
System Open Market Account
During 1979, meetings of the Federal Open Market Committee were generally
held at monthly intervals. (See "Record of Policy Actions of the Federal Open
Market Committee" in this REPORT.)




Directories and Meetings

361

December 31, 1979

District No. 1—HENRY S. WOODBRIDGE, JR., President and Chief Executive
Officer, Rhode Island Hospital Trust National Bank, Providence, R.I.
District No. 2—WALTER B. WRISTON, Chairman of the Board, Citibank, N.A.,
New York, N.Y.
District No. 3—WILLIAM B. EAGLESON, JR., Chairman of the Board and President, Girard Bank, Bala Cynwyd, Pa.
District No. 4—MERLE E. GlLLIAND, Chairman of the Board, Pittsburgh National
Bank, Pittsburgh, Pa.
District No. 5—J. OWEN COLE, Chairman of the Board, First National Bank of
Maryland, Baltimore, Md.
District No. 6—FRANK A. PLUMMER, Chairman of the Board and Chief Executive
Officer, First Alabama Bancshares, Inc., Birmingham, Ala.
District No. 7—ROGER E. ANDERSON, Chairman of the Board, Continental
Illinois National Bank and Trust Company, Chicago, 111.
District No. 8—CLARENCE C. BARKSDALE, Chairman of the Board and Chief
Executive Officer, First National Bank in St. Louis, St. Louis, Mo.
District No. 9—CLARENCE G. FRAME, President and Chief Executive Officer,
First National Bank of St. Paul, St. Paul, Minn.
District No. 10—J. W. MCLEAN, Chairman, The Liberty National Bank and Trust
Company of Oklahoma City, Oklahoma City, Okla.
District No. 11—JAMES D. BERRY, Chairman of the Board and Chief Executive
Officer, Republic of Texas Corporation, Dallas, Tex.
District No. 12—CHAUNCEY E. SCHMIDT, Chairman of the Board, President, and
Chief Executive Officer, The Bank of California, N.A., San Francisco, Cal.
J. W. MCLEAN, President

Vacant, Vice President

HERBERT V. PROCHNOW. Secretary
WILLIAM J. KORSVIK, Associate Secretary

FRANK A. PLUMMER

CLARENCE C. BARKSDALE
WALTER B. WRISTON

Meetings of the Federal Advisory Council were held on February 1-2, May 3-4,
September 6-7, and November 1-2, 1979. The Board of Governors met with the
council on February 2, May 4, September 7, and November 2, 1979. The council,
which is composed of 12 representatives of the banking industry, one from each
Federal Reserve District, is required by law to meet in Washington at least four
times each year, and is authorized by the Federal Reserve Act to consult with and
advise the Board on all matters within the jurisdiction of the Board.




362

Directories and Meetings

Consumer Advisory Council
December 31, 1979
WILLIAM D. WARREN, LOS Angeles, California, Chairman
MARCIA A. HAKALA, Omaha, Nebraska, Vice Chairman
ROLAND E. BRANDEL,
San Francisco, California

R. C. MORGAN,
El Paso, Texas

JAMES L. B R O W N ,

FLORENCE M.

Milwaukee, Wisconsin
M A R K E. BUDNITZ,

Atlanta, Georgia

RICE,

New York, New York
RALPH J. ROHNER,

Washington, D.C.

JOHN G. B U L L ,

R A Y M O N D J. SAULNIER,

Fort Lauderdale, Florida
ROBERT V. BULLOCK,
Frankfort, Kentucky

New York, New York
HENRY B. SCHECHTER.
Washington, D.C.

C A R L FELSENFELD,

E. G. SCHUHART II,

New York, New York

Amarillo, Texas

JEAN A. Fox,

BLAIR C.

Pittsburgh, Pennsylvania
RICHARD H. HOLTON.
Berkeley, California

Cambridge, Massachusetts
THOMAS R. SWAN.
Portland, Maine

E D N A D E C O U R S E Y JOHNSON,

A N N E G A R Y TAYLOR.

Baltimore, Maryland

SHICK,

Alexandria, Virginia

RICHARD F. KERR,

RICHARD A. V A N WINKLE,

Cincinnati, Ohio
ROBERT J. KLEIN,
New York, New York

Salt Lake City, Utah
RICHARD D. WAGNER.
Simsbury, Connecticut

H A R V E Y M. KUHNLEY,

M A R Y W.

Minneapolis, Minnesota
PERCY W. LOY,
Portland, Oregon

Monroe, Georgia
LEONOR K. SULLIVAN.
Chairman Emeritus,
St. Louis, Missouri

WALKER.

Meetings between the Consumer Advisory Council and members of the Board of
Governors were held on February 21-22, June 6-7. and October 22-23. 1979. The
council, which is composed of creditors, consumers, and others, was established
pursuant to the Equal Credit Opportunity Act to advise the Board on consumerrelated matters.




Directories and Meetings

363

Federal Reserve Banks and Branches
December 31, 1979

CHAIRMEN AND DEPUTY CHAIRMEN
OF BOARDS OF DIRECTORS
Federal Reserve
Bank
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

Chairman and
Federal Reserve Agent
Robert M. Solow
Robert H. Knight
John W. Eckman
Robert E. Kirby
Maceo A. Sloan
Vacant
Robert H. Strotz
Armand C. Stalnaker
Stephen F. Keating
Harold W. Andersen
Irving A. Mathews
Joseph F. Alibrandi

Deputy Chairman
Robert P. Henderson
Boris Yavitz
Werner C. Brown
Arnold R. Weber
Steven Muller
William A. Fickling. Jr.
John Sagan
William B. Walton
William G. Phillips
Joseph H. Williams
Gerald D. Hines
Cornell C. Maier

CONFERENCE OF CHAIRMEN
The Chairmen of the Federal Reserve Banks are organized into a Conference of
Chairmen that meets to consider matters of common interest and to consult with
and advise the Board of Governors. Such meetings, attended also by the Deputy
Chairmen, were held in Washington on May 31-June 1 and November 29-30,
1979.
The Executive Committee of the Conference of Chairmen during 1979 comprised Joseph F. Alibrandi, Chairman, Harold W. Andersen, Vice Chairman,
and John W. Eckman, member.
On November 30, 1979, Mr. Eckman was elected chairman of the conference
and of its Executive Committee to serve for the succeeding year; Stephen F.
Keating was elected Vice Chairman of the conference and a member of the
Executive Committee; and Robert K. Kirby and Irving A. Mathews were elected as
the other members of the Executive Committee.




364

Directories and Meetings

DIRECTORS
Class A and Class B directors are elected by the member banks of a Federal Reserve
District. Class C directors are appointed by the Board of Governors of the Federal
Reserve System. One term in each class of directors expires each year. Directors
are chosen without discrimination as to race, creed, color, sex, or national origin.
The Class A directors are chosen as representatives of member banks and, as a
matter of practice, are active officers of member banks. Class B and Class C
directors represent the public and are selected with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Class B and Class C directors may not be officers, directors, or employees
of any bank, nor may Class C directors be stockholders of any bank. Annually, the
Board of Governors designates one Class C director of each Reserve Bank to serve
as Chairman of the Bank and one to serve as Deputy Chairman.
Branches of Federal Reserve Banks have either five or seven directors, of whom
a majority are appointed by the board of directors of the parent Federal Reserve
Bank. The others are appointed by the Board of Governors of the Federal Reserve
System. The Chairmen of branch boards are selected from among directors appointed by the Board of Governors.
Term
expires
Dec. 31

District 1—BOSTON
Class A
John Hunter, Jr
Richard D. Hill
Fred A. White
Class B
Carol R. Goldberg
Weston P. Figgins
Robert D. Kilpatrick

Class C
Kenneth I. Guscott
Robert M. Solow
Robert P. Henderson




President, Vermont National Bank,
Brattleboro, Vt
Chairman of the Board, First National
Boston Corporation, Boston, Mass
President, Dartmouth National Bank of
Hanover, Hanover, N.H
Senior Vice President, The Stop & Shop
Companies, Inc., Boston, Mass
Chairman of the Board, Wm. Filene's
Sons Company, Boston, Mass
President & Chief Executive Officer,
Connecticut General Life Insurance Co.,
Hartford, Conn
President, Ken Guscott Associates,
Boston, Mass
Institute Professor, Massachusetts
Institute of Technology, Cambridge,
Mass
President and Chief Executive Officer,
ItekCorp., Lexington, Mass

1979
1980
1981

1979
1980
1981

1979
1980
1981

Directories and Meetings

Term
expires

District 2—NEW YORK
Class A
Ellmore C. Patterson
Raymond W. Bauer
James Whelden

365

Dec. 31
Former Chairman of the Board, Morgan
Guaranty Trust Company of N.Y., New
York, N.Y
Chairman and President, United Counties
Trust Company, Elizabeth, N.J
President, Ballston Spa National Bank,
Ballston Spa, N.Y

1979
1980
1981

Class B
Maurice F. Granville . . . .
William S. Sneath

Chairman of the Board, Texaco Inc.,
White Plains, N.Y
Chairman of the Board, Union Carbide
Corporation, New York, N.Y

Vacant

Class C
Boris Yavitz
Robert H. Knight
Gertrude G. Michelson.. .

Dean, Graduate School of Business,
Columbia University, New York, N.Y...
Partner, Shearman and Sterling,
Attorneys, New York, N.Y
Senior Vice President, Macy's New
York, New York, N.Y

1979
1980
1981

1979
1980
1981

BUFFALO BRANCH

Appointed by Federal Reserve Bank
M. Jane Dickman
Partner, Touche Ross & Co., Buffalo,
N.Y
William B. Webber
Vice Chairman of the Board, Lincoln
First Bank, N.A., Rochester, N.Y
William S. Gavitt
President, The Lyons National Bank,
Lyons, N.Y
Robert J. Donough
President, Liberty National Bank and
Trust Co., Buffalo, N.Y
Appointed by Board of Governors
Frederick D. Berkeley III. Chairman of the Board and President,
Graham Manufacturing Company, Inc.,
Batavia, N.Y
John R. Burwell
President, Rollins Container Corporation,
Rochester, N.Y
George L. Wessel
President, Buffalo AFL-CIO Council,
Buffalo, N.Y




1979
1979
1980
1981

1979
1980
1981

366

Directories and Meetings

District 3 — P H I L A D E L P H I A
Class A
Donald J. Seebold
John R. Biechler

Robert H. Deacon

Class B
William S. Masland
Vacant
Richard P. Hauser

Class C
Jean A. Crockett

Werner C. Brown
John W. Eckman

President, The First National Bank of
Danville, Danville, Pa
President and Chief Executive Officer,
The Commonwealth National Bank,
Harrisburg, Pa
President, The Bank of Mid-Jersey,
Bordentown, N.J

President and Chief Executive Officer,
C. H. Masland & Sons, Carlisle, Pa
Chairman and Chief Executive Officer,
John Wanamaker, Philadelphia, Pa

Chairman, Dept. of Finance, Wharton
School, University of Pennsylvania,
Philadelphia, Pa
Chairman, Hercules Incorporated,
Wilmington, Del
Chairman and President, Rorer Group,
Inc., Fort Washington, Pa

Term
expires
Dec. 31

1979

1980
1981

1979
1980
1981

1979
1980
1981

District 4—CLEVELAND
Class A
John W. Alford

John A. Gelbach
Everett L. Maffett

Class B
Charles Y. Lazarus
Hays T. Watkins
Walter J. Robb




Chairman of the Board and Chief
Executive Officer, The Park National
Bank, Newark, Ohio
Chairman of the Board, Central National
Bank, Cleveland, Ohio
President and Chief Executive Officer,
Eaton National Bank & Trust Co., Eaton.
Ohio

Chairman, The F. & R. Lazarus Co.,
Columbus, Ohio
Chairman and President, Chessie System,
Cleveland, Ohio
Chairman and Senior Partner, Proctor,
Robb & Company, Granville, Ohio

1979
1980

1981

1979
1980
1981

Directories and Meetings

367
Term
expires
Dec. 31

Class C
Robert E. Kirby

Arnold R. Weber

J. L. Jackson

Chairman and Chief Executive Officer,
Westinghouse Electric Corporation,
Pittsburgh, Pa
Provost, Office of Provost,
Carnegie-Mellon University, Pittsburgh,
Pa
President, Falcon Coal Company I n c ,
Lexington, Ky

1979

1980
1981

CINCINNATI BRANCH

Appointed by Federal Reserve Bank
William N. Liggett

Walter W. Hillenmeyer, Jr

Lawrence C. Hawkins . . .
Elden Houts

Chairman of the Board and Chief
Executive Officer, The First National
Bank of Cincinnati, Cincinnati, Ohio . . .
Chairman and Chief Executive Officer,
First Security National Bank and Trust
Company, Lexington, Ky
Senior Vice President, University of
Cincinnati, Cincinnati, Ohio
President, The Citizens Commercial
Bank and Trust Company, Celina, Ohio .

1979

1980
1981
1981

Appointed by Board of Governors
Sister Michael Leo
Mullaney
Lawrence H. Rogers I I . . .

Martin B. Friedman

President, St. Joseph Hospital,
Lexington, Ky
President and Chief Executive Officer,
Omega Communications, Inc.,
Cincinnati, Ohio
President, Formica Corporation,
Cincinnati, Ohio

1979

1980
1981

PITTSBURGH BRANCH

Appointed by Federal Reserve Bank
Peter Mortensen
William E. Bierer
Robert W. Fiscus

R. Burt Gookin




President, F.N.B. Corporation, Sharon,
Pa
President, Equibank N.A., Pittsburgh,
Pa
President and Chief Executive Officer,
The Savings & Trust Company of
Pennsylvania, Indiana, Pa
Director, H. J. Heinz Co., Pittsburgh.
Pa

1979
1980

1981
1981

368

Directories and Meetings

Appointed by Board of Governors
G. J. Tankersley
Chairman and Chief Executive Officer,
Consolidated Natural Gas Company,
Pittsburgh, Pa
Lloyd M. McBride
President, United Steelworkers of
America, Pittsburgh, Pa
William H. Knoell
President, Cyclops Corporation,
Pittsburgh, Pa

Term
expires
Dec. 31
1979
1980
1981

District 5—RICHMOND
Class A
Frank B. Robards, Jr
Frederic H. Phillips
Vincent C. Burke, Jr

Class B
Andrew L. Clark
Thomas A. Jordan
Paul G. Miller

Class C
Paul E. Reichardt
Steven Muller
Maceo A. Sloan




President, Rock Hill National Bank,
Rock Hill, S.C
Senior Vice President, Virginia National
Bank, Roanoke, Va
Chairman of the Board and Chief
Executive Officer, The Riggs National
Bank of Washington, D.C., Washington,
D.C
President, Andy Clark Ford, Inc.,
Princeton, W. Va
Secretary-Treasurer, Stuart Furniture
Industries, Inc., Asheboro, N.C
Chairman of the Board, President and
Chief Executive Officer, Commercial
Credit Company, Baltimore, Md

Chairman of the Board, President and
Chief Executive Officer, Washington Gas
Light Company, Washington, D.C
President, The Johns Hopkins University,
Baltimore, Md
Executive Vice President and Chief
Operating Officer, North Carolina Mutual
Life Ins. Co., Durham, N.C

1979
1980

1981

1979
1980
1981

1979
1980
1981

Directories and Meetings

BALTIMORE BRANCH
Appointed by Federal Reserve Bank
Lacy I. Rice, Jr
President, The Old National Bank of
Martinsburg, Martinsburg, W. Va
A. R. Reppert
President, The Union National Bank of
Clarksburg, Clarksburg, W. Va
Joseph M. Gough, Jr
President, The First National Bank of St.
Mary's, Leonardtown, Md
Pearl C. Brackett
Assistant/Deputy Manager, Baltimore
Regional Chapter of American Red
Cross, Baltimore, Md
Appointed by Board of Governors
I. E. Killian
President, Killian Enterprises, Inc.,
Gibson Island, Md
Catherine Byrne Doehler . Baltimore, Md
Joseph H. McLain
President, Washington College,
Chestertown, Md

369
Term
expires
Dec. 31

1979
1979
1980
1981

1979
1980
1981

CHARLOTTE BRANCH
Appointed by Federal Reserve Bank
Thomas L. Benson
President, The Conway National Bank,
Conway, S.C
W. B. Apple, Jr
President, First National Bank of
Reidsville, Reidsville, N.C
John T. Fielder
President, J. B. Ivey and Company,
Charlotte, N.C
Hugh M. Chapman
Chairman of the Board, The Citizens &
Southern National Bank of South
Carolina, Columbia, S.C
Appointed by Board of Governors
Naomi G. Albanese
Dean, School of Home Economics,
University of North Carolina at
Greensboro, Greensboro, N.C
Robert E. Elberson
President, Chief Executive Officer and
Director, Hanes Corporation,
Winston-Salem, N.C
Henry Ponder
Office of the President, Benedict
College, Columbia, S.C




1979
1979
1980
1981

1979
1980
1981

370

Directories and Meetings
Term
expires
Dec. 31

District 6—ATLANTA
Class A
John T. Oliver, Jr
Hugh M. Willson
Guy W. Botts

President, First National Bank of Jasper,
Jasper, Ala
President, Citizens National Bank,
Athens, Tenn
Chairman of the Board, Barnett Banks of
Florida, Inc., Jacksonville, Fla

1979
1980
1981

Class B
Jean McArthur Davis . . . .
Ulysses V. Goodwyn . . . .

Floyd W. Lewis

President, McArthur Dairy, Inc., Miami,
Fla
Executive Vice President, Southern
Natural Resources, Inc., Birmingham,
Ala
Chairman of the Board and Chief
Executive Officer, Middle South
Utilities, Inc., New Orleans, La

1979

1980

1981

Class C
Vacant
William A. Fickling, J r . . .
Fred Adams, Jr

1979
President and Chairman, Charter Medical
Corporation, Macon, Ga
President, Cal-Maine Foods, Inc.,
Jackson, Miss

1980
1981

BIRMINGHAM BRANCH

Appointed by Federal Reserve Bank
Drury Flowers
Martha H. Simms
George S. Shirley
Guy H. Caffey, Jr

Chairman, First Alabama Bank of
Dothan, Dothan, Ala
Huntsville, Ala
President, The First National Bank of
Tuscaloosa, Tuscaloosa, Ala
Chairman and Chief Executive Officer,
Southern Bancorporation of Alabama and
Birmingham Trust National Bank,
Birmingham, Ala

1979
1979
1980

1981

Appointed by Board of Governors
William H. Martin III
Harold B. Blach, Jr
Louis J. Willie




President and Chief Executive Officer,
Martin Industries, Inc., Florence, Ala. . .
President, Blach's, Inc., Birmingham,
Ala
Executive Vice President, Booker T.
Washington Insurance Co., Birmingham,
Ala

1979
1980

1981

Directories and Meetings

JACKSONVILLE BRANCH

371
Term
expires
Dec. 31

Appointed by Federal Reserve Bank
Richard E. Ehlis
President, Florida National Bank at
Lakeland, Lakeland, Fla
William E. Arnold, Jr. . . . President, William E. Arnold Company,
Jacksonville, Fla
DuBose Ausley
President and Chief Executive Officer,
Capital City First National Bank,
Tallahassee, Fla
Robert E. Warfield, J r . . . . Chairman and President, The First
National Bank and Trust Co., Eustis, Fla.
Appointed by Board of Governors
Copeland D. Newbern . . . Chairman of the Board, Newbern
Groves, Inc., Tampa, Fla
Joan W. Stein
Partner, Regency Square Shopping
Center, Jacksonville, Fla
Jerome P. Keuper
President, Florida Institute of
Technology, Melbourne, Fla

1979
1979
1980
1981

1979
1980
1981

MIAMI BRANCH
Appointed by Federal Reserve Bank
Aristides R. Sastre
President, Republic National Bank,
Miami, Fla
Tully F. Dunlap
Chairman, Florida National Bank,
Miami, Fla
Jane C. Cousins
President, Cousins Associates, Inc.,
Miami, Fla
Alfred W. Roepstorff
President, National Bank of Collier
County, Marco Island, Fla
Appointed by Board of Governors
Castle W. Jordan
President, Aegis Corporation, Coral
Gables, Fla
David G. Robinson
President, Edison Community College,
Fort Myers, Fla
T
Roy W. Vandegrift, J r — President, Vandegrift-Williams Farms,
Inc., Pahokee, Fla




1979
1980
1981
1981

1979
1980
1981

372

Directories and Meetings

NASHVILLE BRANCH
Appointed by Federal Reserve Bank
Virgil H. Moore, Jr
President, First Farmers and Merchants
National Bank, Columbia, Tenn
Vacant
James R. Austin
Chairman and Chief Executive Officer,
Peoples National Bank, Shelbyville,
Tenn
Ruth W. Ellis
President, Mountain Empire Bank,
Johnson City, Tenn
Appointed by Board of Governors
Cecelia Adkins
Executive Director, Sunday School
Publishing Board, Nashville, Tenn
Robert C. H. Mathews, Jr. President, R. C. Mathews, Contractor,
Inc., Nashville, Tenn
John C. Bolinger
Management Consultant, Hamilton
House #130, Knoxville, Tenn

Term
expires
Dec. 31

1979
1979
1980
1981

1979
1980
1981

NEW ORLEANS BRANCH
Appointed by Federal Reserve Bank
Martin C. Miler
Chairman of the Board and President,
The Hibernia National Bank, New
Orleans, La
George P. Hopkins, J r . . . . President, George P. Hopkins, Inc.,
Gulfport, Miss
William E. Howard, Jr. .. Chairman of the Board, Commercial
National Bank and Trust Company of
Laurel, Laurel, Miss
Robert H. Bolton
President, Rapides Bank and Trust
Company in Alexandria, Alexandria, La.
Appointed by Board of Governors
Levere C. Montgomery .. President, Time Saver Stores, Inc., New
Orleans, La
George C. Cortright, Jr. .. Partner, George C. Cortright Company,
Rolling Fork, Miss
Horatio C. Thompson.... President, Horatio Thompson Investment,
Inc., Baton Rouge, La




1979
1979
1980
1981

1979
1980
1981

Directories and Meetings

Term
expires
Dec. 31

District 7—CHICAGO
Class A
Jay J. DeLay
John F. Spies
A. Robert Abboud
Class B
Mary Garst
Arthur J. Decio
Dennis W. Hunt
Class C
Robert H. Strotz
John Sagan
Edward F. Brabec

373

President, Huron Valley National Bank,
Ann Arbor, Mich
President, Iowa Trust and Savings Bank,
Emmetsburg, Iowa
Chairman of the Board, The First
National Bank of Chicago, Chicago, 111. .
Manager of Cattle Division, Garst
Company, Coon Rapids, Iowa
Chairman of the Board and Chief
Executive Officer, Skyline Corporation,
Elkhart, Ind
President, Hunt Truck Lines, Inc.,
Rockwell City, Iowa
President, Northwestern University,
Evanston, 111
Vice President-Treasurer, Ford Motor
Company, Dearborn, Mich
Business Manager, Chicago Journeymen
Plumbers, Chicago, 111

1979
1980
1981

1979
1980
1981

1979
1980
1981

DETROIT BRANCH
Appointed by Federal Reserve Bank
Rodkey Craighead
Chairman and Chief Executive Officer,
Detroitbank Corporation, Detroit, Mich. .
Lawrence A. Johns
President, Isabella Bank and Trust,
Mount Pleasant, Mich
Charles R. Montgomery . . President, Michigan Consolidated Gas
Company, Detroit, Mich
James H. Duncan
Chairman, First American Bank
Corporation, Kalamazoo, Mich
Appointed by Board of Governors
Jordan B. Tatter
President and Chief Executive Officer,
Southern Michigan Cold Storage Co.,
Benton Harbor, Mich
Howard F. Sims
President, Sims-Varner Associates, Inc.,
Detroit, Mich
Herbert H. Dow
Director and Secretary, The Dow
Chemical Company, Midland, Mich. ..




1979
1980
1981
1981

1979
1980
1981

374

Directories and Meetings
Term
expires
Dec. 31

District 8—ST. LOUIS
Class A
Raymond C. Burroughs ..
Donald N. Brandin

George M. Ryrie
Class B
Virginia M. Bailey
Ralph C. Bain
Tom K. Smith, Jr
Class C
Armand C. Stalnaker . . . .
William H. Stroube
William B. Walton

President and Chief Executive Officer,
The City National Bank of Murphysboro,
Murphysboro, 111
Chairman of the Board and Chief
Executive Officer, The Boatmen's
National Bank of St. Louis, St. Louis,
Mo
President, First National Bank & Trust
Company, Alton, 111
Owner, Eldo Properties, Little Rock,
Ark
Vice President, Wabash Plastics, Inc.,
Evansville, Ind
St. Louis, Mo
Chairman of the Board, General
American Life Insurance Co., St. Louis,
Mo
Associate Dean of Faculty Programs,
Western Kentucky University, Bowling
Green, Ky
Vice Chairman of the Board, Holiday
Inns, Inc., Memphis, Tenn

1979

1980
1981

1979
1980
1981

1979
1980
1981

LITTLE ROCK BRANCH
Appointed by Federal Reserve Bank
B. Finley Vinson
Vice Chairman of the Board, The First
National Bank in Little Rock, Little
Rock, Ark
Thomas E. Hays, Jr
President and Chief Executive Officer,
The First National Bank of Hope, Hope,
Ark
Gordon E. Parker
President and Chief Executive Officer,
The First National Bank of El Dorado, El
Dorado, Ark
Shirley J. Pine
Speech Communication, University of
Arkansas at Little Rock, Little Rock,
Ark




1979
1980
1981
1981

Directories and Meetings

Appointed by Board of Governors
E. Ray Kemp, Jr
Vice Chairman of the Board and Chief
Administrative Officer, Dillard
Department Stores, Inc., Little Rock.
Ark
Ronald W. Bailey
Executive Vice President and General
Manager, Producers Rice Mill. Inc.,
Stuttgart, Ark
G. Larry Kelley
President, Pickens-Bond Construction
Co., Little Rock, Ark

375
Term
expires
Dec. 31

1979

1980
1981

LOUISVILLE BRANCH
Appointed by Federal Reserve Bank
Howard Brenner
Vice Chairman of the Board, Tell City
National Bank, Tell City, Ind
J. David Grissom
Chairman and Chief Executive Officer,
Citizens Fidelity Bank and Trust Co.,
Louisville, Ky
Fred B. Oney
President, The First National Bank of
Carrollton, Carrollton, Ky
Sister Eileen M. Egan
President, Spalding College, Louisville,
Ky
Appointed by Board of Governors
James F. Thompson
Professor of Economics, Murray State
University, Murray, Ky
Richard O. Donegan
Senior Vice President and Group
Executive, General Electric Company,
Louisville, Ky
Wendell G. Rayburn
Dean of University College, University
of Louisville, Louisville, Ky

1979

1980
1981
1981

1979

1980
1981

MEMPHIS BRANCH
Appointed by Federal Reserve Bank
Earl L. McCarroll
President, The Farmers Bank & Trust
Co., Blytheville, Ark
Charles S. Youngblood. . .
President and Chief Executive Officer.
First Columbus National Bank.
Columbus, Miss
Stallings Lipford
President, First-Citizens National Bank of
Dyersburg, Dyersburg, Tenn
Bruce E. Campbell, Jr
Chairman and President, National Bank
of Commerce, Memphis, Tenn




1979

1980
1981
1981

376

Directories and Meetings

Appointed by Board of Governors
Walter L. Walker
President, LeMoyne-Owen College,
Memphis, Tenn
Frank A. Jones, Jr
President, Dietz Forge Company,
Memphis, Tenn
Benjamin P. Pierce
President, Tyrone Hydraulics, Inc.,
Corinth, Miss

Term
expires
Dec. 31
1979
1980
1981

District 9—MINNEAPOLIS
Class A
Nels E. Turnquist
James H. Smaby

President, National Bank of South
Dakota, Sioux Falls, S. Dak
President, Commercial National Bank &
Trust Co., Iron Mountain, Mich

Vacant
Class B
Warren B. Jones
Donald P. Helgeson
Russell G. Cleary
Class C
Sister Generose Gervais ..
Stephen F. Keating
William G. Phillips

Secretary-Treasurer, Two Dot Land &
Livestock Co., Harlowton, Mont
Secretary and Vice President, Jack Frost,
Inc., St. Cloud, Minn
Chairman and President, G. Heileman
Brewing Company, LaCrosse, Wis
Administrator, St. Mary's Hospital,
Rochester, Minn
Vice Chairman of the Board, Honeywell,
Inc., Minneapolis, Minn
Chairman and Chief Executive Officer,
International Multifoods, Minneapolis,
Minn

1979
1980
1981

1979
1980
1981

1979
1980
1981

HELENA BRANCH
Appointed by Federal Reserve Bank
Lynn D. Grobel
President, First National Bank of
Glasgow, Glasgow, Mont
William B. Andrews
Chairman, Northwestern Bank of Helena,
Helena, Mont
Jase O. Norsworthy
President, The N.R.G. Company,
Billings, Mont
Appointed by Board of Governors
Norris E. Hanford
Fort Benton, Mont
Patricia P. Douglas
Vice President-Fiscal Affairs, University
of Montana, Missoula, Mont



1979
1980
1980
1979
1980

Directories and Meetings

377
Term
expires

District 10—KANSAS CITY

Dec 31

Class A
Howard K. Loomis
Wayne D. Angell
John D. Woods

Class B
John A. McKinney
James G. Harlow, Jr
Alan R. Sleeper
Class C
Paul H. Henson
Joseph H. Williams
Harold W. Andersen

President, The Peoples Bank, Pratt,
Kans
President, Council Grove National Bank,
Council Grove, Kans
Chairman & Chief Exec. Officer, The
Omaha National Bank, Omaha, Nebr

President and Chief Executive Officer,
Johns-Manville Corporation, Denver,
Colo
President, Oklahoma Gas and Electric
Co., Oklahoma City, Okla
Alden, Kans

Chairman, United Telecommunications,
Inc., Westwood, Kans
Chairman and Chief Executive Officer,
The Williams Companies, Tulsa, Okla...
President, Omaha World-Herald
Company, Omaha, Nebr

1979
1980
1981

1979
1980
1981

1979
1980
1981

DENVER BRANCH
Appointed by Federal Reserve Bank
Felix Buchenroth, Jr
President, The Jackson State Bank,
Jackson, Wyo
William H. Vernon
Director, and Former Chairman and
Chief Executive Officer, Santa Fe
National Bank, Santa Fe, N. Mex
Delano E. Scott
President and Chairman, The Routt
County National Bank of Steamboat
Springs, Steamboat Springs, Colo
Appointed by Board of Governors
A. L. Feldman
President and Chief Executive Officer,
Frontier Airlines, Denver, Colo
Doris M. Drury
Professor and Chairman, Department of
Economics, University of Denver,
Denver, Colo



1979
1980
1980

1979
1980

378

Directories and Meetings

OKLAHOMA CITY BRANCH
Appointed by Federal Reserve Bank
J. A. Maurer
Chairman, Security National Bank &
Trust Co., Duncan, Okla
W. L. Stephenson, Jr. . . . Chairman and Chief Executive Officer,
Central National Bank & Trust Co. of
Enid, Enid, Okla
V. M. Thompson, Jr
Chairman and Chief Executive Officer,
Utica National Bank and Trust Co.,
Tulsa, Okla
Appointed by Board of Governors
Christine H. Anthony
Oklahoma City, Okla
Samuel R. Noble
Chairman of the Board, Noble Affiliates,
Inc., Ardmore, Okla

Term
expires
Dec. 31

1979
1980
1980
1979
1980

OMAHA BRANCH
Appointed by Federal Reserve Bank
Roy G. Dinsdale
Chairman of the Board, Farmers National
Bank of Central City, Central City, Nebr.
Joe J. Huckfeldt
President, Gering National Bank & Trust
Co., Gering, Nebr
F. Phillips Giltner
President, First National Bank of Omaha,
Omaha, Nebr
Appointed by Board of Governors
Durward B. Varner
Chairman and Chief Executive Officer,
University of Nebraska Foundation,
Lincoln, Nebr
Robert G. Lueder
President, Lueder Construction
Company, Omaha, Nebr

1979
1979
1980

1979
1980

District 11—DALLAS
Class A
Gene D. Adams
Frank Junell
Lewis H. Bond




President, The First National Bank of
Seymour, Seymour, Tex
Chairman of the Board, The Central
National Bank of San Angelo, San
Angelo, Tex
Chairman and Chief Executive Officer,
Texas American Bancshares, Inc., Ft.
Worth, Tex

1979
1980
1981

Directories and Meetings

Class B
Stewart Orton

L. Kent Gilbreath
J. Wayland Bennett

Class C
Margaret S. Wilson
Irving A. Mathews
Gerald D. Hines

379

Term
expires
Dec. 31
Chairman of the Board and Chief
Executive Officer, Foley's, Division of
Federated Department Stores, Inc.,
Houston, Tex
Associate Professor of Economics,
Baylor University, Waco, Tex
Associate Dean for Industry Relations
and Professor of Agricultural Economics,
College of Agricultural Sciences, Texas
Tech University, Lubbock, Tex

Chairman of the Board and Chief
Executive Officer, Scarbroughs Stores,
Austin, Tex
Chairman of the Board and Chief
Executive Officer, Frost Bros., Inc., San
Antonio, Tex
Owner, Gerald D. Hines Interests,
Houston, Tex

1979
1980

1981

1979
1980
1981

EL PASO BRANCH
Appointed by Federal Reserve Bank
Arthur L. Gonzales
President, First City National Bank of El
Paso, El Paso, Tex
Claude E. Leyendecker... President, Mimbres Valley Bank,
Deming, N. Mex
Arnold B. Peinado, Jr. . . . Partner, AVC Development, El Paso,
Tex
Charles A. Joplin
President, Security National Bank of
Roswell, Roswell, N. Mex
Appointed by Board of Governors
A. J. Losee
Shareholder, Losee, Carson, &
Dickerson, P.A., Artesia, N. Mex
Chester J. Kesey
C. J. Kesey Enterprises, Pecos, Tex
Josefina A. Salas-Porras.. Executive Director, BI Language
Services, El Paso, Tex




1979
1980
1981
1981

1979
1980
1981

380

Directories and Meetings
Term
expires
HOUSTON BRANCH

Appointed by Federal Reserve Bank
Page K. Stubblefield
Chairman of the Board, Victoria Bank &
Trust Company, Victoria, Tex
Raymond L. Britton
Labor Arbitrator & Professor of Law,
University of Houston, Bates College of
Law, Houston, Tex
John T. Cater
President, Bank of the Southwest
National Association, Houston, Tex
Ralph E. David
President, First Freeport National Bank,
Freeport, Tex
Appointed by Board of Governors
Jerome L. Howard
Chairman of the Board and Chief
Executive Officer, Mortgage & Trust,
Inc., Houston, Tex
Gene M. Woodfin
Chairman of the Board and Chief
Executive Officer, Marathon
Manufacturing Company, Houston, Tex.
Granville M. Sawyer . . . . President, Texas Southern University,
Houston, Tex

Dec. 31

1979
1980
1981
1981

1979
1980
1981

SAN ANTONIO BRANCH

Appointed by Federal Reserve Bank
Ben R. Low
President, National Bank of Commerce,
San Antonio, Tex
John H. Garner
President and Chief Executive Officer,
Corpus Christi National Bank, Corpus
Christi, Tex
John H. Holcomb
Owner-Manager, Progreso Haciendas
Company, Progreso, Tex
Charles E. Cheever, Jr. .. President, Broadway National Bank, San
Antonio, Tex
Appointed by Board of Governors
Pat Legan
Owner, Legan Properties, San Antonio,
Tex
Vacant
Carlos A. Zuniga
Partner, Zuniga Storage and Forwarding
Company, Laredo, Tex




1979
1980
1981
1981

1979
1980
1981

Directories and Meetings

381
Term
expires

District 12—SAN FRANCISCO
Class A
Frederick G. Larkin, Jr. . .
Ole R. Mettler
Robert A. Young
Class B
Clair L. Peck, Jr
J. R. Vaughan
Malcolm T. Stamper
Class C
Dorothy Wright Nelson . .
Cornell C. Maier
Joseph F. Alibrandi

Chairman of the Executive Committee,
Security Pacific National Bank, Los
Angeles, Calif
President and Chairman, Farmers &
Merchants Bank of Central California,
Lodi, Calif
Chairman and President, Northwest
National Bank, Vancouver, Wash
Chairman of the Board, C. L. Peck
Contractor, Los Angeles, Calif
Chairman and Chief Executive Officer,
Knudsen Corporation, Los Angeles,
Calif
President, The Boeing Company, Seattle,
Wash
Dean and Professor of Law, University of
Southern Calif. Law Center, Los
Angeles, Calif
Chairman, President and Chief Executive
Officer, Kaiser Aluminum & Chemical
Corp., Oakland, Calif
President and Chief Exec. Officer,
Whittaker Corporation, Los Angeles,
Calif

Dec. 31

1979
1980
1981

1979
1980
1981

1979

1980
1981

LOS ANGELES BRANCH
Appointed by Federal Reserve Bank
Vacant
Vacant
James D. McMahon
President, Santa Clarita National Bank,
Newhall, Calif
Harvey J. Mitchell
President, First National Bank of San
Diego County, Escondido, Calif




1979
1979
1980
1981

382

Directories and Meetings

Appointed by Board of Governors
Togo W. Tanaka
President, Gramercy Enterprises, Los
Angeles, Calif
Caroline L. Ahmanson . . .
Chairman of the Board, Caroline
Leonetti, Ltd., Beverly Hills, Calif
Harvey A. Proctor
Chairman of the Board, Southern
California Gas Company, Los Angeles,
Calif

Term
expires
Dec. 31
1979
1980

1981

PORTLAND BRANCH
Appointed by Federal Reserve Bank
Merle G. Bryan
President, Forest Grove National Bank,
Forest Grove, Ore
Kenneth Smith
General Manager, The Confederated
Tribes of Warm Springs, Warm Springs,
Ore
Jack W. Gustavel
President and Chief Executive Officer,
First National Bank of North Idaho,
Coeur d'Alene, Idaho
Robert F. Wallace
Chairman of the Board, First National
Bank of Oregon, Portland, Ore
Appointed by Board of Governors
Phillip W. Schneider
Northwest Regional Executive, National
Wildlife Federation, Portland, Ore
Loran L. Stewart
Director, Bohemia, Inc., Eugene, Ore. . .
Jean Mater
Partner and General Manager, Mater
Engineering, Corvallis, Ore

1979

1980

1981
1981

1979
1980
1981

SALT LAKE CITY BRANCH
Appointed by Federal Reserve Bank
Fred H. Stringham
President, Valley Bank and Trust
Company, South Salt Lake, Utah
,.
Mary S. Knox
Chairman, Idaho State Bank, Glenns
Ferry, Idaho
Robert E. Bryans
Chairman of the Board and Chief
Executive Officer, Walker Bank & Trust
Company, Salt Lake City, Utah
David P. Gardner
President, University of Utah, Salt Lake
City, Utah




1979
1980

1981
1981

Directories and Meetings

Appointed by Board of Governors
Robert A. Erkins
J. L. Terteling
Wendell J. Ashton

Geothermal Agri/Aquaculturist, White
Arrow Ranch, Bliss, Idaho
President, The Terteling Company, Inc.,
Boise, Idaho
Publisher, Deseret News Publishing
Company, Salt Lake City, Utah

383
Term
expires
Dec. 31
1979
1980
1981

SEATTLE BRANCH
Appointed by Federal Reserve Bank
Donald L. Mellish
Chairman of the Board, National Bank of
Alaska, Anchorage, Alaska
Rufus C. Smith
Chairman, The First National Bank of
Enumclaw, Enumclaw, Wash
Douglas S. Gamble
President and Chief Executive Officer,
Pacific Gamble Robinson Co., Seattle,
Wash
C. M. Berry
President, Seattle-First National Bank,
Seattle, Wash
Appointed by Board of Governors
Merle D. Adlum
Vice President, Seafarer's International,
Union of North America AFL-CIO,
Seattle, Wash
Virginia L. Parks
Vice President for Finance and Business,
Seattle University, Seattle, Wash
Lloyd E. Cooney
President and General Manager, KIRO Radio & Television, Seattle, Wash




1979
1980

1981
1981

1979
1980
1981

384

Directories and Meetings

PRESIDENTS AND VICE PRESIDENTS
December 31, 1979

Federal
Reserve
Bank
or branch

Boston

President
First Vice President

Vice Presidents

Frank E. Morris
Daniel Aquilino1
James A. Mclntosh T. F. Hunt, Jr.1
Richard A. Walker1
F. K. Cummings
Luther M. Hoyle, Jr.
Stephen K. McNees
D. A. Pelletier
Laurence H. Stone
Richard F. Syron

New York... Temporarily vacant
T. M. Timlen, Jr.

Buffalo

Alan R. Holmes2
Donald B. Gray1
Scott E. Pardee1
Peter D. Sternlight1
Peter Bakstansky
E. Gerald Corrigan
Chester B. Feldberg
Margaret Greene
Edwin R. Powers
Geri M. Riegger
F. C. Schadrack, Jr.
Rudolf Thunberg
H. W. Whiteman, Jr.
JohnT

R. W. Eisenmenger1
Niels 0 . Larsen1
T. E. Cimeno, Jr.
Norman S. Fieleke
Kenneth H. Kulesza
Alicia H. Munnell
Richard E. Randall
Walter T. Sullivan
Herbert F. Wass
Peter Fousek1
P. B. Henderson, Jr.1
Thomas C. Sloane1
James 0 . Aston
W. H. Braun, Jr.
Suzanne Cutler
Henry S. Fujarski
Whitney R. Irwin
A. M. Puckett
Irwin D. Sandberg
Robert C. Thoman
Richard Vollkommer
H. David Willey
Keane

Philadelphia. David P. Eastburn
Richard L. Smoot

K. G. Adack1
Edward G. Boehne1
P. M. DiPlacido
Thomas K. Desch
Guy H. Edwards
James F. Gay lord
Hiliary H. Holloway W. Lee Hoskins
A. A. Kudelich
Donald J. McAneny
G. William Metz
D. J. Mullineaux
L. C. Murdoch, Jr. W. H. Stone, Jr.
Ronald D . Watson

Cleveland... Willis J. Winn
W. H. MacDonald

John M. Davis, Jr.1 W. H. Hendricks1
Donald C. Benjamin George E. Booth, Jr.
Harry W. Huning
R. Thomas King
James H. Nash, Jr.
T. E. Orminston, Jr.
Lester M. Selby
Harold J. Swart
Donald G. Vincel
Charles A. Cerino
Robert E. Showalter
Robert D. Duggan1

Cincinnati
Pittsburgh. . .
For notes see last page of listing.




Directories and Meetings

385

PRESIDENTS AND VICE PRESIDENTS—Continued

Federal
Reserve
Bank
or branch
Richmond.

President
First Vice President

Robert P. Black
George C. Rankin

Baltimore.
Charlotte .
Culpeper3

Vice President

James Parthemos1
Welford S. Farmer1
1
R. E. Sanders, Jr.1
John F. Rand
L. W. Bostian, Jr.
Elizabeth W. Angle
George B. Evans
J. A. Broaddus, Jr.
William C. Glover
Roy L. Fauber
William D. Martin III
R. B. Hollinger, Jr.
A. V. Myers, Jr.
R. D. McTeer, Jr.
Aubrey N. Snellings
C. D. Porter, Jr.
James F. Tucker
Andrew L. Tilton
Joseph F. Viverette
W. E. Pascoe III
J. R. Monhollon'
Gerald L. Wilson
S. P. Fishburne1
Boyd Z. Eubanks
Thomas E. Snider
John G. Stoides
A. D. Tinkelenberg

George C. Guynn1
Billy H. Hargett1
A t l a n t a . . . . Monroe Kimbrel
Arthur H. Kantner1
Brown R. Rawlings1
Robert P. Forrestal
1
Harry Brandt
W. R. Caldwell
William N. Cox III
W. M. Davis
Delmar Harrison
Robert E. Heck
H. Terry Smith
William G. Pfaff
John M. Wallace
Birmingham.
Hiram J. Honea
Jacksonville .
Charles D. East
Miami
F. J. Craven, Jr.
Nashville . . .
Jeffrey J. Wells
New Orleans
Pierre M. Viguerie
Chicago.... Robert P. Mayo
Daniel M. Doyle

Detroit

For notes see last page of listing.




James R. Morrison1
Ward J. Larson'
Karl A. Scheld1
Harry S. Schultz1
1
Carl E. Vander Wilt
Richard P. Anstee
Paul J. Bettini
George W. Cloos
Franklin D. Dreyer
William H. Gram
Daniel P. Kinsella
Joseph G. Kvasnicka
William T. Newport
Dorothy M. Nichols
Louis J. Purol
William Rooney
R. M. Scheider
Roby L. Sloan
Adolph J. Stojetz
Ruth F. Vilona
Eugene J. Wagner
Allen G. Wolkey
1
William C. Conrad
F. S. Dominick
Robert M Fitzgerald

386 Directories and Meetings

PRESIDENTS AND VICE PRESIDENTS

Federal
Reserve
Bank

President
First Vice President

Continued

Vice President

or branch
St. Louis . . .

Lawrence K. Roos
Donald W.
Moriarty, Jr.

Anatol B. Balbach1 J. P. Garbarini1
Bradley G. Glass1
F.G.Russell, Jr.1
Harold E. Uthoff1
Ruth A. Bryant
Melvin A. CanCarol B. Claypool
James R. Kennedy John F. Otting, Jr.
Robert W. Thomas
Warren G. Snover
Delmer Weisz
John F. Breen
Donald L. Henry1
L. Terry Britt

MarkH. Willes
Thomas E. Gainor

Melvin L. Burstein L. W. Fernelius1
J. A. MacDonald1
John P. Danforth
Lester G. Gable
Gary P. Hanson
Bruce J. Hedblom
D. R. Hellweg
Howard L. Knous
David R. McDonald
Clarence W. Nelson James R. Taylor
R. W. Worcester
Betty J. Lindstrom

Roger Guffey
Henry R.
Czerwinski

W. T. Billington1
James R. Bowen1
Thomas E. Davis1
J. D. Hamilton1
James R. Bell
James A. Cacy
Cecil B. Foley
Jay K. Mast
G. H. Miller, Jr.
M. L. Mothersead
James F. O'Meara
Barry K. Robinson
Robert E. Scott
Jerry D. Shreeves
Donald A. Slover
John F. Zoellner
Wayne W. Martin1
William G. Evans
Robert D. Hamilton

Ernest T. Baughman
Robert H. Boykin

Joseph E. Burns1
G. C. Cochran III1
Harry E. Robinson1 Tony J. Salvaggio1
C. J. Pickering
George F. Rudy
Neil B. Ryan
E. W. Vorlop, Jr.
Joel L. Koonce, Jr.
J. Z. Rowe
Carl H. Moore

Little Rock..
Louisville...
Memphis ...
Minneapolis

Helena
Kansas City

Denver
Oklahoma City
Omaha
Dallas

El Paso
Houston....
San Antonio.

For notes see last page of listing.




Directories and Meetings

387

PRESIDENTS AND VICE PRESIDENTS
Federal
Reserve
Bank
or branch

President
First Vice President

San Francisco John J. Balles
John B. Williams

Los Angeles..
Portland
Salt Lake City
Seattle
1. Senior Vice President.
2. Adviser.
3. Culpeper Center is not considered a branch.




Vice President

Kenneth A. Grant1
John J. Carson1
Michael W. Keran1 Donald V. Masten1
Donald K. Carson
KentO. Sims1
Robert C. Dietz
James M. Davis
George P. Galloway
H. Peter Franzel
Warren H. Hutchins
Harry W. Green
Hector M. Martin
Henry B. Jamison
Michael J. Murray
Rix Maurer, Jr.
Wilhelmine Von Turk
Louis E. Reilly
Thomas Warren
Richard C. Dunn1
Angelo S. Carella
A. Grant Holman
Gerald R. Kelly1

388

Directories and Meetings

CONFERENCE OF PRESIDENTS
The presidents of the Federal Reserve Banks are organized into a Conference of
Presidents that meets from time to time to consider matters of common interest and
to consult with and advise the Board of Governors. At a meeting on September 20.
1978, Robert P. Black and Ernest T. Baughman, Presidents of the Federal Reserve Banks of Richmond and Dallas, were elected Chairman and Vice Chairman respectively for the forthcoming conference year, ending with the December 1979 meeting. Bradley H. Gunter of the Federal Reserve Bank of Richmond
was appointed Secretary and Martha T. Sukovich of the Federal Reserve Bank
of Dallas was appointed Assistant Secretary.
CONFERENCE OF FIRST VICE PRESIDENTS
The Conference of First Vice Presidents of the Federal Reserve Banks was organized in 1969 to meet from time to time, primarily for the consideration of
operational matters. On September 29, 1978, George C. Rankin. First Vice President of the Federal Reserve Bank of Richmond, was elected Chairman, and Robert
H. Boykin, First Vice President of the Federal Reserve Bank of Dallas, was elected
Vice Chairman of the conference for the calendar year 1979.
Bradley H. Gunter and Martha T. Sukovich were appointed Secretary and
Assistant Secretary respectively.




389

Index
Acceptances, bankers (See Bankers acceptances)
Assets and liabilities
Banks, by class
Board of Governors
Federal Reserve Banks

331
302
308-13

Balance of payments, review of 1979
26-32
Bank holding companies
Board policy statements
102, 105
International activities
284, 286
Legislative recommendations
254-55, 257
Litigation
259-66
Regulation Y
82, 95-98
Supervision and regulation by Federal Reserve System
252, 276
Bank mergers and consolidations
282-84, 339-55
Bank supervision and regulation by Federal Reserve System
Improvements
293
In 1979
252, 276-88
Litigation
267-68, 270-71
Policy statements and actions
100-06
Regulations (See Regulations, Board of Governors)
Regulatory improvement project
295
Bankers acceptances
Authority to purchase and to enter into repurchase agreements
117-19
Federal Reserve Banks
Earnings
299, 318
Holdings
299, 308, 310, 312
Open market transactions during 1979
317
Repurchase agreements
308, 310, 312, 317
Banking offices
Number, changes
336
Par and nonpar, number
337
Banking schools
287
Banking system, condition
289-94
Board of Governors (See also Federal Reserve System)
Annual Reports to Congress
221-48
Banking schools
287




390

Index

Board of Governors—Continued
Chairman, legislative recommendation on term
Consumer Advisory Council
Consumer affairs (See Consumer affairs)
Delegation of authority, actions under
Discount rates, decisions
Financial statements
Foreign applications processed
Interpretations
Legislative recommendations
Litigation
Members and officers, list
Policy actions
Publications
Regulations (See Regulations, Board of Governors)
Regulatory improvement project
Rules (See Rules, Board of Governors)
Salaries
Branch banks
Changes in number
Federal Reserve
Bank premises
Directors
Litigation
Vice presidents in charge
Foreign and international activities
Budget resolutions, federal

256
220, 362
278, 283-84
106-15
301-05
284-85
90, 98
253-58
259-71
358
81-115
218
295
303
336
298, 322
364-83
268
384-87
82, 273 * 284
273

Capital accounts
Banks, by class
331
Federal Reserve Banks
309, 311, 313
Check clearing and collection (See Transfers of funds)
Checks, Board policy statement on remote disbursement
101
Chrysler Corporation Loan Guarantee Act
274
Commercial banks
Assets and liabilities
331
Banking offices, changes in number
336
Number, by class
331
Reserve requirements, legislative recommendations
253
Transfers of funds (See Transfers of funds)
Community Reinvestment Act
100, 106, 216, 217, 248, 249, 279




Index

391

Condition statement of Federal Reserve Banks
308-13
Consumer Advisory Council
220, 362
Consumer affairs
Annual Reports to Congress
221^48
Board actions, review
216-21
Community Reinvestment Act
100, 106, 216, 217, 248, 249, 279
Consumer Advisory Council
220, 362
Educational activities
218-19
Equal Credit Opportunity (See Equal Credit Opportunity Act)
Litigation
267, 269, 270, 271
Publications
218
Reimbursement to financial institutions for providing
financial records of customers
94
Transfers of funds (See Transfers of funds)
Truth in Lending (See Truth in Lending)
Credit (See also Loans)
Consumer (See Consumer affairs)
Equal Credit Opportunity (See Equal Credit Opportunity Act)
Federal Reserve Banks, lending authority, legislative recommendation
255
Truth in Lending (See Truth in Lending)
Debt ceiling, legislation to increase
272
Defense production loans
95, 299
Deposits
Banks, by class
331
Federal Reserve Banks
309, 311,313, 333, 335
Interest rates (See Interest on deposits)
Reserve requirements (See Reserve requirements)
Directors, Federal Reserve Banks and branches
256, 364-83
Discount rates at Federal Reserve Banks (See Interest rates)
Discounts and advances by Federal Reserve Banks .. 308, 310, 312, 318, 332, 334
Discrimination, Board policy statement
104
Dividends, Federal Reserve Banks
297, 319, 320
Earnings of Federal Reserve Banks
Economy in 1979
Educational activities, consumer
Electronic fund transfers (See Transfers of funds)
Equal Credit Opportunity Act
Annual Report to Congress
Regulation B




297, 318, 320
5-13
218-19

230-42
81

392

Index

Examinations
Consumer and civil rights laws, enforcement
Federal Reserve Banks
Foreign or international financial corporations
Member banks
National banks
State member banks
Expenses
Board of Governors
Federal Reserve Banks

219
297
284-87
248, 280
281
248, 280
301-05
297, 318, 320

Federal Advisory Council
361
Federal agency securities
Authority to purchase and to enter into repurchase agreements 117-18, 134,215
Federal Reserve Bank holdings and earnings
299, 308, 310, 312, 316
Futures, forward, and standby contracts, Board policy statement
104
Open market transactions of Federal Reserve System during 1979
317
Repurchase agreements
308, 310, 312, 316, 317
Federal budget resolutions
273
Federal deposit insurance of branches of foreign banks, legislation
273
Federal Financial Institutions Examination Council
287
Federal Financing Bank
117
Federal Open Market Committee
Audit of System Open Market Account
297
Continuing authorizations, review
142
Litigation
267, 270
Meetings
116, 360
Members and officers
360
Policy actions
116-215
Federal Reserve Act, legislative recommendations
254-55, 284, 285, 286
Federal Reserve Agents
363
Federal Reserve Banks
Assessments for expenses of Board of Governors
303, 319, 320
Bank premises
298, 308, 310, 312, 322
Branches (See Branch banks)
Capital accounts
309, 311,313
Chairmen and Deputy Chairmen
363
Condition statement
308-13
Delegation by Board of authority, actions under
278, 283-84
Directors
256, 364-83
Discount rates (See Interest rates)




Index

393

Federal Reserve Banks—Continued
Dividends
297, 319, 320
Earnings and expenses
297, 318, 320
Examination or audit
297
Lending authority, legislative recommendation
255
Officers and employees, number and salaries
325
Operations, volume and cost
300, 323, 324
Payments mechanism, development (See Transfers of funds)
Presidents and vice presidents
384-88
Profit and loss
319
U.S. government securities (See U.S. government securities)
Federal Reserve notes
Condition statement data
308-13
Cost of printing, issue, and redemption
303
Interest paid to U.S. Treasury
319, 320
Federal Reserve System (See also Board of Governors)
Consumer affairs (See Consumer affairs)
Foreign currency operations (See Foreign currency operations)
Map of Federal Reserve Districts
356
Membership
282
Payments mechanism, development (See Transfers of funds)
Schools, banking
287
Supervision and regulation by
252, 276-88
Federal Trade Commission Act
242-48, 273
Financial markets and monetary policy
14—25
Foreign applications processed by Board
284-85
Foreign bank holding companies, Board statement on supervision
102
Foreign banks
Federal deposit insurance of branches, legislation
273
International banking operations
82, 284-87
Foreign currency operations
Authorization and directive
117, 120-23, 143, 144, 156, 187
Federal Reserve earnings on foreign currencies
318
Review
142
Gold, tables on gold certificate accounts of Federal Reserve Banks
and gold stock
308, 310, 311,312, 313, 332, 334
Home Mortgage Disclosure Act
Housing and Community Development Amendments of 1979




248
274

394

Index

Individual retirement accounts (IRA)
Insured commercial banks
Assets and liabilities
Banking offices, changes in number
Control, reporting requirements on changes
Interest on deposits (See also Interest rates)
Maximum rates, table
Regulation Q, amendments and interpretation
Interest rates (See also Interest on deposits)
Federal Reserve Banks
Changes
Table on rates
Legislation
Interlocking relationships
International banking operations
International developments, review
Interpretations, Board of Governors
Regulation Q
Regulation Z
Investments
Banks, by class
Federal Reserve Banks

93
331
336
281
328
90-93

106-15
325
274
87
82, 284—87
26-32
90
98
331
308, 310, 312

Keogh plan retirement accounts

93

Labor market developments
Legislation
Enacted
Recommendations
Litigation
Bank holding companies, antitrust action and review of Board
actions
Board procedures and regulations, challenges
Loans (See also Credit)
Affiliates of member banks, legislative recommendations
Banks, by class
Chrysler Corporation Loan Guarantee Act
Defense production
Executive officers of member banks and certain others
Federal Reserve Banks
Holdings and earnings

10




272-75
253-58

259-66
267-71
254-55
331
274
95, 299
88, 282
299, 318

Index

395

Loans—Continued
Federal Reserve Banks—Continued
Interest rates
325
Lending authority, legislative recommendation
255
Volume
308, 310, 312, 323, 332, 334
Real estate (See Real estate)
Margin requirements, table
Member banks (See also National banks)
Affiliates, legislative recommendations
Assets, liabilities, and capital accounts
Banking offices, changes in number
Borrowings from Federal Reserve Banks
Branches (See Branch banks)
Consumer and civil rights enforcement
Examination
Executive officers and certain others, loans
Foreign activities
Home Mortgage Disclosure Act
Number
Reserve requirements (See Reserve requirements)
Reserves and related items
State member banks (See State member banks)
Transfers of funds (See Transfers of funds)
Mergers and consolidations
Monetary policy
Financial markets relative to
Reports to Congress
Review of 1979
Mortgages (See Real estate)
Mutual savings banks
National banks (See also Member banks)
Assets and liabilities
Banking offices, changes in number
Examination
Executive officers and certain others, loans
Foreign activities
Number
Reserve requirements on foreign deposits
Negotiable orders of withdrawal, legislation




330
254-55
331
336
255
219
280
88, 282
284-85
248
282, 331
332-35

282-84, 339-55
14-25
33-77
3-32
336

331
336
281
88
284-85
282, 331
82
274

396

Index

Nonmember banks
Assets and liabilities
Banking offices, changes in number
Number

331
336
331

Par and nonpar banking offices, number
337
Payments mechanism, development (See Transfers of funds)
Policy actions
Board of Governors
Discount rates at Federal Reserve Banks
106-15
Regulations (See Regulations, Board of Governors)
Statements and rules
100-06
Federal Open Market Committee
Authority to effect transactions in System Open Market Account
Domestic operations . . . 117-20, 124, 134, 135, 146, 148, 158, 167, 179,
188, 190, 199, 200, 207, 215
Foreign currency operations
117, 120-23, 143, 144, 156, 187
Review
142
Presidents and vice presidents of Federal Reserve Banks
Conference of Presidents and Conference of First Vice Presidents
388
List
384-87
Salaries of presidents
325
Price stability, amendments to Council on Wage and Price
Stability Act
272
Prices
11
Profit and loss, Federal Reserve Banks
319
Publications, consumer
218
Real estate
Community Reinvestment Act
100, 106, 216, 217, 248, 249, 279
Home Mortgage Disclosure Act
248
Mortgage loans, legislation
274
Regulations, Board of Governors
B, Equal Credit Opportunity
81
BB, Community Reinvestment Act
100, 216, 248
C, Home Mortgage Disclosure
248
D, Reserves of Member Banks
81, 82
E, Electronic Fund Transfers
83-85, 219
F, Securities of Member State Banks
86
H, Membership of State Banking Institutions in the
Federal Reserve System
86




Index

397

Regulations, Board of Governors—Continued
K, International Banking Operations
82, 284
L, Management Official Interlocks
87
M, Foreign Activities of National Banks
82
O, Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks
88
Q, Interest on Deposits
90-93
S, Bank Service Arrangements, rescission, and adoption of
new Regulation S, Reimbursement to Financial Institutions
for Assembling or Providing Financial Records
93-94
V, Loan Guarantees for Defense Production
95
Y, Bank Holding Companies and Change in Bank Control
82, 95-98
Z, Truth in Lending
98-100, 219
Regulatory improvement project
295
Repurchase agreements
Authority to purchase and to enter into
117-18
Bankers acceptances
117-18, 308, 310, 312, 317
Federal agency securities
117-18, 308, 310, 312, 316, 317
Interest on, amendment of Regulation Q
92
U.S. government securities 117-18, 156-57, 308, 310, 312, 316, 317, 332, 334
Reserve requirements
Legislative recommendation
253
Member banks
Changes
81, 82
Table
326
Reserves, member banks
Reserve requirements (See Reserve requirements)
Reserves and related items
332-35
Rules, Board of Governors
Foreign gifts and decorations
103
Practice for hearings
103
Rulemaking procedures concerning regulations
100

Salaries
Board of Governors
Federal Reserve Banks
Savings and loan associations
Securities (See specific types)
Securities Acts Amendments of 1975
Special drawing rights




303
325
273
252
308, 310, 312, 332, 334

398

Index

State member banks (See also Member banks)
Assets and liabilities
331
Banking offices, changes in number
336
Consumer and civil rights laws, enforcement
219
Control, reporting requirements on changes
281
Examination
248, 280
Foreign branches, number
285
Home Mortgage Disclosure Act
248
Mergers and consolidations
282-84, 339-55
Number
331
Securities
86, 252
Supervision and regulation {See Bank supervision and regulation
by Federal Reserve System)
System Open Market Account
Audit
297
Authority to effect transactions in
Domestic operations .. 117-20, 124, 134, 135, 146, 148, 158, 167, 179, 188,
190, 199, 200, 207, 215
Foreign currency operations
117, 120-23, 142, 143, 144, 156, 187
Review
142
Training activities
Transfers of funds
Checks, Board policy statement on remote disbursement
Electronic fund transfers
Federal Reserve operations, volume and cost
Legislative recommendation and legislation
Payments mechanism, development
Volume and cost of Federal Reserve operations
Truth in Lending
Act
Annual Report to Congress
Legislative recommendations
RegulationZ

287
101
83-85, 219, 258
300, 323, 324
258, 274
296
300, 323, 324

221-30
219, 257
98-100, 219

U.S. balance of payments, review of 1979
26-32
U.S. government securities
Authority to buy, to enter into repurchase agreements, and
to lend
117-18, 134, 156, 199, 215
Bank holdings, by class of bank
331




Index

399

U.S. government securities—Continued
Federal Reserve Banks
Authority to buy directly from U.S. Treasury
118, 146, 188-89, 273
Earnings
297, 299, 318
Holdings
299, 308, 310, 312, 314, 332, 334
Futures, forward, and standby contracts, Board policy statement
104
Open market transactions
317
Repurchase agreements
308, 310, 312, 316, 317, 332, 334
Special certificates purchased directly from U.S. Treasury
316
Usury, legislation
274
Vloans
Wage stability, amendments to Council on Wage and
Price Stability Act




95, 299
272


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102