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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 I 1 & W ill todays microchip-led surge take its place in history? w x ^ c & r d \ 'y u ’/J ^ y ^ C ^ ' t^ C ' ^ y v jp r iy * /* 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 x y ts - t^ r v C ^C O M T H E TIM E W E A R E Y O U N G C H IL D R E N , W E /" M E A S U R E O U R A C H IE V E M E N T S A G A IN ST T H O S E y xyt, xv 'n w b ty r v 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. % P ' r v y ty v r p ' C Every so often, an individual or an industry or a nation ' 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. 'c w u t/ 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, ^ v i * £ & & Su&/. 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. . -j thing to encourage it? D u rin g the industrial revolutions o f the 18th and 19th centuries, invention and the appli • c. 4^ ii _ r* “ — T"* 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 L / . it 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 s y ts tf ’4 'to /ts C ' x /^ tx ^ u ^ y v j / / * ( • y — y f l / 'V £ / Y y ts C $ 'i ^'Pp/t^cd* x f ^ c c '/ x y i ^ f 's> ■ W i^ V C 'yi^*v&s 'icC' $<2suesyv. i 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 c^ x yu 4 $ < & C 'n c & i4 t-'iix y c - 7 c c ■ o -'y v -o -T ^ tlc ^ . i t* ' 'C td 'tx iW 'C 'i ‘ L c 'iiiC 'J x \* v jy t^ c c / ( jy o - ^ tc ^ , } jy ix y t^ iJ ^ y v ^ M // y* * / / vt'tvt<~li2 xvrtx/ 'ti itWYi&v-f nsLy c f l t c l . £ >v'i- -u^'n xJ i e v ^ 7 / 7 !! / j y n ^ w i e -yi'V-j * f / y * t i n t s j c1* V s 1 1 / ^ iy C e n m / / t<?> ^ y o ^ n ^ y /u /u - u r m K t f t t \ p t tic/ •cef. vi / / / / / 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