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2000 A N N U A L R E P O R T / T H E

FEDERAL RESERVE BANK OF ST. LOUI S

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W ill todays microchip-led surge take its place in history?




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C h arles W. M u e lle r
W illia m Poole
P r e s id e n t a n d C E O




Chairman




A MESSAGE FROM OUR PRESIDENT

20™ C E N T U R Y HAS B EEN CALLED T H E

T he breakthrough invention o f m odern times is the

( ^ ‘A M E R IC A N C E N T U R Y .” It was a century in w hich the

microchip. Because it too is a general-purpose technology,

standard o f living o f the average American increased six-fold.

many observers believe that the broad application o f infor­

Econom ic boom s lasted for decades— the 1920s, the 1950s

m ation and com m unications technology throughout the

and the 1960s all saw rapid econom ic grow th and rising

econom y will spur a sustained increase in productivity and

standard o f living. B ut then our econom y’s engine began to

econom ic grow th. But the ju ry is still out on w hether the

sputter. From the early 1970s to the m id-1990s, the average

recent surge in productivity will prove as durable as those

growth rate o f our econom y slowed to about two-thirds o f its

o f the past.

average pace from the 1920s to 1970. Starting about 1995,

O u r exam ination o f the links betw een technological

however, the U.S. econom y began to expand rapidly, and

progress and econom ic grow th reveals how clusters o f tech­

unem ploym ent and inflation fell to low levels n o t seen since

nological breakthroughs lead to sustained increases in pro­

the 1960s. A lthough the pace o f econom ic activity slowed

ductivity grow th and standard o f living. O u r study shows

during the second half o f 2000, m any econom ists remain

also how governm ent policy can affect econom ic growth,

convinced that the econom y’s grow th potential remains high.

principally by helping ensure an econom ic environm ent that

This year’s annual report is concerned w ith econom ic

encourages inventive activity and the efficient allocation o f

growth. O ver long periods, the principal determ inant o f how

econom ic resources. As a central bank, we can play a role in

fast our econom y can grow — that is, how fast o u r standard o f

this effort by ensuring that the market signals o f the price sys­

living can increase— is the grow th o f labor productivity. Since

tem are free o f distortions caused by uncertainty about the

the m id-1990s, the U n ited States has witnessed a remarkable

general level o f prices. Price stability contributes significantly

increase in the grow th o f labor productivity, exceeding that

to an environm ent in w hich technological progress and pro­

o f all oth er G -7 countries. In this report, we look to history

ductivity grow th are encouraged and our econom y can

for inform ation about how such surges in productivity com e

achieve its m axim um sustainable rate o f growth.

about, how long they can last, and w h eth er econom ic policy
can do anything to boost o u r econom y’s potential to grow.
Previous centuries’ productivity boom s w ere associated

I invite you to read this year’s annual report. By explor­
ing the past, we can learn about the present and, perhaps,
w here our so-called new econom y is headed.

w ith fundam ental technological breakthroughs and their
widespread com m ercial application. Industrial revolutions
o f the 18th and 19th centuries were ju m p -started by the
invention o f new general-purpose technologies, such as the
steam engine and the electric m otor, w hich had w ide appli­
cation th ro u g h o u t the economy.




W illiam P o o le , President and CEO

y 7

//
REVOLUTIONS IN PROD U CTIV ITY
W ill today's microchip-led surge take its place in history?

IN T R O D U C T IO N

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y

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O F O U R PR E D E C E SSO R S. In matters both trivial and
weighty— height, athletic prowess, grades, ability to tie a
shoe— we contrast and compare, gaining status from each
piece o f evidence that we are progressing faster or raising
the bar higher. As we get older, such comparisons often
focus on how well we are m anaging to improve our stan­
dard o f living.

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Every so often, an individual or an industry or a nation

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bursts through in some way that leaves its contem poraries
and historical counterparts in the dust. Can anyone explain
the remarkable achievements o f golfer T iger Woods? Using
the same equipm ent as his com petitors and playing the
same courses, Woods rather suddenly began charging past
opponents, setting tournam ent scoring records and, conse­
quently, establishing a m uch higher standard o f living for
himself. In econom ic terms, you m ight say he has been
m ore productive.
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A lthough the inputs T iger W oods uses to w in golf
tournam ents are rather specialized, conceptually they are
similar to the production o f goods and services econom ywide. W oods employs bo th physical capital (golf clubs,
tees, balls, etc.) and labor (physical exertion and skills,

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know ledge o f the course, etc.) in som e com bination.
In the economy, the production o f some goods, like cars
or corn, is inherently capital intensive— workers depend
heavily on machines to get the jo b done. In the m ore

dom inant services sector o f the economy, physical labor is

R evolution brought the introduction o f the steam engine,

the m ore abundant input.

m echanization o f textile m anufacturing, locomotive engines,

W hat caused W oods’ surge in productivity? We d o n ’t

chemical processes like bleaching, and num erous other im por­

really know. It’s likely to be some com bination o f experience,

tant inventions w ith commercial applications. T he late 19th

practice, coaching and other intangibles— w hat economists call

century witnessed the introduction o f the internal com bustion

hum an capital. W ith o u t some obvious technological break­

engine, im portant advances in chemistry, medicine and engi­

through, however, other golfers may be at a loss as to how to

neering, and great strides in the generation, distribution and

duplicate W oods’ efforts.

application o f electric power.

A nother example that better shows how technological

N ow at the dawn o f the 21st century, many observers believe

breakthroughs can lead to a significant ju m p in productivity is

the U.S. economy has entered a new era, reflecting revolutionary

laser eye surgery. For hundreds o f years, eyeglasses were the

technological advances associated w ith the microchip. These

only rem edy for hum an sight im pairm ent. In the 1940s, the

advances, some economists claim, perm it the economy to grow

developm ent o f contact lenses enabled many people to throw

faster and, hence, living standards to rise higher than they have in

away their glasses. C ontact lenses soon becam e the most rap­

recent decades. Others are skeptical, contending that the recent

idly grow ing means o f vision correction.

productivity spurt will prove to be an aberration and that the sus­

U ntil recently, that is. In the 1970s, a breakthrough sur­

tainable pace o f economic growth has not increased appreciably.

gical procedure called radial keratotom y appeared in Russia.

W hat is not up for debate is the econom y’s strength over

C om bined w ith another breakthrough technology, the excim er

the recent past. T he U nited States entered its record-setting

laser, w hich was originally developed to etch com puter chips,

ninth consecutive year o f econom ic expansion in 2000.

radial keratotom y revolutionized the field o f eye
surgery. Since FDA approval in 1998, such
procedures are now so com m on that the
advertising blitz for corrective laser eye
surgery is quite impossible to avoid.
Still, such a specific technological change pales
in com parison to an advance in w hat economists
call a general-purpose technology. Clusters o f

A lthough the pace o f econom ic activity slowed during the
second half o f 2000, productivity grow th— the principal
engine o f long-term econom ic grow th— rem ained strong.
In fact, since the m id-1990s, the U nited States has enjoyed
a remarkable increase in the grow th o f average labor produc­
tivity— an increase m atched by few other countries.
Can the U.S. productivity surge be credited to the invention
o f the microchip and related technologies, as past eras benefited

new developm ents in these types o f technologies

from their own major inventions? Are we in the midst o f ano­

characterized the m ajor industrial revolutions,

ther industrial revolution that will generate years o f rapid pro­

notably the British Industrial R evolution o f the

ductivity increase and prosperity? O r are we riding a wave that

18th and early 19th centuries and the so-called

will crest sooner than we think? O n the following pages, we

Second Industrial R evolution o f the late 19th

attem pt to answer these questions by looking back at the past.

and early 20th centuries, in w hich the U nited

First, we examine m ore closely the staggering productivity leap

States led the way. T h e British Industrial

the U nited States has made over the past half decade. ■




W O R S T T O F IR S T : W H E R E D ID T H E P R O D U C T IV IT Y S U R G E C O M E FR O M ?

Between 1980 and 1995, total output per w orker in the

H ittin g a G ro w th S p u rt

U nited States grew at the slowest rate o f any G -7 country.

Productivity Growth in the G -7 Countries

Since then, however, the grow th of U.S. labor productivity*
has exceeded that o f all other G -7 countries (see chart), as
has the growth o f U.S. real Gross Domestic Product. Increased
growth o f labor productivity explains fully half o f the increase

3.0
Percent, average growth rates

1981-1995

■ 1996-1999 +

in real econom ic growth in the U nited States since 1995.
And, by expanding the econom y’s productive potential, faster
productivity growth has resulted in rising real wages and
declining unem ploym ent w ithout significantly higher inflation.
So why the dramatic reversal o f fortune for the U nited
States? M any attribute it to the microchip— m ore specifically,
to investment by firms in com puters and inform ation process­
ing equipm ent and software. Federal Reserve Chairm an Alan
Greenspan has noted that “technological innovation, and in
particular the spread o f inform ation technology, has revolution­
ized the conduct o f business over the past decade and resulted
in rising productivity grow th.” Economists estimate that one-

Canada France Germany Italy

Japan

U .K .

U .S .

half to three-quarters o f the increase in trend labor productivity
grow th in the U nited States since 1995 can be attributed to

+ Year 2000 data on productivity growth are not availablefor all G -7 countries.

SOURCE: OECD Economic Outlook

rapid rates o f investment in inform ation and com puter tech­
nology (ICT) equipm ent.
T he spread o f inform ation technology noted by Chairm an

system. Similarly, the use o f com puterized robots on assembly

Greenspan and others has been encouraged by rapid declines in

lines has increased the num ber o f automobiles and other goods

the prices o f IC T equipm ent and software. Investment in IC T

assembled per w orker employed in m anufacturing industries.

capital has increased productivity by placing m ore capital at the

C om puters are also used for designing and testing new prod­

disposal o f each w orker— a process that economists refer to as

ucts, operating precision equipm ent, m anaging inventory and

“capital deepening.” For example, w ith a com puter and simple

personnel, and even for designing new computers. In many firms,

software, a records-keeper in a medical office can maintain

investment in IC T capital permits increased production w ithout

many m ore patient files than he or she can using a hand-filing

additional labor. Indeed, in some cases, such investment enables

* LABOR PRODUCTIVITY is the output of either an industry or the aggregate economy divided by labor input. A change in labor productivity reflects any change in output that cannot
be accounted for by a change in labor input; such changes may be due, for example, to changes in the amount of capital used per person employed or to changes in technology.




PLANTS POW ERED BY STEAM utilized a system of overhead shafts and belts. The advent
of electric motors to drive individual machines made many such facilities obsolete.

firms to adopt more efficient production technologies by aiding,
for example, in the design o f more efficient production lines.
Through such efficiency gains, output increases w ithout com ­
mensurate increases in labor or capital inputs.
C om puter technology is not new. T he first electronic digital
com puter was built before World War II, the transistor dates from
the late 1940s, and the silicon m icrochip from about 1970.
Personal com puters becam e widely used in offices in the 1980s.
Yet, aggregate U.S. labor productivity grow th declined after
about 1970 and rem ained low for another 25 years, even as
other im portant com puter technology breakthroughs occurred.

developm ent by a firm s engineers realizing ad hoc opportuni­

Economists were puzzled. W hy did it seem that the impact o f

ties to produce a good cheaper or better. O ver time, a long

com puter and inform ation technology was observed “every­

sequence o f such microinventions may lead to major gains in

where but in the productivity statistics,” as N obel-laureate

productivity, impressive advances in quality, fuel and material

economist R o b e rt Solow once quipped? In fact, there often is

savings, durability and so on.”

a delay betw een the invention o f a general-purpose technology
and its im pact on productivity. T h e next section takes a closer
look at this p h enom enon. ■

For example:
• Although Thomas N ew com en built the first successful
steam engine in 1712, it was not until about 1765 that major

T H E E C O N O M IC IM P A C T O F A N EW IN V E N T IO N :

improvements in the engine by James Watt made it suitable for

W H Y D O E S IT T A K E S O LO N G ?

factory use. Additional improvements, which included the addi­

H istory shows that new technologies do not move instantly

tion o f a governor and rotary movement, made the steam engine

from the inventors laboratory to everyday usage. It can take a

a huge economic success in the 19th century. R ecent estimates

long tim e for them to increase productivity. T h e absence o f

suggest that at the height o f the British Industrial Revolution

immediate productivity im provem ent w ith the advent o f new

(1760 to 1830) output per capita in the U nited Kingdom grew

inform ation processing technology was not unlike earlier expe­

at less than 0.5 percent per year on average, about the same rate

riences w ith general-purpose technologies. Similar delays in

as during the period between 1700 and 1760. By comparison,

the im pact o f technological progress on aggregate productivity

per capita output increased at an average rate o f nearly 2 percent

occurred d u rin g past industrial revolutions.

per year from 1830 to 1870. M okyr argues that despite slow

Part o f the delay, according to N orth w estern University

growth during the era o f high invention, rapid growth in Britain

econom ist Joel M okyr, occurs because, im portant as they are,

after 1830 could not have occurred w ithout the technological

fundam ental technological breakthroughs often require further

breakthroughs o f the previous 70 years.

inventions to m ake them broadly applicable: “ Such gap-filling
inventions are often the result o f o n -th e-jo b learning or o f a



• Although Michael Faraday invented the first electric m otor
in 1821 and the dynamo in 1831, it took nearly a century o f

additional, substantial breakthroughs to make electricity the

tional inventions came along to apply the new technology. In

dom inant source o f pow er in m anufacturing. Despite major

banking, for example, microinventions like the ATM , the debit

technological breakthroughs in electricity, chemicals, steel

card and credit-scoring software were required to generate the

production and other major sectors, American manufacturing

productivity gains promised by the computer.

productivity slowed in the late 19th century. Whereas output

Stanford University econom ist Paul David explores the

per hour increased at 1.7 percent per year from 1869 to 1889,

dynamics o f technological diffusion by com paring the electric

output per hour increased at just 1.4 percent per year from

dynamo, a key technological advance o f the 19th century, w ith

1889 to 1909. U.S. m anufacturing productivity growth

the m odern computer. T he dynamo, like the com puter and
steam engine, is a general-purpose technology, having profound
effects on nearly all sectors o f the economy. Decades elapsed,
however, betw een the introduction o f reliable electric m otors
and their widespread use in industry. Some o f the delay was

Share o f Power Used in U.S. Industry

accounted for by lags in the developm ent o f efficient means o f
electric power generation and by com petition betw een direct

100
Percent

■ Steam

W ater

■ Electricity

and alternating current. Electric pow er generation was reason­
ably efficient and commercially viable by 1880, however, and
the superiority o f alternating current for most applications was
clear by 1893. Yet, as the chart to the left illustrates, electricity
accounted for just 5 percent o f mechanical pow er in U.S. m an­
ufacturing in 1900 and did not exceed 50 percent until 1920.
“ Part o f the delay in the exploitation o f the potential
industrial productivity gains offered by the [electric] dynamo,”
according to David, “was due simply to the durability o f old
manufacturing plants em bodying technology adapted to the
regime o f mechanical power derived from w ater and steam.”
A slow rate o f decline in the cost o f adopting electric power
also contributed to the delay. Between 1907 and 1917, the

SO U R C E : David (1991)

price o f electricity to industrial users dropped sharply, how ­
ever, and the technology began to spread rapidly.

rem ained m odest until after W orld War I, but grew during the
1920s at an astounding rate o f 5.6 percent per year. Producti­
vity grow th remained high for another 40 years.

O nce electricity accounted for some 50 percent o f the
pow er sources used in Am erican m anufacturing, U.S. produc­

tivity began to accelerate. Electrification enhanced productivity
As w ith the steam engine and electric motor, the com puter by affording greater flexibility and m ore efficient use o f labor
chip did not affect productivity in many industries until addi­
and capital in m anufacturing. For example, electrification
•




.AraSnrroMCur if
u sssts De*/y
.

IN V E N T IO N : Newcomen's steam
engine, with its reciprocating piston
working in a cylinder, was the first
true steam engine. ( 1 7 1 2 )
P R O D U C T : Road locomotive, first

In both the First and Second Industrial
Revolutions, as well as in the modern world,
major technological breakthroughs have led
to a wide range o f new applications.
O n this page are examples o f a key
invention from each era and a product
or service that resulted from it.

M O D ER N DAY

P R O D U C T : Laser ege sur­
gery is performed using
an excimer laser controlled
by a microcomputer.
IN V E N T IO N : Peari

P R O D U C T : The distribution of

Street power station,

electricity to individual house-

IN V E N T IO N : Intel's first microprocessor,
the 4004, paved the way for desktop, and
even smaller, computers with processing

generating plant,

o f convenience products such

opened in 1882

as vacuum cleaners




1906

capacity far exceeding that of many room ­
sized mainframe computers. ( 1 9 7 1 )

enabled m ore use o f continuous-process techniques, such
as the factory assembly line, w hich often reduced produc­
tion times and waste. Efficiency was improved also by the
wide adoption o f “unit drive,” that is, the use o f dedicated
electric m otors to pow er individual machines and tools,
rather than a system o f shafts and belts powered by a single
engine. U nit drive brought savings through reduced energy
usage, less wear and tear, and more flexible and efficient
factory design. Electrification also enhanced productivity
by improving factory lighting and safety.
T he histories o f the steam engine and the electric
dynam o show us that delays o f years o r even decades from
the initial invention o f a general-purpose technology and
its impact on aggregate productivity and standard o f living
should not be surprising. Follow-up inventions and adap­
tations o f existing workplaces and products to the new
technology are required before large productivity gains
arise. Is there any way to ensure that such m icroinventions
do occur— that fundamental technological breakthroughs
lead to grow th in productivity and standard o f living?
M any observers believe that a co u n try ’s econom ic
perform ance is related to its political and econom ic institu­
tions. C ountries w ith stable, dem ocratic political systems,
lim ited governm ent involvem ent in econom ic decision­
making, but strong protection o f property rights, are thought
to have institutions that are conducive for technological
progress and econom ic grow th. We tu rn next to how
public policy m ight affect grow th and w hat the histories
o f past industrial revolutions m ight teach us. ■




IS T H E R E A R O L E F O R P U B LIC P O LIC Y ?

Thus far, we have focused on how technological
progress can increase the grow th o f productivity and

m.

standard o f living. But, how does technological progress
come about and, specifically, can governm ents do any­

iL.

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thing to encourage it? D u rin g the industrial revolutions
o f the 18th and 19th centuries, invention and the appli­

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cation of new technologies were carried out by private
individuals and firms, virtually w ithout governm ent sub­
sidies or direction. N onetheless, the histories o f these
industrial revolutions suggest that governm ents can have
a powerful im pact on grow th.
Douglass N o rth , a N obel laureate econom ist at
W ashington U niversity in St. Louis, argues that a nation’s
institutions, including its governm ent, are fundam ental

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determ inants o f econom ic grow th. Focusing specifically
on the role o f governm ent, N o rth and his co -au th or Barry

FIRST U .S. PATENT, issued July 30,1790

Weingast argue: “Successful econom ic perform ance ... must
be accom panied by institutions that lim it econom ic
in tervention and allow private rights and markets
to prevail in large segments o f the economy. ...

representative parliament and independent judiciary, that
produced a marked increase in the security o f private rights.
Secure property rights, in turn, provided the freedom and

T h e ability o f a governm ent to com m it to

incentive to take economic risks, to invest in new technologies

private rights and exchange is thus an essential

and to look for ways to use economic resources more efficiently.

condition for grow th.” In his classic study o f

T he U nited States inherited the English tradition o f protecting

U.S. productivity grow th, Jo h n K endrick makes

property rights and, hence, the same fundamental mechanism

a similar point. C iting the im portance o f resources

for providing incentives for invention, investment and risk-

devoted to increasing scientific and technical knowledge, Ken­

taking that was in place in England by the early 18th century.

drick contends that “the relative volum e o f resources devoted

Providing these incentives would seem to be a fundamental

to research developm ent and innovation depends on the basic

contribution that governments can make to encourage gains

values and m otivations o f a people and on the efficacy o f the

in productivity and standard o f living.

rewards and penalties provided by prevailing institutions for the
success or failure in the efforts to improve productive efficiency.”
In the view o f N o rth and Weingast, the “ G lorious R evo­
lution’ o f 1688 gave England political institutions, such as a



In addition to enforcing contracts and lim iting arbitrary
confiscation o f property, governments often extend special
protections to inventors in the form o f patents and copyrights.
Such protections seem particularly im portant in the case o f

intellectual property or knowledge-based products, such as

teaching “agricultural and mechanical arts,” including engineering

com puter software. T he initial developm ent o f a piece o f soft­

and other technical subjects. Economists widely believe that basic

ware m ight be extremely costly, but the costs o f producing and

and technical education enhanced the productivity o f American

disseminating copies o f the software are trivial. W ithout strong

labor and contributed to the accelerated pace o f productivity

protection o f intellectual property rights, such as a software

growth that began in the 1920s. H igh school graduation rates

developers copyright, there will be little incentive to produce

were at high levels in the 1920s, and, as in recent decades, income

knowledge-based products. In other words, secure property

growth rates were higher for more-educated workers.

rights encourage the technological breakthroughs that acceler­
ate productivity growth and living standards.
British patent law dates from 1624, whereas France and

Defense o f property rights, sound m acroeconom ic policies,
a strong educational system, and patents and copyrights are
institutional supports that governm ents can use to strengthen

other continental European countries did not have patent laws

econom ic grow th in a m arket system. Such supports prom ote

until at least 1791 (the first U.S. patent law was enacted in 1790).

the allocation o f econom ic resources to their m ost productive

Scholars debate the extent to w hich patent protection con­

uses and encourage technological progress by ensuring that

tributed to the high rate o f invention during the Industrial

inventors are rewarded for developing successful technologies.

Revolution, in part because o f inconsistent enforcement o f patent

M any countries, however, have pursued technological progress

laws by British courts. Enforcement o f property rights granted

and econom ic grow th by limiting, even eliminating, m arket

by patents and copyrights is, o f course, crucial to their success as

forces. A lthough grow th rates can be high for short periods

stimulants to invention. Patents and copyrights can also inhibit

under governm ent ownership and control o f econom ic

innovation if firms are perm itted to extend them indefinitely.

resources, history suggests that m arket-based econom ies

W ell-designed patent and copyright laws, along w ith a
legal system that protects property rights, are examples o f how

have faster grow th rates over the long term .
Today, few observers contend that highly controlled

governments can prom ote economic development. O ther con­

econom ies will grow faster for long periods than m arket

tributions that governments can make include sound macroeco­

econom ies. Nevertheless, m any believe that governm ents

nomic policies and, in the view o f many economists, a strong

can do more to prom ote technological progress and econom ic

education system. Paul R om er, a leading grow th econom ist at

developm ent than simply providing a conducive climate for

Stanford University, for example, argues that “the real success o f

markets to w ork their magic. Some countries have adopted

A m erican econom ic policy has been to have moderately strong

formal “industrial policies” aimed at guiding technological

property rights w ith lots o f subsidies for inputs— like research

change by subsidizing or otherw ise prom oting specific tech­

and education— that are used in the innovation process.”

nologies, industries or firms over others. Econom ists do not

The U nited States has long supported both public and private

agree w hether such policies can enhance econom ic growth, and

education. In the 19th century, federal assistance to education

some argue that the policies are m ore likely to retard grow th by

was largely in the form o f land grants used to finance the estab­

interfering w ith the efficient allocation o f econom ic resources.

lishment o f public schools and colleges. T he M orrill Act o f 1862,
for example, provided land grants for the establishment o f colleges



To some extent, all countries, including the U nited States,
have used subsidies, protective trade barriers, and other direct

CONCLUSION

FROM 19 19 TO 19 7 B , the trend
growth rate o f U .5 . produ ctivity
averaged 2 .7 percent per year
as Americans applied the great

Chip

Nonfarm Business Productivity

technological in ven tion s of
the late 19th and early 20th

Output per hour (log), annual data

centuries: electric power, the

1996 to 2000
(2 . 8 %)

internal com bustion engine and
major advances in ste e l-m a k in g ,

1919 to 1973

2001-2045

(2 .7 % )

(To be determ ined)

chemicals and num erous other
industries. P ro du ctivity growth
slowed from the early 19 70 s
through 1 9 9 5 . Since th e n ,
however, p ro du ctivity growth

1889 to 1916
( 2 .0 %)

has been com parable to that
earlier 5 4 -y e a r su rge . But
before our new era is considered
as revolutionary as those o f the
past, several m ore decades o f
rapid pro du ctivity growth
must occur.

Numbers in parentheses are average rates for periods shown.

SO U RCES: 1889-1946— Kendrick, John. Productivity Trends in the United States (Princeton, 1961).
1947-2000— Bureau o f Labor Statistics

means to foster technological developm ent. A feature o f the

champions,’ w hich they identify as a few big firms whose

18th and 19th century industrial revolutions, however, was the

m onopoly positions they try to protect. That really goes in

lim ited extent that governm ents sought to dictate or interfere

all the w rong directions.” ■

w ith the form and extent o f technological progress. T he great
econom ist Joseph S chum peter coined the term “ creative

D E F IN IN G T H E R E C E N T P R O D U C T IV IT Y A C C E L E R A T IO N :

destruction” to describe how econom ic grow th arises from

BOOM OR B O O M LE P

the continual reallocation o f econom ic resources as new, more

T he fundamental technological inventions o f the past

productive firms and technologies replace old and inefficient

50 years have given us an astonishing variety o f new products

firms and technologies. Paul R o m e r argues that A m erica’s

and services, from cellular telephones to digital video to

great success com es from allowing this process to occur: “T he

e-com m erce. At the same time, IC T has also enabled firms to

U nited States has m aintained a regulatory and financial system

produce many old-econom y goods and services, such as auto­

that makes it easy to create new companies, raise capital and

mobiles, steel and financial services, more efficiently Since the

start new businesses. We also tolerate failure." By contrast,

mid-1990s, the U.S. econom y has witnessed an astounding

other countries have “focused on w hat they call ‘national

increase in productivity grow th that has brought higher stan­




dards o f living, em ploym ent and real incomes to most A m eri­

betw een 1974 and 1995, at 1.4 percent per year. W ere that

cans. H ow long can it last?
Although G D P grow th slowed toward the end o f 2000,

rate to persist for 50 years, standard o f living w ould only

there is no sign that the forces causing the rise in productivity

to grow at the pace o f 1996-2000, but to be on par w ith the

growth have diminished. This suggests that the recent slowdown

great boom s o f the past, our current rate o f productivity

will prove to be a temporary, cyclical phenom enon and not the

grow th will have to continue for decades m ore. It’s simply

beginning o f a return to a slower long-run growth path.
A m ore fundamental question, however, is w hether the U.S.
econom y can sustain a high pace o f trend econom ic growth

double. Obviously we hope that productivity will continue

too soon to tell w hether the productivity surge o f the last
five years will prove to be a boom or a boom let.
In the past, long booms in productivity growth and standard

over many years, even decades. M any economists think so, but

o f living proceeded from clusters o f major technological break­

there are skeptics. O n e skeptic is R o b ert G ordon, a professor

throughs, made commercially successful by subsequent inven­

o f economics at N orthw estern University. G ordon argues that

tions and gap-filling innovations. T he histories o f the great

m uch o f the recent acceleration in U.S. productivity is due to

industrial revolutions o f the 18th and 19th centuries teach us

cyclical forces, suggesting that productivity growth will fall as

that technological progress and econom ic developm ent are

economic activity slows to a m ore modest pace. Moreover, he

encouraged by a market system that rewards individuals and

contends that the computer, the Internet and other high-tech

firms whose advances increase productivity and econom ic

products o f the late 20th century pale in comparison with the

growth the most. A high standard o f living and sustainable

great inventions o f the late 19th century in terms o f their impact

economic growth is surely a testament to our free market

on productivity and long-run standard o f living. Electricity, the

econom ic system and the opportunities for wealth creation

internal combustion engine, and significant advances in chem i­

that spring from it. Strong support o f property rights, stable

cals, medicine and com m unication were m uch more im portant

m acroeconomic policies and a sound educational system

for sustained economic development, G ordon contends, than

underpin our market system and encourage technological

the transistor, the microchip or the Internet.

progress and econom ic growth. Macroeconomic grow th is,

Thus far, the short period since 1996 favors those w ho

in the end, the product o f countless microeconomic decisions

believe we have a “ new economy.” As the chart on the previ­

made everyday in response to market signals. As a society, we

ous page illustrates, average labor productivity grow th in the

can best ensure a high, sustainable rate o f econom ic growth

U nited States has increased at an average rate o f 2.8 percent

over the long term through a market system that encourages

since 1996. Productivity is now grow ing at about the same

the search for new technologies and m ore efficient m ethods

rate as it did during the halcyon productivity boom o f 1919

o f production. ■

to 1973, w hich scholars attribute to the industrial revolution
o f the late 19th century. A lthough in terru p ted by a m ajor
econom ic depression and a w orld war, the great boom o f the
m id-20th century produced a quadrupling in U.S. standard
o f living. By contrast, productivity grew only half as fast



BIBLIOGRAPHY

Barro, R o b e rt J., and X avier Sala-i-M artin. Economic Growth.
N ew York: M cG raw -H ill, 1995.
David, Paul A. “ C o m p u ter and the Dynam o: T he M odern
Productivity Paradox in a N ot-to o -D istan t M irror,” in
Technology and Productivity: The Challenge for Economic Policy.
Paris: O rganization for E conom ic C ooperation and
D evelopm ent, 1991.
David, Paul A., and G avin W right. “Early Twentieth C entury
Productivity G row th Dynamics: An Inquiry into the
E conom ic H istory o f ‘O u r Ignorance.” ’ University o f

Jorgenson, Dale W., and Kevin J. Stiroh. “ Raising the Speed
Limit: U.S. Econom ic Growth in the Information Age,”
Brookings Papers on Economic Activity 1, pp. 125-211.
Kendrick, John W. Productivity Trends in the United States.
Princeton: National Bureau o f Econom ic Research, 1961.
M okyr,Joel. “Editor’s Introduction: T he N ew Econom ic
History and the Industrial Revolution,” in Joel Mokyr, ed.
The British Industrial Revolution: A n Economic Perspective.
Second edition. Boulder: Westview Press, 1999, pp. 1-127.
Mokyr, Joel. “ T he Second Industrial R evolution, 1870-1914.”

O xford Discussion Papers in Econom ic and Social H istory

N orthw estern University D epartm ent o f Economics

no. 33, O cto b er 1999.

w orking paper, August 1998.

G ordon, R o b e rt J. “ D oes the ‘N ew E conom y’ Measure up
to the Great Inventions o f the Past?” Journal o f Economic
Perspectives, Fall 2000, pp. 49-74.
International M onetary Fund. “ C u rren t Issues in the W orld
Econom y: Productivity and IT G row th in the Advanced

N orth, Douglass C., and Barry R . Weingast. “Constitutions and
Com m itm ent: T he Evolution o f Institutions Governing
Public Choice in Seventeenth-C entury England,” Journal of
Economic History, D ecem ber 1989, pp. 804-32.
Oliner, Stephen D., and Daniel E. Sichel. “T he Resurgence o f

Econom ies,” World Economic Outlook, O cto b er 2000,

Growth in the Late 1990s: Is Information Technology the

C hapter 2.

Story?” Journal of Economic Perspectives, Fall 2000, pp. 3-22.







BOARD OF DIRECTORS

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RETIRING BOARD M EMBERS

W E W O U L D LIKE T O EX PR ESS O U R D EEPEST G R A T IT U D E
to those m em bers o f our Eighth D istrict Boards o f Directors
w ho retired at the end o f 2000.
O u r appreciation and best wishes go out to Susan S. Elliott,
w ho served as chairm an o f the St. Louis Board,
and D iana T. H ueter, chairm an o f the Little R o ck Board.
We also thank the following board members
for their distinguished service:
M ichael A. Alexander from St. Louis;
Ross M . W hipple from Little R ock;
Larry E. D unigan and D ebbie Scoppechio from Louisville;
and Carol G. Crawley from M emphis.




ST. LOUIS

BOARD OF DIRECTORS

Charles W. Mueller
Chairman

C hairm an, President
and C E O
Am eren C orporation
St. Louis, Missouri

Gayle P.W. Jackson

Bradley W. Small

Lunsford W. Bridges

M anaging Director
Lange, M ullen & Bohn LLC,
Global Financial Solutions
St. Louis, Missouri

President and C E O
T he Farmers and Merchants
National Bank
Nashville, Illinois

President and C E O
M etropolitan National Bank
Little R ock, Arkansas

R o b e rt L.Jo hn so n

C h a irm a n and C E O
J o h n s o n Bryce Inc.
M e m p h is, Tennessee




Joseph E. Gliessner Jr.

Bert Greenwalt

Executive D irector
N ew Directions
H ousing C orporation
Louisville, Kentucky

Partner
Greenwalt Com pany
Hazen, Arkansas

Walter L . Metcalfe Jr.
Deputy Chairman

Chairm an
Bryan Cave LLP
St. Louis, Missouri

N ot pictured:
Thomas H . Jacobsen

Chairm an o f the Board
Firstar C orporation
Milwaukee, W isconsin




LITTLE R O C K

BOARD OF DIRECTORS

I
V

Vick M. Crawley
Chairman

Plant Manager
Baxter Healthcare C orporation
M ountain Hom e, Arkansas

LITTLE ROCK BRANCH

Lawrence A . Davis Jr.

David R. Estes

A . Rogers Yarnell II

Chancellor
University o f Arkansas
at Pine Bluff
Pine Bluff, Arkansas

President and C E O
First State Bank
Lonoke, Arkansas

President
Yarnell Ice Cream Co. Inc.
Searcy, Arkansas

Cynthia J. Brinkley

Eve re tt Tucker III

President-Arkansas
Southwestern Bell
Telephone Com pany
Little Rock, Arkansas

Chairm an
Moses Tucker R eal Estate Inc.
Little R ock, Arkansas




N o t pictured:
Raymond E. Skelton

R egional President
Firstar Bank N.A.
Little R ock, Arkansas




LOUISVILLE

Roger Reynolds
Chairman

President and C E O
Interlink Logistics LLC
Louisville, Kentucky

BOARD OF DIRECTORS

Norman E. Pfau Jr.

Orson Oliver

J . Stephen Barger

President and C E O
Geo. Pfau s Sons Com pany Inc.
Jeffersonville, Indiana

President
M id-Am erica Bank o f Louisville
Louisville, Kentucky

Executive Secretary-Treasurer
Kentucky State District Council
o f Carpenters, A FL-CIO
Frankfort, Kentucky

Frank J . Nichols

Marjorie Z . Soyugenc

Chairm an, President and C E O
C om m unity Financial
Services Inc.
Benton, Kentucky

Executive D irector
W elborn Foundation
Evansville, Indiana




N o t pictured:
Edwin K. Page

Vice President, External Affairs
AP Technoglass Com pany
Elizabethtown, Kentucky




MEMPHIS

BOARD OF DIRECTORS

Gregory M. Duckett
Chairman

Senior Vice President and
C orporate Counsel
Baptist M em orial Health
Care Corporation
Memphis, Tennessee

James A . England

Russell Gwatney

John C. Kelley Jr.

C hairm an, President and C E O
D ecatur C ounty Bank
Decaturville, Tennessee

President
Gwatney Companies
M emphis, Tennessee

President, Business
Financial Services
First Tennessee Bank
M em phis, Tennessee

$4

Walter L. Morris Jr.

E.C . Neelly III

Mike P. Sturdivant Jr.

President
H&M Lumber Co. Inc.
West Helena, Arkansas

M anagem ent C onsultant
First Am erican National Bank
Iuka, Mississippi

Partner
D ue West
Glendora, Mississippi







FINANCIAL STATEMENTS

T H E FED ERA L RESERVE BA N K O F ST. LO U IS
FIN A N C IA L STA TEM EN TS
for the years ended December 3 i, 2000 and 1999

LETTER TO BOARD OF DIRECTORS

M arch 2, 2001

T O T H E B O A R D O F D IR E C T O R S :
T he m anagem ent o f the Federal Reserve Bank o f St. Louis (the “Bank”) is responsible for the preparation and fair presentation
o f the Statem ent o f Financial C ondition, Statem ent o f Income, and Statement o f Changes in Capital as o f Decem ber 31, 2000 (the
“Financial Statem ents”). T he Financial Statements have been prepared in conform ity w ith the accounting principles, policies, and
practices established by the Board o f Governors o f the Federal Reserve System and as set forth in the Financial Accounting Manual
for the Federal Reserve Banks, and as such, include amounts, some o f w hich are based on judgm ents and estimates o f management.
The m anagem ent o f the Bank is responsible for maintaining an effective process o f internal controls over financial reporting
including the safeguarding o f assets as they relate to the Financial Statements. Such internal controls are designed to provide rea­
sonable assurance to m anagem ent and to the Board o f Directors regarding the preparation o f reliable Financial Statements. This
process o f internal controls contains self-m onitoring mechanisms, including, but not limited to, divisions o f responsibility and a
code o f conduct. O n ce identified, any material deficiencies in the process o f internal controls are reported to management, and
appropriate corrective measures are im plem ented.
Even an effective process o f internal controls, no m atter how well designed, has inherent limitations, including the possibility
o f hum an error, and therefore can provide only reasonable assurance w ith respect to the preparation o f reliable financial statements.
T h e m anagem ent o f the Bank assessed its process o f internal controls over financial reporting including the safeguarding o f
assets reflected in the Financial Statements, based upon the criteria established in the “ Internal Control— Integrated Framework”
issued by the C om m ittee o f Sponsoring Organizations o f the Treadway Commission (C O SO ). Based on this assessment, the m an­
agem ent o f the Bank believes that the Bank m aintained an effective process o f internal controls over financial reporting including
the safeguarding o f assets as they relate to the Financial Statements.
Federal R eserve Bank o f St. Louis

William Poole

W. LeGrande Rives

President and Chief Executive Officer

First Vice President and Chief Operating Officer




REPORT OF INDEPENDENT ACCOUNTANTS

T O T H E B O A R D O F D IR E C T O R S O F T H E FED ERAL RESERVE BA N K O F ST. LO U IS
We have examined m anagem ent’ assertion that the Federal Reserve Bank o f St. Louis (“ FRBSTL”) maintained effective
s
internal control over financial reporting and the safeguarding o f assets as they relate to the Financial Statements as o f D ecem ber
31, 2000, included in the accompanying M anagement s Assertion.
O u r examination was made in accordance with standards established by the American Institute o f Certified Public
Accountants, and accordingly, included obtaining an understanding o f the internal control over financial reporting, testing, and
evaluating the design and operating effectiveness o f the internal control, and such other procedures as we considered necessary
in the circumstances. We believe that our examination provides a reasonable basis for our opinion.
Because o f inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected.
Also, projections o f any evaluation o f the internal control over financial reporting to future periods are subject to the risk that
the internal control may become inadequate because o f changes in conditions, or that the degree o f compliance w ith the poli­
cies or procedures may deteriorate.
In our opinion, m anagem ents assertion that the FRBSTL maintained effective internal control over financial reporting and
over the safeguarding o f assets as they relate to the Financial Statements as o f D ecem ber 31, 2000, is fairly stated, in all material
respects, based upon criteria described in “ Internal Control— Integrated Framework” issued by the C om m ittee o f Sponsoring
Organizations o f the Treadway Commission.

M arch 2, 2001
St. Louis, Missouri




REPORT OF INDEPENDENT ACCOUNTANTS

T O T H E B O A R D O F G O V E R N O R S O F T H E FED ERA L RESERVE SYSTEM A N D
T H E B O A R D O F D IR E C T O R S O F T H E FED ER A L RESERVE BA N K O F ST. LOUIS:
We have audited the accom panying statements o f condition o f T he Federal Reserve Bank o f St. Louis (the “Bank”)
as o f D ecem ber 31, 2000 and 1999, and the related statements o f incom e and changes in capital for the years then ended.
These financial statem ents are the responsibility o f the B ank’s m anagem ent. O u r responsibility is to express an opinion
on the financial statem ents based on o u r audits.
We conducted our audits in accordance w ith auditing standards generally accepted in the U nited States o f America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about w hether the financial
statements are free o f m aterial m isstatem ent. A n audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates m ade by m anagem ent, as well as evaluating the overall financial statem ent presentation. We believe that our audits
provide a reasonable basis for o u r opinion.
As discussed in N o te 3, the financial statem ents were prepared in conform ity w ith the accounting principles, policies,
and practices established by the Board o f G overnors o f T he Federal Reserve System. These principles, policies, and prac­
tices, w h ich were designed to m eet the specialized accounting and reporting needs o f T he Federal Reserve System, are set
forth in the “ Financial A ccounting M anual for Federal R eserve Banks” and constitute a comprehensive basis o f accounting
o th er than accounting principles generally accepted in the U nited States o f America.
In o u r opinion, the financial statem ents referred to above present fairly, in all material respects, the financial position o f
the B ank as o f D ecem ber 31, 2000 and 1999, and results o f its operations for the years then ended, on the basis o f account­
ing described in N o te 3.

M arch 2, 2001
St. Louis, M issouri




FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
STATEMENTS OF CO ND ITIO N
(in millions)

AS O F D E C E M B E R 31,
1999

2000
ASSETS
Gold certificates
Special drawing rights certificates

S

Coin
Items in process o f collection
Loans to depository institutions
U.S. government and federal agency securities, net
Investments denom inated in foreign currencies

359
71

$

337
175

51

10

539

471

8

37

19,696

15,918

385

327

229

Bank premises and equipm ent, net
O th er assets

160

—
57

Accrued interest receivable
Interdistrict settlement account

5,176

21

Total assets

55
16

$ 21,416

S 22,682

S 19,410

$ 21,575

596

440

LIABILITIES A N D CAPITAL
Liabilities:
Federal Reserve notes outstanding, net
Deposits:
Depository institutions
O ther deposits

2

1

Deferred credit items

296

272

Interest on Federal Reserve notes due to U.S. Treasury
Interdistrict settlement account

38

19

740

_

52

51

6

8

21,140

22,366

Capital paid-in

138

158

Surplus

138

158

276

316

S 21,416

$ 22,682

Accrued benefit costs
O th er liabilities
Total liabilities
Capital:




Total capital
Total liabilities and capital

The accompanying notes are an integral part o f these financial statements.

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
STATEMENTS OF INCOME
(in millions)

F O R T H E YEARS E N D E D D E C E M B E R 31,
2000

1999

IN T E R E S T IN C O M E :
Interest on U.S. governm ent and federal agency securities

$

Interest on investments denom inated in foreign currencies
Interest on loans to depository institutions

1,151
7

$

917
5

3

2

1,161

924

Incom e from services

47

42

R eim bursable services to governm ent agencies

28

19

(35)

(10)

(3)
2

(1)
1

39

51

Total interest incom e
O th e r operating incom e (loss):

Foreign currency losses, net
U.S. governm ent securities losses, net
O th e r incom e
Total other operating incom e
O perating expenses:

74

70

O ccupancy expense

Salaries and other benefits

7

7

E quipm ent expense

9

8

Assessments by Board o f Governors

20

19

O th e r expenses

52

44

162

148

Total operating expenses
N e t incom e p rio r to distribution

$

1,038

$

9

$

827

D istribution o f net income:
Dividends paid to m em ber banks

$




S

37

957

Transferred to surplus
Payments to U.S.Treasury as interest on Federal Reserve notes
Total distribution

9

72

781

1,038

The accompanying notes are an integral part o f these financial statements.

S

827

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
STATEMENTS OF CHANGES IN CAPITAL
(in millions)

F O R TH E YEARS EN D ED D E C E M B E R 31, 2000, A N D D E C E M B E R 31, 1999
Capital
Paid-in
Balance at January 1, 1999
(2.4 million shares)

$

121

Surplus

$

N et income transferred to surplus

121

Total
Capital

$

37

242
37

N et change in capital stock issued
(0.8 million shares)
Balance at D ecem ber 31,1999
(3.2 million shares)

37
$

158

N et incom e transferred to surplus
Surplus transfer to the U.S. Treasury




$

158

$

316

72

72

(92)

N et change in capital stock redeemed
(0.4 million shares)
Balance at Decem ber 31, 2000
(2.8 million shares)

37

(92)

(20)
S

138

(20)
138

The accompanying notes are an integral part o f these financial statements.

$

276

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
1. O R G A N IZ A T IO N
The Federal Reserve Bank o f ST. L O U IS (“Bank”) is part o f the Federal

in the payments mechanism, including large-dollar transfers o f funds, automated

Reserve System (“System”) created by Congress under the Federal Reserve

clearinghouse operations and check processing; distribution o f coin and cur­
rency; fiscal agency functions for the U.S. Treasury and certain federal agencies;

Act o f 1913 (“ Federal Reserve Act”) w hich established the central bank o f the

serving as the federal governm ents bank; providing short-term loans to depos­

U nited States. T he System consists o f the Board o f Governors o f the Federal

itory institutions; serving the consumer and the community by providing edu­

Reserve System (“Board o f Governors”) and twelve Federal Reserve Banks

cational materials and information regarding consumer laws; supervising bank

(“Reserve Banks”). T he Reserve Banks are chartered by the federal govern­

holding companies, and state m em ber banks; and administering other regula­

m ent and possess a unique set o f governmental, corporate, and central bank

tions o f the Board o f Governors. The Board o f Governors’ operating costs are
funded through assessments on the Reserve Banks.

characteristics. O th er major elements o f the System are the Federal O pen
Market C om m ittee (“ F O M C ”) and the Federal Advisory Council. The

The FO M C establishes policy regarding open market operations, oversees

FO M C is com posed o f members o f the Board o f Governors, the president

these operations, and issues authorizations and directives to the FPJiN Y for its

o f the Federal Reserve Bank o f N ew York (“ F R B N Y ”) and, on a rotating

execution o f transactions. Authorized transaction types include direct purchase

basis, four other Reserve Bank presidents.

and sale o f securities, matched sale-purchase transactions, the purchase o f securi­

Structure

The FR B N Y is authorized by the FO M C to hold balances o f and to execute

ties under agreements to resell, and the lending o f U.S. government securities.
T he Bank and its branches in Little R ock, Louisville and M em phis,
serve the Eighth Federal Reserve District, w hich includes Arkansas, portions

spot and forward foreign exchange and securities contracts in nine foreign cur­
rencies, maintain reciprocal currency arrangements (“F /X swaps”) with various

o f Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. In accor­

central banks, and “warehouse” foreign currencies for the U.S. Treasury and

dance w ith the Federal Reserve Act, supervision and control o f the Bank is

Exchange Stabilization Fund (“ESF”) through the Reserve Banks.

exercised by a Board o f Directors. Banks that are m em bers o f the System
include all national banks and any state chartered bank that applies and is
approved for m em bership in the System.

3. SIG N IFIC A N T A C C O U N T IN G POLICIES
Accounting principles for entities with the unique powers and responsi­
bilities o f the nation s central bank have not been formulated by the Financial

Board o f Directors

T he Federal Reserve Act specifies the composidon o f the Board o f

Accounting Standards Board. The Board o f Governors has developed special­
ized accounting principles and practices that it believes are appropriate for the

Directors for each o f the Reserve Banks. Each board is composed o f nine

significantly different nature and function o f a central bank as compared to the

members serving three-year terms: three directors, including those designated

private sector. These accounting principles and practices are documented in

as Chairm an and D eputy Chairm an, are appointed by the Board o f Governors,

the “ Financial Accounting Manual for Federal Reserve Banks” (“ Financial

and six directors are elected by m em ber banks. O f the six elected by m em ber

Accounting M anual”), w hich is issued by the Board o f Governors. All

banks, three represent the public and three represent m em ber banks. M em ber

Reserve Banks are required to adopt and apply accounting policies and

banks are divided into three classes according to size. M em ber banks in each

practices that are consistent w ith the Financial A ccounting Manual.
T he financial statements have been prepared in accordance w ith the
Financial A ccounting Manual. Differences exist between the accounting
principles and practices o f the System and generally accepted accounting
principles (“ GAAP”). T he prim ary differences are the presentation o f all
security holdings at am ortized cost, rather than at the fair value presentation
requirements o f GAAP, and the accounting for m atched sale-purchase trans­
actions as separate sales and purchases, rather than secured borrowings with
pledged collateral, as is generally required by GAAP. In addition, the Bank

class elect one director representing m em ber banks and one representing the
public. In any election o f directors, each m em ber bank receives one vote,
regardless o f the num ber o f shares o f Reserve Bank stock it holds.
2. O P E R A T IO N S A N D SERVICES
T he System perform s a variety o f services and operations. Functions
include: form ulating and conducting m onetary policy; participating actively




FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
has elected not to present a Statement o f Cash Flows. T he Statement o f Cash
Flows has not been included as the liquidity and cash position o f the Bank
are not o f prim ary concern to the users o f these financial statements. O ther
information regarding the Bank s activities is provided in, or may be derived
from, the Statements o f Condition, Income, and Changes in Capital. T here­
fore, a Statement o f Cash Flows would not provide any additional useful
information. T here are no other significant differences betw een the policies
outlined in the Financial Accounting Manual and GAAP.
The preparation o f the financial statements in conform ity w ith the
Financial A ccounting Manual requires m anagem ent to make certain estimates
and ^assumptions that affect the reported amounts o f assets and liabilities and
disclosure o f contingent assets and liabilities at the date o f the financial state­
ments and the reported amounts o f incom e and expenses during the report­
ing period. Actual results could differ from those estimates. U nique accounts
and significant accounting policies are explained below.
a. Gold Certificates

The Secretary o f the Treasury is authorized to issue gold certificates to the
Reserve Banks to monetize gold held by the U.S. Treasury. Payment for the
gold certificates by the Reserve Banks is made by crediting equivalent amounts
in dollars into the account established for the U.S.Treasury. These gold certifi­
cates held by the Reserve Banks are required to be backed by the gold o f the
U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any rime
and the Reserve Banks must deliver them to the U.S. Treasury. At such time,
the U.S.Treasury’ account is charged and the Reserve Banks’ gold certificate
s
accounts are lowered. The value o f gold for purposes o f backing the gold cer­
tificates is set by law at $42 2 /9 a fine troy ounce. The Board o f Governors allo­
cates the gold certificates among Reserve Banks once a year based upon Federal
Reserve notes outstanding in each District at the end o f the preceding year.
b. Special Drawing Rights Certificates

Special drawing rights (“ SD Rs”) are issued by the International
M onetary Fund (“ Fund”) to its m em bers in proportion to each m em ber’s
quota in the Fund at the rime o f issuance. SDRs serve as a supplement to
international m onetary reserves and may be transferred from one national
m onetary authority to another. U nder the law providing for U nited States
participation in the S D R system, the Secretary o f the U.S. Treasury is author­
ized to issue S D R certificates, somewhat like gold certificates, to the Reserve
Banks. At such time, equivalent amounts in dollars are credited to the account
established for the US.Treasury, and the Reserve Banks’ SD R certificate
accounts are increased. T he Reserve Banks are required to purchase SDRs,
at the direction o f the U.S. Treasury, for the purpose o f financing S D R certi­




ficate acquisitions or for financing exchange stabilization operations. The
Board o f Governors allocates each S D R transaction am ong Reserve Banks
based upon Federal Reserve notes outstanding in each District at the end
o f the preceding year.
c. Loans to Depository Institutions

T he Depository Institutions Deregulation and M onetary C ontrol Act
o f 1980 provides that all depository institutions that m aintain reservable trans­
action accounts or nonpersonal tim e deposits, as defined in R egulation D
issued by the Board o f Governors, have borrow ing privileges at the discretion
o f the Reserve Banks. Borrowers execute certain lending agreements and
deposit sufficient collateral before credit is extended. Loans are evaluated for
collectibility, and currently all are considered collectible and fully collateral­
ized. If any loans were deem ed to be uncollectible, an appropriate reserve
would be established. Interest is recorded on the accrual basis and is charged
at the applicable discount rate established at least every fourteen days by the
Board o f Directors o f the Reserve Banks, subject to review by the Board o f
Governors. However, Reserve Banks retain the option to impose a surcharge
above the basic rate in certain circumstances.
d. U.S. Government and Federal Agency Securities and Investments
Denominated in Foreign Currencies

The FO M C has designated the F R B N Y to execute open market trans­
actions on its behalf and to hold the resulting securities in the portfolio known
as the System O pen M arket A ccount (“ SO M A ”). In addition to authorizing
and directing operations in the domestic securities market, the F O M C
authorizes and directs the FPJ3N Y to execute operations in foreign markets
for m ajor currencies in order to counter disorderly conditions in exchange
markets or other needs specified by the FO M C in carrying out the System’s
central bank responsibilities.
Purchases o f securities under agreements to resell and m atched sale-purchase transactions are accounted for as separate sale and purchase transactions.
Purchases under agreements to resell are transactions in w hich the F R B N Y
purchases a security and sells it back at the rate specified at the com m ence­
m ent o f the transaction. M atched sale-purchase transactions are transactions
in w hich the FR B N Y sells a security and buys it back at the rate specified at
the com m encem ent o f the transaction.
Effective April 26, 1999, F R B N Y was given the sole authorization by
the FO M C to lend U.S. governm ent securities held in the SO M A to U.S.
governm ent securities dealers and to banks participating in U S . governm ent
securities clearing arrangements, in order to facilitate the effective function­
ing o f the domestic securities market. These securities-lending transactions

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
are fully collateralized by other U.S. governm ent securities. FO M C policy
requires F R B N Y to take possession o f collateral in excess o f the market values
o f the securities loaned. T he market values o f the collateral and the securities
loaned are m onitored by F R B N Y on a daily basis, w ith additional collateral
obtained as necessary. T he securities loaned continue to be accounted for in
the SO M A. P rior to April 26,1999, all Reserve Banks were authorized to
engage in such lending activity.
Foreign exchange contracts are contractual agreements betw een two
parties to exchange specified currencies, at a specified price, on a specified
date. Spot foreign contracts norm ally settle two days after the trade date,
whereas the setdem ent date on forward contracts is negotiated betw een the
contracting parties, but will extend beyond two days from the trade date.
The F R B N Y generally enters into spot contracts, w ith any forward con­
tracts generally lim ited to the second leg o f a sw ap/warehousing transaction.
T he FRBNY, on behalf o f the Reserve Banks, maintains renewable,
short-term F /X swap arrangements w ith two authorized foreign central
banks. T he parties agree to exchange their currencies up to a pre-arranged
m axim um am ount and for an agreed upon period o f tim e (up to twelve
m onths), at an agreed upon interest rate. These arrangements give the
FO M C tem porary access to foreign currencies that it may need for inter­
vention operations to support the dollar and give the partner foreign central
bank tem porary access to dollars it may need to support its own currency
Drawings under the F /X swap arrangements can be initiated by either the
FR B N Y o r the partner foreign central bank, and must be agreed to by the
drawee. T he F /X swaps are structured so that the party initiating the trans­
action (the drawer) bears the exchange rate risk upon maturity. T he FR B N Y
will generally invest the foreign currency received under an F /X swap in
interest-bearing instruments.
W arehousing is an arrangem ent under w hich the F O M C agrees to
exchange, at the request o f the Treasury, U.S. dollars for foreign currencies
held by the Treasury or ESF over a lim ited period o f time. T he purpose
o f the w arehousing facility is to supplem ent the U.S. dollar resources o f the
Treasury and ESF for financing purchases o f foreign currencies and related
international operations.
In connection w ith its foreign currency activities, the FRBNY, on
behalf o f the Reserve Banks, may enter into contracts w hich contain varying
degrees o f off-balance sheet market risk, because they represent contractual
com m itm ents involving future setdem ent, and counter-party credit risk. The
F R B N Y controls credit risk by obtaining credit approvals, establishing trans­
action limits, and perform ing daily m onitoring procedures.
W hile the application o f current market prices to the securities currendy
held in the SO M A portfolio and investments denom inated in foreign curren­




cies may result in values substantially above or below their carrying values,
these unrealized changes in value would have no direct effect on the quantity
o f reserves available to the banking system or on the prospects for future
Reserve Bank earnings or capital. Both the domestic and foreign components
o f the SO M A portfolio from time to time involve transactions that can result
in gains or losses w hen holdings are sold prior to maturity. However, deci­
sions regarding the securities and foreign currencies transactions, including
their purchase and sale, are motivated by m onetary policy objectives rather
than profit. Accordingly, earnings and any gains or losses resulting from the
sale o f such currencies and securities are incidental to the open market oper­
ations and do not motivate its activities or policy decisions.
U.S. governm ent and federal agency securities and investments denom i­
nated in foreign currencies comprising the SOM A are recorded at cost, on a
settlem ent-date basis, and adjusted for amortization o f premiums or accretion
o f discounts on a straight-line basis. Interest income is accrued on a straightline basis and is reported as “ Interest on U S . government and federal agency
securities” o r “ Interest on investments denominated in foreign currencies,” as
appropriate. Incom e earned on securities lending transactions is reported as a
com ponent o f “O th er income.” Gains and losses resulting from sales o f secu­
rities are determ ined by specific issues based on average cost. Gains and losses
on the sales o f U.S. governm ent and federal agency securities are reported as
“U.S. governm ent securities gains (losses), net.” Foreign currency denom inat­
ed assets are revalued m onthly at current market exchange rates in order to
report these assets in U.S. dollars. Realized and unrealized gains and losses on
investments denom inated in foreign currencies are reported as “Foreign cur­
rency gains (losses), net.” Foreign currencies held through F /X swaps, when
initiated by the counter-party, and warehousing arrangements are revalued
monthly, w ith the unrealized gain or loss reported by the FR B N Y as a com ­
ponent o f “O th er assets” or “O ther liabilities,” as appropriate.
Balances o f U.S. governm ent and federal agency securities bought out­
right, investments denom inated in foreign currency, interest income, am orti­
zation o f premiums and discounts on securities bought outright, gains and
losses on sales o f securities, and realized and unrealized gains and losses on
investments denom inated in foreign currencies, excluding those held under
an F /X swap arrangement, are allocated to each Reserve Bank. Effective
April 26, 1999, incom e from securities lending transactions undertaken by
FR B N Y was also allocated to each Reserve Bank. Securities purchased
under agreements to resell and unrealized gains and losses on the revaluation
o f foreign currency holdings under F /X swaps and warehousing arrange­
ments are allocated to the FR B N Y and not to other Reserve Banks.

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
e. Bank Premises and Equipment

Bank premises and equipm ent are stated at cost less accumulated depre­
ciation. Depreciation is calculated on a straight-line basis over estimated use­
ful lives o f assets ranging from 2 to 50 years. N ew assets, major alterations,
renovations and improvements are capitalized at cost as additions to the asset
accounts. M aintenance, repairs and m inor replacements are charged to oper­
ations in the year incurred. Internally developed software is capitalized based
on the cost o f direct materials and services and those indirect costs associated
w ith developing, implementing, or testing software.
f . Interdistrict Settlement Account

At the close o f business each day, all Reserve Banks and branches assem­
ble the payments due to or from other Reserve Banks and branches as a result
o f transactions involving accounts residing in other Districts that occurred
during the days operations. Such transactions may include funds settlement,
check clearing and autom ated clearinghouse operations, and allocations o f
shared expenses. T he cumulative net am ount due to or from other Reserve
Banks is reported as the “ Interdistrict settlement account.”

Finally, as obligations o f the U nited States, Federal Reserve notes are backed
by the full faith and credit o f the U nited States government.
T he “ Federal Reserve notes outstanding, n e t” account represents Federal
Reserve notes reduced by currency held in the vaults o f the Bank o f $3,770
million, and $4,689 million at D ecem ber 31, 2000 and 1999, respectively.
h. Capital Paid-in

T he Federal Reserve Act requires that each m em ber bank subscribe to
the capital stock o f the Reserve Bank in an am ount equal to 6 percent o f
the capital and surplus o f the m em ber bank. As a m em ber bank’s capital and
surplus changes, its holdings o f the Reserve Bank’s stock must be adjusted.
M em ber banks are those state-chartered banks that apply and are approved
for membership in the System and all national banks. Currently, only onehalf o f the subscription is paid-in and the rem ainder is subject to call. These
shares are nonvoting with a par value o f $100. They may not be transferred
or hypothecated. By law, each m em ber bank is entitled to receive an annual
dividend o f 6 percent on the paid-in capital stock. This cumulative dividend
is paid semiannually. A m em ber bank is liable for Reserve Bank liabilities up
to twice the par value o f stock subscribed by it.

g. Federal Reserve Notes

Federal Reserve notes are the circulating currency o f the U nited States.
These notes are issued through the various Federal Reserve agents to the
Reserve Banks upon deposit with such Agents o f certain classes o f collateral
security, typically U.S. governm ent securities. These notes are identified as
issued to a specific Reserve Bank. T he Federal Reserve Act provides that
the collateral security tendered by the Reserve Bank to the Federal Reserve
Agent must be equal to the sum o f the notes applied for by such Reserve
Bank. In accordance with the Federal Reserve Act, gold certificates, special
drawing rights certificates, U S . governm ent and federal agency securities,
triparty agreements, loans to depository institutions, and investments denom i­
nated in foreign currencies are pledged as collateral for net Federal Reserve
notes outstanding. T he collateral value is equal to the book value o f the col­
lateral tendered, with the exception o f securities, whose collateral value is
equal to the par value o f the securities tendered. T he Board o f Governors
may, at any time, call upon a Reserve Bank for additional security to ade­
quately collateralize the Federal Reserve notes. T he Reserve Banks have
entered into an agreem ent w hich provides for certain assets o f the Reserve
Banks to be jointly pledged as collateral for the Federal Reserve notes o f
all Reserve Banks in order to satisfy their obligation o f providing sufficient
collateral for outstanding Federal Reserve notes. In the event that this col­
lateral is insufficient, the Federal Reserve Act provides that Federal Reserve
notes becom e a first and param ount hen on all the assets o f the Reserve Banks.




i. Surplus

T he Board o f Governors requires Reserve Banks to m aintain a surplus
equal to the am ount o f capital paid-in as o f D ecem ber 31. This am ount is
intended to provide additional capital and reduce the possibility that the
Reserve Banks would be required to call on m em ber banks for additional
capital. Reserve Banks are required by the Board o f G overnors to transfer to
the U.S. Treasury excess earnings, after providing for the costs o f operations,
payment o f dividends, and reservation o f an am ount necessary to equate sur­
plus w ith capital paid-in.
The Consolidated Appropriations Act o f 2000 (Public Law 106-113,
Section 302) directed the Reserve Banks to transfer to the U.S. Treasury
additional surplus funds o f $3,752 million during the Federal G overnm ents
2000 fiscal year. Federal Reserve Bank o f St. Louis transferred $92 million
to the U.S. Treasury during the year ended D ecem ber 31, 2000. Reserve
Banks were not perm itted to replenish surplus for these am ounts during
fiscal year 2000 w hich ended Septem ber 30, 2000: However, the surplus
was replenished by D ecem ber 31, 2000.
In the event o f losses or a substantial increase in capital, payments to the
U.S. Treasury are suspended until such losses or increases in capital are recov­
ered through subsequent earnings. W eekly payments to the U.S. Treasury'
may vary significantly.

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
j . Income and Costs related to Treasury Services

T he Bank is required by the Federal Reserve Act to serve as fiscal agent
and depository o f the U nited States. By statute, the D epartm ent o f the Trea­
sury is perm itted, but not required, to pay for these services. T he costs o f
providing fiscal agency and depository services to the Treasury D epartm ent
that have been billed but will not be paid are imm aterial and included in
“O th e r expenses.”
k. Taxes

4. U.S. G O V E R N M E N T A N D FEDERAL AGENCY SECU RITIES
Securities bought outright are held in the SOM A at the FRBNY. An
undivided interest in SOM A activity, with the exception o f securities held
under agreements to resell and the related premiums, discounts and income, is
allocated to each Reserve Bank on a percentage basis derived from an annual
setdem ent o f interdistrict clearings. The setdement, performed in April o f
each year, equalizes Reserve Bank gold certificate holdings to Federal Reserve
notes outstanding. T he Bank’ allocated share o f SOMA balances was 3.799
s
percent and 3.289 percent at Decem ber 31, 2000 and 1999, respectively.

The Reserve Banks are exempt from federal, state, and local taxes, except for
taxes on real property which are reported as a component of “Occupancy expense.”
T he Bank’s allocated share o f securities held in the SO M A at D ecem ber 31, that were bought outright, were as follows (in millions):

PA R VALUE:
Federal agency
U.S. governm ent:
Bills
N otes
Bonds

2000
................
$
5

"
$

6

6,790
9,124
3,524

5,806
7,186
2,730

19,443

Total par value

15,728
299
(109)

370
(117)

U nam ortized premiums
U naccreted discounts
Total allocated to Bank

1999

$

19,696

$

15,918

Total SO M A securities bought outright were $518,501 million and $483,902 million at D ecem ber 31, 2000 and 1999, respectively.




FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
The m aturity distribution o f U.S. government and federal agency securities bought
outright, which were allocated to the Bank at D ecem ber 31, 2000, were as follows (in millions):

PAR VALUE
U.S. Governm ent
Securities
M A TU R ITIE S O F SE C U R IT IE S HELD
W ithin 15 days
16 days to 90 days
91 days to 1 year
O ver 1 year to 5 years
O ver 5 years to 10 years
O ver 10 years
Total

$

Federal Agency
Obligations

686
4,139
4,769
5,044
2,107
2,693

$

$

$

$ 19,438

Total

5

5

686
4,139
4,769
5,049
2,107
2,693

$ 19,443

At Decem ber 31, 2000 and 1999, m atched sale-purchase transactions involving U.S. governm ent securities w ith par values
o f $21,112 m illion and $39,182 million, respectively, were outstanding, o f w hich $802 million and $1,289 m illion
were allocated to the Bank. M atched sale-purchase transactions are generally overnight arrangements.

5. IN V ESTM EN TS D E N O M IN A T E D IN F O R E IG N C U R R E N C IE S
The FRBNY, on behalf o f the Reserve Banks, holds foreign currency
deposits w ith foreign central banks and the Bank for International Settlements
and invests in foreign government debt instruments. Foreign government debt
instruments held include both securities bought outright and securities held
under agreements to resell. These investments are guaranteed as to principal
and interest by the foreign governments.
Each Reserve Bank is allocated a share o f foreign-currency-denom inated
assets, the related interest income, and realized and unrealized foreign currency




gains and losses, w ith the exception o f unrealized gains and losses on F /X
swaps and warehousing transactions. This allocation is based on the ratio o f
each Reserve Bank’ capital and surplus to aggregate capital and surplus at the
s
preceding D ecem ber 31. T he Bank’ allocated share o f investments denom i­
s
nated in foreign currencies was approximately 2.456 percent and 2.028 per­
cent at Decem ber 31, 2000 and 1999, respectively.

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
T he Bank’ allocated share o f investments denom inated in foreign currencies,
s
valued at current exchange rates at D ecem ber 31, were as follows (in millions):

E U R O P E A N U N IO N E U R O :
Foreign currency deposits
G overnm ent debt instruments including agreements to resell

2000
1999
---------------------------------------------------------------------------$ 114
$
88
67
51

JAPANESE YEN:
Foreign currency deposits
G overnm ent debt instruments including agreements to resell

68
135

7
180

1

1

A C C R U E D IN T E R E S T
Total

$

385

$

327

Total investments denom inated in foreign currencies were $15,700 million and $16,140 million at Decem ber 31, 2000 and 1999, respectively.
T he 2000 balance includes $49 million in unearned interest collected on certain foreign currency holding that is allocated solely to the FRBNY.
T he m aturity distribution o f investments denom inated in foreign currencies which
were allocated to the Bank at D ecem ber 31, 2000, were as follows (in millions):
M A T U R IT IE S O F IN V ESTM EN TS D E N O M IN A T E D IN F O R E IG N C U R R E N C IE S
W ithin 1 year
$
361
O ver 1 year to 5 years
10
O ver 5 years to 10 years
11
O ver 10 years
3
Total




$

385

At D ecem ber 31, 2000 and 1999, there were no open foreign exchange contracts or outstanding F /X swaps.
At D ecem ber 31, 2000 and 1999, the warehousing facility was $5,000 million, w ith no balance outstanding.

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
6. BANK PREM ISES A N D E Q U IP M E N T
A summary o f bank premises and equipm ent at D ecem ber 31 is as follows (in millions):
1999

2000
BANK PREM ISES A N D E Q U IP M E N T :
Land
Buildings
Building m achinery and equipm ent
C onstruction in progress
Furniture and equipm ent

$

4
36
15
1
52

$

101
(46)

108
Accumulated depreciation
Bank premises and equipm ent, net

(51)
$

57

4
34
12
1
50

$

55

Depreciation expense was $8.7 m illion and $7.4 m illion for the years ended D ecem ber 31, 2000 and 1999, respectively.
7. C O M M IT M E N T S A N D C O N T IN G E N C IE S
At D ecem ber 31, 2000, the Bank was obligated under noncancelable
leases for premises and equipm ent w ith terms ranging from 1 to approxi­
mately 3 years. These leases provide for increased rentals based upon
increases in real estate taxes, operating costs o r selected price indices.
Rental expense under operadng leases for certain operating facilities,
warehouses, and data processing and office equipm ent (including taxes, insur­
ance and maintenance w hen included in rent), net o f sublease rentals, was
$1 million for both years ended D ecem ber 31, 2000 and 1999. C ertain o f
the Bank’s leases have options to renew.
U nder the Insurance Agreem ent o f the Federal Reserve Banks dated as
o f March 2,1999, each o f the Reserve Banks has agreed to bear, on a per
incident basis, a pro rata share o f losses in excess o f 1 percent o f the capital
paid-in o f the claiming Reserve Bank, up to 50 percent o f the total capital
paid-in o f all Reserve Banks. Losses are borne in the ratio that a Reserve
Banks capital paid-in bears to the total capital paid-in o f all Reserve Banks
at the beginning o f the calendar year in w hich the loss is shared. N o claims
were outstanding under such agreem ent at D ecem ber 31, 2000 or 1999.
T he Bank is involved in certain legal actions and claims arising in the
ordinary course o f business. A lthough it is difficult to predict the ultimate
outcom e o f these actions, in m anagem ent’s opinion, based on discussions w ith
counsel, the aforem entioned litigation and claims will be resolved w ithout




material adverse effect on the financial position or results o f operations
o f the Bank.

8. R E T IR E M E N T A N D T H R IF T PLANS
Retirement Plans

T he Bank currendy offers two defined benefit retirem ent plans to its
employees, based on length o f service and level o f com pensation. Substan­
tially all o f the Bank’s employees participate in the R etirem ent Plan for
Employees o f the Federal Reserve System (“ System Plan”) and the Benefit
Equalization R etirem ent Plan (“BEP”). T he System Plan is a m ulti-em ployer
plan w ith contributions fully funded by participating employers. N o separate
accounting is maintained o f assets contributed by the participating employers.
T he Bank’s projected benefit obligation and net pension costs for the BEP at
D ecem ber 31, 2000 and 1999, and for the years then ended, are not material.
Thrift Plan

Employees o f the Bank may also participate in the defined contribution
T hrift Plan for Employees o f the Federal Reserve System (“T hrift Plan”).
T he Bank’s Thrift Plan contributions totaled $2 m illion for both years ended
D ecem ber 31, 2000 and 1999, and are reported as a com ponent o f “ Salaries
and other benefits.”

FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
9. P O S T R E T IR E M E N T BENEFITS O T H E R T H A N PE N SIO N S A N D
PO ST E M PL O Y M E N T BENEFITS
Postretirement benefits other than pensions

The Bank funds benefits payable under the medical and life insurance
plans as due and, accordingly, has no plan assets. N et postretirement benefit
costs are actuarially determ ined using a January 1 measurement date.

In addition to the Bank’s retirem ent plans, employees w ho have m et
certain age and length o f service requirements are eligible for both medical
benefits and life insurance coverage during retirem ent.

Following is a reconciliation o f beginning and ending balances o f the benefit obligation (in millions):
2000

1999

Accum ulated postretirem ent benefit obligation at January 1
Service cost-benefits earned during the period
Interest cost o f accumulated benefit obligation
Actuarial (gain)
C ontributions by plan participants
Benefits paid

$

42.0
1.0
2.9
(0.9)
0.1
(2.2)

$

43.8
1.0
2.6
(3.9)
0.1
(1.7)

Accum ulated postretirem ent benefit obligation at D ecem ber 31

S

42.9

$

41.9

Following is a reconciliation o f the beginning and ending balance o f the plan assets, the unfunded
postretirem ent benefit obligation, and the accrued postretirem ent benefit costs (in millions):

2000
Fair value o f plan assets at January 1
C ontributions by the employer
C ontributions by plan participants
Benefits paid
Fair value o f plan assets at D ecem ber 31
U nfunded postretirem ent benefit obligation
Unrecognized prior service cost
U nrecognized net actuarial gain
Accrued postretirem ent benefit costs

$

$
$

S

—
2.0
0.2
(2.2)
— ’
42.9
0.7
4.8
48.4

1999
$

—

1.5
0.1
(1.6)

$
s

$

—

41.9
0.8
4.1
46.8

A ccrued postretirem ent benefit costs are reported as a com ponent o f “A ccrued benefit costs.”
At D ecem ber 31, 2000 and 1999, the weighted-average assumption used in developing the postretirem ent benefit obligation was 7.5 percent.
For m easurem ent purposes, an 8.75 percent annual rate o f increase in the cost o f covered health care benefits was assumed for 2001.
Ultimately, the health care cost trend rate is expected to decrease gradually to 5.50 percent by 2008, and remain at that level thereafter.




FINANCIALS

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point
change in assumed health care cost trend rates would have the following effects for the year ended D ecem ber 31, 2000 (in millions):
1 Percentage
Point Increase
Effect on aggregate o f service and interest cost components
o f net periodic postretirem ent benefit costs
Effect on accumulated postretirem ent benefit obligation

1 Percentage
Point Decrease

0.9

0.7
6.9

8.6

T he following is a summary o f the com ponents o f net periodic postretirem ent benefit costs for the years ended D ecem ber 31 (in millions):
2000

1999

Service cost-benefits earned during the period
Interest cost o f accumulated benefit obligation
Am ortization o f prior service costs

$

0.9
2.9
(0.2)

$

1.0
2.6
—

N et periodic postretirem ent benefit costs

$

3.6

$

3.6

N et periodic postretirem ent benefit costs are reported as a com ponent o f “Salaries and other benefits.”
Postemployment benefits

The Bank offers benefits to form er or inactive employees. Postemploym ent benefit costs are actuarially determ ined and include the cost o f medical
and dental insurance, survivor income, and disability benefits. Costs were
projected using the same discount rate and health care trend rates as were




used for projecting postretirem ent costs. T he accrued postem ploym ent
benefit costs recognized by the Bank at both D ecem ber 31, 2000 and 1999,
were $4 million. This cost is included as a com ponent o f “A ccrued benefit
costs.” N et periodic postem ploym ent benefit costs included in 2000 and
1999 operating expenses were $1 million for both years.

ADVISORY COUNCILS AND BANK OFFICERS

Katie S. Winchester
President, C E O and D irector
First Citizens National Bank
Dyersburg, Tennessee

Dennis Ott
President/O w ner
Dennis O tt and Company Inc.
Clarksville, Indiana

Carolyn Betsy Hudson
Senior Vice President
Bank o f Benton
Benton, Kentucky

Ann Ross
A nn s Business Consulting
St. Louis, Missouri

D on Hughes
President
FCB Services
Farmers Capital Bank
C orporation
Frankfort, Kentucky

FINANCIAL SERVICES
ADVISORY GROUP
Agricultural

Paul Com bs
Vice President
Baker Im plem ent Com pany
Kennett, Missouri

Camden Fine
President
M idwest Independent Bank
Jefferson City, Missouri

Robert A. Cunningham
Valley Farms
Bigbee Valley, Mississippi

Barbara McKenzie
Executive Vice President and C FO
Banterra C orporation
El Dorado, Illinois

Robert Seidenstricker
Hazen, Arkansas
Joseph H. Spalding
Lebanon, K entucky
Small Business

Gerald W. Clapp Jr.
P resident/O w ner
Clapp Oldsm obile
Clarksville, Indiana
William D. Crawley
President
Southern Sales & Service
M em phis, Tennessee
Chris Krehmeyer
Executive D irector
Beyond H ousing
St. Louis, Missouri




Phil Porter
President
Arvest Bank Operations Inc.
Lowell, Arkansas
Judy R. Loving
C hairm an
T he Bank o f Yellville
Yellville, Arkansas
Charles W. Tucker
Executive Vice President
Bank o f Bartlett
Bartlett, Tennessee
Reynie Rutledge
C hairm an
First Security Bank
Searcy, Arkansas

James Clayton
President
Planters Bank and
Trust Com pany
Indianola, Mississippi

Robert H. Rasche
Senior Vice President
and Director o f Research
David A. Sapenaro
Senior Vice President
Richard G. Anderson
Vice President
John P. Baumgartner
Vice President
John W. Block Jr.
Vice President
T im othy A. Bosch
Vice President
Tim othy C. Brown
Vice President

St. Louis Office

William Poole
President and C h ief
Executive Officer

Marilyn K. Corona
Vice President
Cletus C. Coughlin
Vice President

W. LeGrande Rives
First Vice President and
C h ief O perating Officer

Judith A. Courtney
Vice President

Karl W. Ashman
Senior Vice President

William T. Gavin
Vice President

Henry H. Bourgaux
Senior Vice President

R. Alton Gilbert
Vice President

Joan P. Cronin
Senior Vice President

Jean M. Lovati
Vice President

Mary H. Karr
Senior Vice President,
General Counsel
and Secretary

Jeffrey L. Miller
Vice President
Michael J. Mueller
Vice President

ADVISORY COUNCILS AND BANK OFFICERS

Kim D. Nelson
Vice President
Michael D. Renfro
General Auditor
Steven N. Silvey
Vice President
William Sneed
Vice President

Patricia A. Marshall
Assistant Counsel and
Assistant Secretary
Jerome J. M cGunnigle
Assistant Vice President
John P. Merker
Assistant Vice President
John M. Mitchell
Assistant Vice President

Randall C. Sumner
Vice President and
Assistant Secretary

John W. Mitchell
Assistant Vice President

Daniel L. Thornton
Vice President

Kathleen O ’Neill Paese
Assistant Vice President

Dennis W. Blase
Assistant Vice President

Frances E. Sibley
Assistant Vice President

Daniel P. Brennan
Assistant Vice President

Harold E. Slingerland
Assistant Vice President

James B. Bullard
Assistant Vice President
Martin J. Coleman
Assistant Vice President
Susan K. Curry
Assistant Vice President
Hillary B. Debenport
Assistant Vice President
Michael W. DeClue
Assistant Vice President
Elizabeth A. Hayes
Assistant Vice President
Edward A. Hopkins
Assistant Vice President




Leisa J. Spalding
Assistant Vice President and
Assistant General Auditor
Robert James Taylor
Assistant Vice President
Jeffrey L. Wann
Assistant Vice President

Michael J. Dueker
Research Officer
Joseph C. Elstner
Public Affairs Officer
Paul M. H elm ich
O perations Officer
Joel H. James
Public Affairs Officer
Gary J. Juelich
Supervisory Officer

Glenda J. Wilson
C om m unity Affairs
Officer
Little Rock Office

Robert A. Hopkins
Vice President and
Branch Manager
William D. Little
Assistant Vice President
Todd J. Purdy
Assistant Vice President

Visweswara R. Kaza
O perations Officer
Louisville Office

W. Scott McBride
Assistant Counsel
Patricia S. Pollard
Research Officer
Kathy A. Schildknecht
O perations Officer
P hilip G. Schlueter
Inform ation Technology
Officer

Thom as A. Boone
Vice President and
Branch M anager
Ronald L. Byrne
Vice President
V. Gerard Mattingly
Assistant Vice President
Thom as O. Short
Assistant Vice President

H arriet Siering
O perations Officer
Memphis Office

David C .W heelock
Assistant Vice President

Diane A. Smith
Inform ation Technology
Officer

Carl K. Anderson
Supervisory Officer

Mark D. Vaughan
Supervisory Officer

Barkley Bailey
Supervisory Officer

Howard J. Wall
Research Officer

Diane B. Camerlo
Assistant Counsel

Sharon N . W illiam son
H um an Resources Officer

Martha Perine Beard
Vice President and
Branch M anager
John G. H olm es
Assistant Vice President

SUM M ARY OF OPERATIONS

SU M M A RY O F O P E R A T IO N S
Summary o f K ey Operation Statistics fo r Services Provided to Depository Institutions and the U.S. Treasury

N um ber o f Item s

Dollar Am ount
(Millions)

2000
G overnm ent Checks Processed
Postal M oney O rders Processed
Com m ercial Checks Processed
A C H Com m ercial Items O riginated
C urrency Processed
Funds Transfers
Loans to D epository Institutions
Transfer o f G overnm ent Securities
Food C oupons Destroyed




1999

21,625,000
230,133,000
1,087,336,000
167,204
1,074,327,000
4,814,815
801
126,077
18,783,000

22,894,000
225,853,000
1,062,774,000
155,877
1,007,593,000
4,791,747
595
137,644
55,915,000

1999

2000
$

20,151
30,036
547,758
302,412
16,407
3,597,950
1,690
768,228
95

$

22,100
29,118
537,430
279,070
13,921
3,524,052
2,656
851,898
282




OUR MISSION STATEMENT

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T H E FEDERAL RESERVE BANK O F ST. LO U IS is one o f 12 regional Reserve Banks, w hich together
w ith the Board o f Governors, make up the nation’s central bank. T he Fed carries out U.S. m onetary policy,
regulates certain depository institutions, provides w holesale-priced services to banks and acts as fiscal agent
for the U.S. Treasury. T he St. Louis Fed serves the E ighth Federal Reserve District, w hich includes all o f
Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and
n orthern Mississippi. Branch offices are located in Little R ock, Louisville and Memphis.




FEDERAL RESERVE BANK OF ST. LOUIS
411 Locust Street
St. Louis, Missouri 63102
314.444.8444

LITTLE R O C K B R A N C H
325 West Capitol Avenue
Little R ock, Arkansas 72201
501.324.8300

LOUISVILLE B R A N C H
410 South Fifth Street
Louisville, Kentucky 40202
502.568.9200

M EM PHIS B R A N C H
200 N orth Main Street
Memphis, Tennessee 38102
901.523.7171

Authors: David C.W heelock and
Kevin L. Kliesen
Research Analyst: Heidi L. Beyer
Editor: Stephen Greene
Designer: Joni L. Williams
Photography o f boards of directors
and child: Scott Raffe
O ther photography and illustration credits:
Victoria Art Gallery, Bath & North East
Somerset Council, U.K., Bridgeman Art
Library, N ew York; BASF AC., Ludwigshafen;
Deutsches Museum, Munich; Siemens AG,
Munich; National Museum o f Photography,
SSPL: T he Com puter Museum History
Center; LaserVision Centers* o f St. Louis
This annual report is also available on the
Federal Reserve Bank o f St. Louis web site
at www.stls.frb.org.
For additional print copies, contact
Public Affairs Department
Federal Reserve Bank of St. Louis
411 Locust Street
St. Louis, Missouri 63102
314.444.8809


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102