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FEDERAL RESERVE BANK
OF NEW YORK

A N N U A L REPORT
1981

FEDERAL

RESERVE

B A N K OF N E W Y O R K

January 28, 1982

To the Depository Institutions in the
Second Federal Reserve District

I am pleased to present our
sixty-seventh Annual R e p o r t , which this
year includes a discussion of the long-term
implications of financial innovation for
monetary policy.

Anthony M. Solomon
President

Federal Reserve Bank
of New York

SIXTY-SEVENTH
ANNUAL REPORT
For the Year
Ended
December 3 1 ,1 9 8 1

Second Federal R eserve D istrict

Contents:

Page

Financial Innovation and Monetary P o lic y ......................................................................

Economic Overview— 1 9 8 1 ...............................................................................................

The Pricing of Federal Reserve Services
and the Payments Mechanism .......................................................................................

Financial Statements.........................................................................................................

Changes in Directors and Senior O ffic e r s ......................................................................

List of Directors and O ffic e rs .........................................................................................

Sixty-seventh Annual Report
Federal Reserve Bank of New York

Financial Innovation and M onetary Policy
By Anthony M. Solomon

(Remarks given before a Joint Luncheon of the American Economic and American
Finance Associations on Monday, December 28,1981, in Washington, D.C.)

As I am sure everyone in this room is aware, we are in the midst of a wave of
innovation in the financial industry that amounts to a veritable revolution. We
are seeing major changes in the kinds of financial instruments and services
offered and changes in the institutions that provide these services. This revolu
tion clearly has broad implications— implications for competitive structure and
market shares within the financial industry, implications for the availability of
financial services to the public, implications for the size and distribution of
financial risk in the economy, for the supervision and regulation of financial
institutions, and implications for the implementation of monetary policy.
I want to concentrate on a relatively narrow but important aspect of this
wave of financial innovation: its impact on the Federal Reserve’s use of long
term monetary targets to structure monetary policy. As many of you know,
monetary aggregate targeting has been used internally by the Federal Reserve
since the early 1970s. Its use was later formalized and made public in response
to a Congressional resolution in 1975 and was reaffirmed in the HumphreyHawkins legislation of 1978. In October 1979, a substantial change in our
operating procedures was made, with the primary objective of enhancing the
achievement of our monetary targets.

The formulation of one-year targets for growth of money stock measures
(along with an “associated” target for bank credit) seeks to provide a coherent
monetary response to endemic inflation. It reflects the perception that, on the
monetary side at least, a slowdown in the trend rate of money growth is a
necessary condition for restoring price stability. As an approach, however, it
makes no commitment to any particular theory of the underlying causes of
inflation, to the possible need for other anti-inflation policies, or to the needed
precision of monetary control. The monetary targeting approach does serve as
an important communications tool. It provides a means for us in the Federal
Reserve to check our shorter run and intermediate decisions against a more
enduring yardstick. Just as important, it provides a means of communicating
our objectives to the Congress and to the public at large, and it gives a standard
for reviewing our performance.
In my view, the monetary targeting approach has proved to have substantial
value both in formulating and executing policy and in defining the longer term
strategy of policy. But it is widely recognized that the usefulness of the approach
depends on the existence of measures of money that bear a reasonably stable
and predictable relationship to broad economic conditions. The wave of finan
cial innovation we are currently experiencing seems to be producing major
effects on these relationships, however, and these effects seem likely to grow
larger over time. It seems to me— and I am only offering a personal view— that
these effects are having and will continue to have implications for what money
measures we target and for the levels at which the targets are set. Perhaps, in the
longer run, even the very viability of money stock targets is at stake.

r e c e n t p e r f o r m a n c e .
Developments in 1981 have once again pushed
to the fore questions about the implication of financial innovation for our target
ing process that have been around for some time. The ongoing process of
financial innovation seems to have produced a sharp and largely unexpected
divergence this year in the performance of the narrow money measures (such
as M-1B) and the broader measures (such as M-2 and M -3). In the eleven
months through November, M-1B, adjusted for the effects of the introduction
of nationwide NOW (negotiable order of withdrawal) accounts at the beginning
of the year, rose at a 2.8 percent annual rate. The comparable rates for the
broader measures M-2 and M-3, however, were 10.1 percent and 11.3 percent,
respectively.

T here are several interesting points to be m ade about these num bers. First,
and perhaps m ost obvious, is the sharply divergent signals the narrow and broad
m easures seem to convey, taken literally, about the stance of m onetary policy
in 1981. T hus, the M -1B m easure looks quite tight. It represents a sharp slow
down from the grow th rate of 1980. In contrast, the grow th rates of the
b ro ad er aggregates in both cases were actually slightly m ore rapid in 1981 than
their already rapid 1980 increases. Thus, they m ake policy look quite “easy” .

Developments in 1981 have once again pushed to the fore
questions about the implication of financial innovation for
our targeting process that have been around for some time.

P erhaps just as im portant, we did not anticipate, and alm ost certainly could
not have anticipated, the extent of these divergencies. In term s of the m idpoints
of o u r 1981 targets for M -1B and the broader m easures, the divergencies
allowed for were far sm aller than the divergencies that have actually m ateri
alized. We did have some reason to believe, and we said so publicly, that the
narrow m easures were m ore likely to be around the bottom of their ranges and
the b roader m easures near the tops of theirs. But there really was no way to
anticipate the extent of the divergencies that actually occurred. T here were only
one or two earlier episodes in the last fifteen years, when the tw elve-m onth
grow th rate of M -2 exceeded the com parable grow th rate of M -1B by as large
an am ount as has been the case this year. A nd these earlier periods when
M -2 growth was especially rapid relative to M -1B were periods of low interest
rates— quite a contrast to m ost of 1981! In the past, M -2 has grown especially
rapidly relative to M -1B during periods when low interest rates were causing
a shift of funds back into time and savings accounts and out of open m arket
instrum ents.
Thus, the very large gap betw een M-2 and M -1B in 1981 represents an
extrem ely unusual, if not actually unique situation th at has com plicated the
task of setting policy as the year has proceeded. O ver m ost of the year, M -1B
seems to have been giving a misleadingly weak signal, even in view of the clear
em ergence of recession late in the year. M -1B growth has been substantially

Chart 1.

FOR A PERIOD OF HIGH INTEREST RATES, GROW TH IN 1981 OF
M>2 WAS UNUSUALLY RAPID RELATIVE TO M-1B GROWTH.

P e rce n ta g e ch a n g e from tw elve months e a rlie r

slower than one would expect from past history, given the general state of the
economy and the performance of interest rates this year. This should perhaps
be not wholly surprising, however, given the rising importance of new instru
ments that are more or less close substitutes for the items we include in M-1B.
On the other hand, monetary policy cannot reasonably be charged with the
easy policy that a literal reading of the broad money measures would suggest.
The strength of the broader money measures in 1981 is surely due in good
part to the changing character of the instruments included in them. In any case,
6

my purpose is not to assess just how “easy” or “tight” monetary policy has
actually been this year. Instead, my point is that the money stock numbers them
selves have not provided clear signals.
The public has, understandably, had some difficulty in assessing the divergent
developments in the different measures in relation to our goal of reducing mone
tary growth in a gradual way, ultimately to noninflationary levels. Yet, numer
ology aside, I believe that most financial market participants feel, as I do, that
we have been true to the spirit of that goal. The challenge, as we come to con
sider our targets for both narrow and broad measures in 1982, will be to shape
them in a way that recognizes the financial innovations under way while con
tinuing to advance our underlying objectives.

Chart 2.

GROW TH O F M-1B SLOWED SHARPLY IN 1981, ENDING THE YEAR SOMEW HAT BELOW
ITS TARGET RANGE, WHILE M-2 GROW TH REMAINED QUITE RAPID, ENDING THE YEAR
SOM EW HAT ABO VE ITS O W N TARGET RANGE.

P erce n ta g e chang e from fo u r q u a rte rs e a r lie r

n e w in s tr u m e n ts .
I have suggested that m uch of our problem this year
w ith the aggregates probably stems from the spreading use of new substitutes for
the m ore traditional instrum ents included in our m oney m easures. Some of these
developm ents are already quite fam iliar. T he N O W account, for exam ple, has
been with us for som e years. Its introduction nationw ide this year gave us some
technical problem s in adjusting our narrow m oney m easures for its im pact.
H ow ever, it has presented no fundam entally new difficulty. L ike the zero-rate
d em and deposit, N O W accounts currently pay a regulation-constrained interest
rate set well below m oney m arket rates and are generally subject to reserve
requirem ents. O f m ore significance for m onetary targeting are the new instru
m ents th a t pay m arket-related rates. Some of these, like the corporate overnight
R P (repurchase agreem ent) and the m oney m arket m utual fund, have also been
w ith us for some time, b u t in the case of the m oney funds their im portance has
exploded over the past year o r two.

A t the end of this process of innovation and deregulation,
one could imagine a world in which ultimately all but the
smallest accounts pay market-related rates, a world in
which depository and perhaps other institutions offer a
wide array of instruments with varying mixes of trans
actions and investment characteristics.

Some other m ore recent developm ents, propelled both by interest rate condi
tions and advancing technology, may come to have growing significance. These
include procedures for, in effect, w riting checks on fixed-m aturity time deposits
by opening a line of credit at the time the funds are deposited. Potentially far
m ore im portant are some new types of “sweep” accounts, some designed
prim arily for business depositors, others for individuals. In these arrangem ents,
funds are autom atically m oved into or out of conventional transactions accounts
from investm ent accounts paying m arket-related rates. Some of these investm ent
accounts involve bank consum er R Ps, while others are nonbank m oney m arket
m utual funds. T hese new accounts thus m ake available for small businesses
and consum ers an arrangem ent previously available only to larger depositors in
the traditional “w holesale” R P m arket. U nder the new sweep arrangem ents,
8

the funds in the “transactions” portion of the account cannot fall below a m ini
m um w ithout triggering a new transfer from the investm ent com ponent. Thus,
the m inim um balances in the transactions account w ould be, in effect, “com pen
sating balances” not really available for m aking transactions. Still other innova
tions of recent years, such as the six-m onth m oney m arket CD (certificate of
d ep o sit), have no direct im plications for transactions m easures but are trans
form ing the character of the bro ad er m onetary aggregates.

Whatever the precise details of the new set of arrange
ments, it is reasonably clear that problems are going to be
created for monetary aggregate targeting.

These various innovations have h ad at least three effects that together help
account for the differential behavior of o u r m onetary m easures this year. First,
their introduction and spread appears to be progressively reducing the dem and
for conventional, fixed-interest rate transactions instrum ents. T he process seem
ingly operates unevenly over tim e and is proving h ard to predict. Second, the
overall dem and for the bro ad er m oney m easures has probably increased to
som e extent as individuals and businesses have shifted some funds out of open
m arket instrum ents and into the new instrum ents included in the b road money
m easures. Third, the sensitivity of the dem and for the broad m easures as a
w hole to m ovem ents in open m arket interest rates is alm ost certainly declining
as the share of instrum ents paying m arket-related rates in these broad m easures
increases. Thus, w hen m arket rates rise, for exam ple, rates paid on many instru
ments included in the broad m oney m easures tend to rise with them, so there
is far less tendency to shift out of bro ad m oney and into open m arket instru
ments than there was in earlier years. This developm ent may well have been
the m ost im portant factor in explaining how grow th of M -2 exceeded growth
of M -1B by near-record am ounts in a year of high rath er than low interest rates.
Innovations of the kind that have produced these various effects will continue
to occur, and the im portance of the ones already in existence will continue to
spread. T hus, we can expect the resulting im pacts on the econom ic character
of the m onetary aggregates to proceed further as well. It seems entirely possible,

for exam ple, th at the m oney funds will increasingly com e to be used as transac
tions accounts. F u rth er, the increasingly frequent announcem ent of new sweep
accounts suggests th a t these arrangem ents could also becom e of m ajor im por
tance. Plans are apparently going forw ard for national credit card organizations
to offer sweep arrangem ents betw een N O W accounts and m oney m arket
funds for depositors at participating banks. T he exact term s and prices at which
the service w ould be available to depositors would be set by the individual bank
participants. B ut the num ber of banks and the volum e of funds involved could
ultim ately be large.
F u rth er, the law requires the elim ination of interest rate ceilings on all types

C h a rt

3. T H E
HAS

P R O P O R T IO N
R ISEN

M -2

D R A M A TIC A LLY

FU N D S
OVER

P A Y IN G
TH E

M A R K E T -R E LA T E D

P A S T TH R E E

IN TER EST

R A TE S

YEARS.

Percent of
total M 2

------ M - I B *
80

70
S A V I N G S A N D SM AL L
------ TIME DEPOSITS WITH
FIXED -RA TE CEILINGS

30
INSTRUMENTS P A Y I N G
MA RK ET-RE LATED RATES +

20
10

0
197 8-IV

1979- IV

19 80 -IV

1981-111

* M-IB consists of demand deposits, other checkable deposits, and currency.
t The M-2 components paying a market-related rate of interest are: money market
certificates, money market mutual funds, small savers certificates, overnight RPs,
and overnight Eurodollars.

of deposits (except the statutory zero ceiling on demand deposits) by 1986.
When interest ceilings are raised or removed on transactions instruments in
cluded in M-1B, this will of course tend to increase the demand for the narrow
money measure under given conditions—but again the quantitative impact
is uncertain. For one thing, the cost to depository institutions of reserve require
ments on transactions accounts might lead them to favor the use of sweeptype arrangements even after all interest rate ceilings on NOW accounts have
been removed. In such arrangements, the bulk of the funds could be swept
into accounts not subject to reserve requirements.
At the end of this process of innovation and deregulation, one could imagine
a world in which ultimately all but the smallest accounts pay market-related
rates, a world in which depository and perhaps other institutions offer a wide
array of instruments with varying mixes of transactions and investment
characteristics. In such a world, the level of transactions services provided by
an instrument would be reflected in the costs charged for the service—whether
directly or indirectly as a differential from interest rates paid on pure investmenttype accounts. But, in any case, most of these funds would receive marketrelated rates.

Whatever the precise details of the new set of
arrangements, it is reasonably clear that problems are going to be created
for monetary aggregate targeting, both in the transition period now evidently
under way and in the new state of things when the process of transition has
been completed. First, we can expect that, as the transition proceeds, the use
of new substitutes for conventional transactions instruments will spread and our
current transactions measures of money will continue to shrink in size relative
to the economy. As long as this happens, we will have to allow for such demand
reductions in setting and adjusting our annual targets. At some point, to be sure,
deregulation of rate ceilings on NOW accounts may provide an offset by in
creasing the demand for these “conventional” measures. But again we will have
to make an appropriate allowance.
Second, we will have to allow for more uncertainty about the demand for
money as these hard-to-predict changes in demand proceed. This may suggest
a greater need for midyear corrections in the monetary targets that are
announced in February of each year. It might also recommend the use of
wider target ranges.
p r o b l e m s

f o r

p o l ic y

Third, we are going to have to make allowance for the declining sensitivity
of the broad money measures to changes in market interest rates as the
fraction of these aggregates paying market-related rates increases. This declining
rate sensitivity of the broad aggregates has two significant implications. The
first, well illustrated by the 1981 experience, is that old rules of thumb for
determining the mutual consistency of narrow and broad target ranges under
given conditions will require revision. And the need for such revision may
introduce a degree of uncertainty in setting the broad aggregate targets com
parable to the increasing difficulties of determining appropriate target ranges
for the narrow measures.
But perhaps the more interesting question posed by the declining rate
sensitivity of the broad money measures involves our ability to control them.
I think we may already be nearing the point where the Federal Reserve can
influence the growth of these broad measures only indirectly by first influencing
the behavior of the economy itself. When the Federal Reserve contracts re
serves, for example, it of course has the short-run effect of putting upward
pressure on the Federal funds rate and other short-term market interest rates.
But, as long as rates paid on many instruments included in the broader aggre
gates, such as money fund accounts, respond reasonably promptly to changes
in open market rates, there will be much less reason for an increase in open
market rates to produce shifts out of such instruments and into open market
securities. And this consideration, coupled with the absence of reserve require
ments on many items included in the broader money measures, means that
there may be little or no tendency for these measures to slow. Of course
eventually, rises in interest rates will slow aggregate demand, and they will
thus ultimately slow the growth of the broad measures via this route. But such
a process, in effect, amounts to slowing the economy to slow money growth,
a sequence that may call into question the usefulness of interposing monetary
aggregate measures as intermediate objectives.
So at the moment I see us as in the middle of a transition phase in which
we will have to rely mainly on controlling the narrow money measure as an
operational matter, a measure whose relative importance is shrinking. And
this will have to be done in an environment in which it may be getting increas
ingly difficult to predict the precise economic consequences of given target
growth rates for either narrow or broad measures. As I suggested, such a
situation will require some flexibility in setting long-term targets and in reevalu
ating them as the year unfolds. The price to be paid for such flexibility could
12

be some loss in the com m unications value of the targets since the reasons for
the adjustm ents w ould have to be clearly explained. B ut the alternative might
be to stick to a rigid p attern of annual target reductions of constant size that
could prove increasingly unrealistic as the process of financial innovation and
deregulation proceeds.
A t some point, the process of innovation and deregulation may move us to
a new situation in which a m ore fundam ental reevaluation of our use of
m onetary targets m ay be necessary. I do not know how far we may be from
such a situation, but the tim e is probably less than a decade and may possibly
be substantially less than that. If, for example, the sweep accounts should
spread as rapidly as the use of the m oney funds has in the past couple of years,
the need for a basic new look at o u r procedures could come on with uncom
fortable speed.

At some point, the process of innovation and deregulation
may move us to a new situation in which a more funda
mental reevaluation of our use of monetary targets may
be necessary.

As I already suggested, in this new w orld the bulk of all transactions balances
will be paying m arket-related rates. M oreover, under present regulations, m any,
if not most, transactions accounts and their close substitutes would be free from
reserve requirem ents. This w ould be true of the “investm ent” portion of sweep
accounts, and it w ould of course also b e tru e, u n d er current law, for any account
at nondepository institutions. M oreover, under the 1980 M onetary C ontrol A ct,
reserve requirem ents on all personal tim e and savings accounts will be com
pletely elim inated by Septem ber 1, 1983. U nder these circum stances, it might
well be m uch m ore difficult to define an econom ically significant m onetary
aggregate th at w ould b e readily controllable by the Federal R eserve except
indirectly via the interest rate effects of open m arket operations on the econom y
at large. Thus, all m eaningful definitions of m oney might exhibit the kinds of
control problem s that the b ro ad definitions are already beginning to show.
O ne possible m eans of rem edying such a situation would be to develop

legislation defining a “transactions” aggregate very broadly, perhaps to include
all instrum ents payable at “p a r” w ithin a few business days, and then to impose
reserve requirem ents on such instrum ents. T he reserve requirem ent would
have to be universal across all institutions offering transactions instrum ents.
Such an approach would, in effect, generalize the Federal R eserve B o ard ’s
recent proposal to im pose reserve requirem ents on money fund accounts offering
transactions services.
W hile attractive, there are some difficulties with this approach. First, there is
a question as to w hether even the im position of reserve requirem ents would
get around the practical control problem s posed by the lack of any real sensi
tivity of the dem and for the transactions m easure to changes in open m arket

For the present, as I have indicated, our targeting pro
cedures continue to be workable and useful, provided they
are used flexibly.

rates. W ithout such sensitivity, open m arket operations might lead to disturb
ingly large short-run im pacts on interest rates.
A second problem is th a t w hatever definition of a transactions instrum ent
were adopted, the existence of a reserve requirem ent “tax ” would provide a
continuing incentive for the m arket to invent new substitutes just outside the
definition. A s a result, we could find ourselves inducing yet an o th er w ave of
innovations. In principle, at least, this problem could be solved by paying
m arket-related interest rates on required reserves to rem ove the com petitive
cost disadvantage of reserve requirem ents.
T he potential difficulties of fram ing legislation to impose uniform reserve
requirem ents on a newly defined transactions instrum ent should not be m ini
mized. U niversal requirem ents to hold noninterest-bearing reserves would
of course be opposed by institutions offering transactions instrum ents th at are
currently free of such requirem ents. A n d if the reserve requirem ent “tax ” pro b
lem were avoided by paying interest on reserves, there w ould be some indirect
cost to the U nited States T reasury.

a p p r o a c h e s .
These difficulties seem formidable enough to
raise the question of possible alternative approaches. The possibilities would
seem to include the substitution of other financial measures for the money
concepts as intermediate targets and perhaps, at the extreme, even doing away
with financial aggregate targeting altogether.
Among alternative financial aggregates, total bank reserves or the monetary
base might appear to be obvious possibilities. The monetary base is reasonably
controllable at present and should continue to be so in the prospective future
environment. One question raised by the monetary base and by reserves, how
ever, is whether they are, or will be, sufficiently closely related to movements in
the economy at large to be useful intermediate targets for policy. The evidence
I have seen does not seem particularly encouraging in this respect. One problem
for the monetary base is the extent to which its behavior is dominated by move
ments in currency in circulation. Coin and currency now account for nearly three
fourths of the base. Further, to the extent that reservable deposits prove to be
unresponsive to movements in open market interest rates, the demand for re
serves and the base would be similarly unresponsive. As a result, efforts to
control the base might require unacceptably sharp movements in market rates.
Given these various problems, perhaps the only value a target framed in terms
of the base or total reserves might have would be to perform some communica
tions function and to provide a rough check on both excessively “easy” and
excessively “tight” monetary postures.
Another possibility would be to replace the money targets with a measure of
credit, perhaps bank credit, credit extended by all depository institutions, or
some still broader credit measure. But, given liability management by banks and
other financial institutions, and given variable rate lending and the absence of
reserve requirements on many major funding sources, the question again arises
as to whether bank credit can be readily controlled. This same question arises
even more insistently in the case of still broader credit aggregates. With some
of these credit measures there are also significant lags in data availability.
Another approach to the problems posed by financial innovation would of
course simply be to downgrade the role of all actual and potential financial
aggregates as intermediate targets. Conceivably at least, the Open Market Com
mittee could turn to articulating its objectives more directly in terms of growth for
nominal GNP. Accompanying such an approach could perhaps be some broadly
framed constraints on real interest rates and a renewed emphasis on nominal
interest rates as short-term operating objectives. The problems with this ap

a l t e r n a t iv e

proach, how ever, are also reasonably clear. We w ould lose the potential virtues
of aggregate targeting as a m eans of articulating a long-run anti-inflation strat
egy. A nd we w ould lose the virtues of the post-O ctober 1979 de-em phasis on
interest rates, a process w hich has served to free the F ederal R eserve from a
tendency under interest rate targeting to m ove the targets too slowly.
F ortunately, we have some tim e to decide on appropriate ways of coping
with the longer run im plications of the current wave of innovations. M y only

And going beyond their impact on aggregate targeting,
financial innovation and the accompanying process of de
regulation is clearly changing the way in which monetary
policy works.

aim here has been to sketch possibilities. C learly the process of innovation does
still have some considerable distance to go. It may proceed at a slower or faster
pace depending in part on the behavior of the econom y. F o r exam ple, a sub
stantial and long-lasting reduction of interest rates w ould very likely slow signif
icantly th e spread of these innovations— though I do n ot think it w ould undo
the changes th at have already taken place. F o r the present, as I have indicated,
our targeting procedures continue to be w orkable and useful, provided they are
used flexibly.
In the meanwhile, there is a question as to w hether any legislation w ould be
desirable to deal with the effects of innovation on m onetary policy. T he Federal
R eserve B o ard ’s proposal to im pose reserve requirem ents on checkable money
fund accounts can be accepted on com petitive equity grounds alone. B ut to be
effective from a m onetary targeting point of view, reserve requirem ents would
probably also have to be extended to the sweep accounts and perhaps to other
instrum ents. Im position of reserve requirem ents on sweep accounts could prove
to be a com plicated and contentious m atter. In any case, increm entalism in
regulation often seems to result in a chase in w hich the m arkets seek to keep a
step ahead of the regulators. T his was true in the 1960s w hen the regulators
had to apply R egulations D and Q to new types of instrum ents successively
in an earlier effort to pro tect m onetary policy from the eroding effects of finan
cial innovation.
16

Perhaps for the present, the clearest point that emerges is simply the need
for us to be aware of the problems that innovations are creating for the co
herence of the monetary targeting approach. The issues raised by this process
are, I submit, of substantially more fundamental importance than the relatively
technical matters that have been receiving much attention recently, such as
contemporaneous reserve accounting and the design of our approach to adjust
ment borrowing at the discount window. Some of these questions are un
doubtedly of real interest. But they seem relatively minor in a year when
different money measures, each perhaps equally plausible as targets a priori,
differ in what they are telling us about even the direction of policy. Clearly the
forces of financial innovation behind this development and their implications
for the future deserve a major share of our attention.
And going beyond their impact on aggregate targeting, financial innovation
and the accompanying process of deregulation is clearly changing the way in
which monetary policy works. Increasingly we live in a world of universally
flexible interest rates and highly mobile sources of funds. This is a world in
which policy impacts the economy primarily through the effects of credit cost
on borrowers and spenders and decreasingly through availability effects created
by legal and institutional impediments to interest rate movements. It is a world
in which interest rates must move further to achieve significant impacts and a
world in which rates are more variable. It is also a world in which, for the
present at least, financial fragility has seemingly increased because institutional
adaptations to the floating rate environment remain imperfect.
My own instinct is that there is no single approach to monetary policy that
is best for all times and places. As conditions change, the approach will prob
ably have to change, too. The world that will come into existence after the
current wave of innovation and deregulation has spent its force is still, in many
respects, an unknown. For just that reason its prospects are bound to create a
certain amount of anxiety. In adapting to this changing world, policymakers
will continue to benefit importantly from the results of economic research on
these matters. Clearly there are many important issues raised for monetary
policy by innovation and deregulation for which we as yet have no final answers.

Economic Overview—1981
Economic developments during 1981 underscored how difficult, prolonged, and
at times painful the period of adjustment would be to the legacy of high inflation
and oil price shocks that has been plaguing the world economy in recent years.
No major industrial country achieved what would ordinarily be called
satisfactory economic performance during the year. Business activity was brack
eted between weak or uneven growth and outright recession, and the conse
quences for labor markets and capital formation were uniformly adverse. There
were large increases in unemployment in most industrial nations— to postwar
records in several European countries. Domestic investment spending was
disappointingly low, even in Japan where the overall rise in GNP was much
greater than in other industrial countries. And government financial deficits
remained large virtually everywhere. To be sure, a measure of progress was
made against inflation. But, while some wage moderation occurred, the main
impetus for lower inflation came from falling world commodities prices (when
expressed in dollars, that is), depressed because of the generalized weakness
in world demand. By the year-end, inflation rates for consumer prices were
noticeably lower in only a few industrial countries—including the United States
where the rate dropped below double digits; in a number of European countries,
whose currencies had depreciated heavily against the dollar, they were actually
somewhat higher.
Probably the most positive development in 1981 was the continued progress
toward meaningful energy conservation. In the United States, the volume of oil
consumed dropped by another 5 percent or so during 1981, following a decline
of 8 percent in 1980, and oil consumption continued to fall in the other indus
trial countries. Part of this fall in consumption reflected the weak economic
growth pattern. But a substantial portion was directly attributable to priceinduced conservation. This significant cutback in consumption left the world
oil market considerably softer than it has been for several years. And it meant
that the members of the Organization of Petroleum Exporting Countries
(OPEC) cartel could just about maintain dollar oil prices, but only by signifi
cantly reducing their output. By the end of 1981, OPEC was producing just
over 20 million barrels of oil a day, down nearly 20 percent from the year
before and about 9 million barrels a day less than they were producing at the
beginning of 1980. The results were a drop in OPEC dollar revenues and, with
18

their imports of goods and services from the rest of the world rising rapidly, a
large reduction of their current account surplus— to perhaps $60 billion, from
upward of $100 billion in 1980.
The counterpart of this sizable reduction was mainly an improvement in
the current account position of the industrial countries. It appears that for
the third year in a row the United States recorded a small surplus. Elsewhere,
bolstered by a strong expansion of exports, the Japanese current account swung
about $15 billion from a large dcficit in 1980 to a surplus of around $5 billion
in 1981. The German deficit was cut in half during the year, and there were
smaller improvements for a number of other industrial countries.
Yet the problem of large imbalances in global payments remained serious.
While circumstances differed among the less developed countries (LDCs),
their overall current account situation worsened. The aggregate deficit of the
LDCs, already in the neighborhood of $60 billion in 1980, now appears to
have gone up by about $10 billion last year. So further heavy financing from
both private and official sources has been required to avert a major contraction
of LDC imports and domestic economic growth. Meanwhile, the dramatic
political events in Poland, accompanied by severe internal economic disarray
and acute debt-servicing interruptions, highlighted the very real risks involved
in international lending.

u.s. e c o n o m y in iB s i. The unusually short, weak recovery from the brief
but sharp economic contraction in 1980 began to stall out in the early months
of 1981. With interest rates having moved up substantially during the recovery
and long-term rates continuing to rise in 1981, interest-sensitive components
of spending, especially housing, weakened substantially, and domestic car sales
also fell off. But there was enough momentum left in other sectors to offset
these declines and keep real GNP roughly steady through the summer.
The business climate abruptly soured later in the year, however, and the
economy slipped rapidly into recession as the weakness in housing and cars
fanned out to envelop other parts of the economy. There was a significant con
traction in consumption and business investment spending, a plunge in new
factory orders,' and a sharp reduction of industrial output as firms sought to
reduce inventory levels. There was also a continued slackening in state and
local government expenditures amid growing concerns about their future
financial positions, as well as a reduction of the volume of export sales. Reflect-

ing the fall in output, the unemployment rate rose, while total employment, the
number of hours worked, and capacity utilization rates declined.
No single factor precipitated the recession, but the main underlying ele
ments are clear. At the root of it was the high rate of inflation, coming down
only irregularly and grudgingly over the course of the year, coupled with stub
bornly high inflationary expectations among investors. As these inflationary
forces clashed with a basically restrictive, anti-inflationary monetary policy,
the end product was a powerful restraint on total spending in the economy.
When for various reasons spending plans were abruptly postponed late in the
year, the initial (and typical) response of businesses was often to slash output
rather than to bring down prices fast enough to sustain previous sales levels.
This output adjustment was accentuated by relatively high interest rates, but it
continued even as interest rates dropped sharply in line with a recessioninduced slackening in credit demands. The lesson, which has been repeated
twice in two years, is inescapable. In an environment of high inflation, the
economy is vulnerable to downward pressures and is unlikely to maintain
steady expansion until those inflationary forces are permanently checked.
Some success has been achieved in moving inflation lower, but not enough
to remove this basic vulnerability.

d o m e s t ic f in a n c ia l m a r k e t s .
Interest rates continued to vary over
a broad range in 1981 on both short- and long-term financial instruments.
But most businesses, commercial banks, and other financial institutions seemed
able to cope with what were obviously difficult markets. While a few pockets
of severe strain did emerge, there was no imminent danger of widespread
failures that could do lasting damage to the financial structure. And in one
case, the money market funds, 1981 brought thorough-going prosperity.
The corporate bond market was whipsawed in 1981. The underlying problem
was that corporate borrowers had amassed a sizable overhang of short-term
debt on their balance sheets, and the markets knew that a large number of
prime companies were eager to take advantage of any improvement in market
conditions to switch from short-term to long-term borrowings. This weight of
potential new issues generated a sense that any rate decline could easily be cut
short, while other factors could push rates higher at any point. For one
thing, there was a continuing sensitivity both to the published money supply
statistics and to the apparent ease or tautness of the money markets, reflecting

Ch a rt 4.

INTEREST RATES C O N TIN U E D T O V A R Y

SHORT-TERM

INTEREST RATES

f/r---- V - i
A \\ \
1

D ISCOU NT RATE
PLUS S U R C H A R G E

s—

—

“

r* r J

'K _
\

FEDERAL FU N D S RATE

\ \ 1

O V E R A B R O A D R A N G E IN 1981.

D ISC O U N T RATE

I .
3 -M O N T H
TREASURY BILL
RATE

the interplay of bank reserve needs relative to availability as the Federal
Reserve sought to achieve its monetary objectives. In an uncertain interest
rate environment, investors were prepared to stay in high-yielding short-term
assets, waiting for the right moment to go long.
But beyond that, the bond market was buffeted by shifting assessments of
the economic outlook, most particularly the outlook for the size of the Federal
Government budget deficit following passage of the Administration’s program
of domestic spending and tax cuts. Regardless of how inflationary market par
ticipants felt the deficit would or would not be over the longer term (and
opinions differed on that), there was a pervasive feeling that large Treasury

borrowing needs, competing for a limited amount of funds available for invest
ment, would cause higher long-term interest rates. This prevailing view made
investors wary and dealers extremely cautious about buying or holding bonds.
In turn, many corporations were not eager to issue bonds at what might have
turned out to be the peak of the market.
While the bond market improved for a few weeks in November and large
amounts of new corporate issues were readily sold, one sector—tax-exempt
municipals— remained exceptionally weak. Because of the tax-exempt feature,
municipals typically have sold at a premium in the market, with yields substan
tially below those on comparable taxable issues. By late 1981, however, that
yield differential had greatly narrowed. The poor performance of municipal
bonds reflected various adverse factors. These included new forms of tax-free
investments authorized in the Economic Recovery and Tax Act of 1981, altered
investment preferences by banks and casualty insurance companies which tradi
tionally have been large holders of municipals, and a growing concern about
the financial strength of state and local governments.
The financial sector that experienced the most acute strains in 1981 was the
thrift industry. Savings and loan associations and mutual savings banks have
been unusually vulnerable to periods of high interest rates. Their assets are
heavily in the form of fixed-rate mortgages or securities, many at rates far below
prevailing market rates, while their deposits are increasingly in instruments that
pay market rates (about two thirds of their deposits at year-end 1981). Last
year, therefore, most thrift institutions lost money and suffered a decline in net
worth. Exacerbating this adverse balance-sheet position, many thrifts have lost
sizable amounts of deposits to fast-growing money market funds offering checkwriting convenience and market interest rates for relatively small-sized investments.
In a few cases, where earnings problems were most severe, the relevant
Federal regulatory agencies orchestrated and assisted in mergers with financially
stronger thrift institutions. Several mergers took innovative forms, including
interstate combinations. To help the thrift industry in general, the Congress
authorized a new tax-free all savers certificate as of October, and almost $25 bil
lion was placed in these deposits at thrift institutions by the year-end.
Despite all the problems, many thrifts continued to be willing to make mort
gages. But increasingly they sought to shift from conventional fixed-rate instru
ments to various kinds of adjustable rate mortgages. At the same time, the
dwindling number of potential home buyers were shying away from paying the
high rates on long-term, fixed-rate mortgages. And many were willing to turn
22

(albeit reluctantly) to nontraditional financing techniques, including adjustable
rate mortgages and mortgages provided by the seller of the house.
The fastest growing part of the financial sector was the money market
funds. They more than doubled during 1981 and by the end of the year
were handling over $180 billion of investments. To put this in perspective,
they already are a fourth as large as the whole thrift industry. And the money
market fund component of the broadly defined money supply (M-2) is now
about 10 percent of the total. With retail repurchase agreements and various
types of “sweep” accounts also taking hold during the year, the pace of financial
innovation clearly accelerated in 1981.

FOREIGN EXCHANGE AND INTERNATIONAL FINANCIAL MARKETS. The
dollar came into 1981 on a strong upward trend and continued to strengthen
against all the other major currencies through midsummer. For some time,
the primary impetus had come from relative interest rate developments. Yields
on dollar assets were persistently higher than yields on comparable assets in
other currencies, although interest rate differentials varied widely. But the
dollar was sensitive to other factors as well. Thus, an improving outlook for
U.S. inflation compared with other countries, reasonably good U.S. current
account performance, and an initially favorable market attitude toward the
Reagan administration’s economic program helped sustain demand for dollars.
By August, the dollar had reached five-year highs against the German mark
and other key European currencies. It slipped back during subsequent months,
as U.S. interest rates declined relative to rates elsewhere, the current account
positions of other industrial countries improved, and the possible inflationary
impact of higher U.S. budget deficits came under market scrutiny. But the
dollar still ended the year up by more than 10 percent on average.
Within Europe, the members of the European Monetary System sought to
keep their currencies within agreed limits, while floating more or less as a
group against the dollar. At times, when there were market pressures on the
currency limits, fairly sizable official intervention was needed to maintain the
arrangement. And two adjustments of the limits were made, one in March
involving the Italian lira and a general realignment in October involving all
seven currencies. Meanwhile, foreign central banks also intervened in large
amounts to moderate movements in currency rates against the dollar. The U.S.
authorities were prepared to intervene in special circumstances, but no opera

tions were in fact conducted after March.
In the international capital markets, there continued to be huge flows of
funds during 1981. Although the OPEC investable surplus fell considerably,
it was still large. And there were substantial financing needs by a number of
industrial countries, as well as the developing ones. U.S. banks played a rela
tively bigger role in the markets, stepping up the growth of new international
lending, while banks from other major industrial countries (apart from Japan)
appeared to have scaled back their lending expansion somewhat. Arab banks
took up some of this slack as they became more visible internationally last year.
In December, U.S. banking institutions, along with affiliates of foreign banks
operating in the United States took advantage of regulatory and tax changes
to open international banking facilities (IBFs). The facilities permit business
to be done with non-U.S. residents out of U.S. banking offices in much the same
way as in the Eurocurrency markets— that is, without interest rate ceilings or
reserve requirements. By the year-end, about 250 IBFs had been established,
and banks were planning to shift a considerable portion of assets and liabilities
now booked in offshore locations to their IBFs. Over time, the new facilities
have the potential to enhance the relative position of New York and other cities
in this country as international financial centers.

Th e Pricing of Federal Reserve Services and the
Paym ents Mechanism
The Monetary Control Act of 1980 (MCA) required the Federal Reserve to
price its payment services explicitly and make these services available to all
depository institutions. Specifically, pricing is to provide for full recovery of
costs over the long run plus a mark-up to allow for the private sector’s cost
of capital. The Federal Reserve System’s payment services range from check
clearing and funds and securities transfer to noncash collection and cash trans
portation. Prior to 1981, these services were provided free and were available
only to member banks. The pricing of Federal Reserve services is expected to
offset revenue losses to the Treasury resulting from reduced reserve requirements
for member banks.
In response to the pricing of Federal Reserve services, banks have begun to
evaluate their service needs against alternative sources and prices. Some corre
spondent and respondent banks have sought to limit the cost impact of using
Federal Reserve check services by turning to direct local clearing arrangements,
which has resulted in volume losses for the System. In New York, the volume
of checks processed has fallen from an average of almost 9 million checks
per day to about 8 million. In some product lines, such as funds transfer, vol
umes have increased but, on balance, overall service volume throughout the
System has declined.
Despite volume losses, efficiency in most System services appears to be at a
competitive level. Well before the MCA, the Federal Reserve had emphasized
both cost containment and productivity. As one example, the New York Federal
Reserve Bank installed the most modern check-processing equipment available
and implemented a modular team-processing approach. Because of initiatives
such as these, productivity nearly doubled in the past four years and unit
costs declined slightly. Ultimately, the success of the System in providing com
petitive payment services will be determined by the market and the System’s
ability to respond to its changing needs.
In the past, the Federal Reserve helped to spur innovation and promote
advances in the payments mechanism. Its nationwide check-clearing system set
the stage for elimination of nonpar checking, standardization of check formats,
and magnetic ink encoding of checks.
The Federal Reserve is also playing a major role in shifting more and more

of the payments system to an electronics base. The System has worked with
commercial banks to develop a nationwide automated clearing house (ACH)
network, which makes possible electronic crediting and debiting of bank ac
counts in all parts of the country.
Another part of the process of furthering electronic payments will be the
placement of the Sigma telecommunications network, which serves this Bank’s
funds and securities transfer operations. When completed, in a year or so, the
new system will provide improved service and permit broader on-line access
for all depository institutions. Today, the Federal Reserve’s funds transfer net
work annually handles about 50 million wire transfers and some 280 million
automated clearing house entries, with a total value in excess of $80 trillion.
Because of the Federal Reserve’s important role in effecting interbank pay
ments, the System has been in a position to influence international payment
practices. Working with the domestic and foreign banking communities, the
Federal Reserve was able to accommodate the move by CHIPS (the Clearing
House Interbank Payments System) to same-day settlement in October 1981.
Sirlce CHIPS is responsible for the bulk of the world’s international interbank
dollar payments, the change is significant. Previously, transactions were settled
on a next-day basis, which increased the attendant settlement risk.
One of the MCA’s requirements is that the Federal Reserve Banks charge for
float if it cannot be eliminated. Through operational and managerial improve
ments, average daily float has been reduced from $6.1 billion over the last
three months of 1979 to $3.4 billion in the final quarter of 1981. The
Federal Reserve intends to reduce float significantly further during 1982.
The precise nature of the Federal Reserve’s involvement in the payments
mechanism of the future cannot be readily predicted. It is likely that the System
will discontinue some services which are provided efficiently elsewhere. But
clearly the System will not use its prices or its market power to dominate service
lines in pursuit of revenue. At the same time, the System cannot use revenue as
the sole determinant of its market presence in every service line if it is to assure
the availability of nationwide payment services. Continuing adjustments will be
required as the System seeks to meet the test of the market while fulfilling
its responsibilities as the central bank in promoting a more efficient and effective
payments mechanism

Financial Statements
S T A T E M E N T O F E A R N IN G S A N D E X P E N S E S F O R
T H E C A LEN D A R Y E A R S 1981 A N D 19 8 0

(In dollars)
1981

1980

Total current earnings................................................................

4,411,378,303

3,335,892,900

Net expenses ..............................................................................

178,868,816

163,597,671

4,232,509,487

3,172,295,229

Current net earnings
Additions to current net earnings:
Profit on foreign exchange (net) ..............................................
All other ......................................................................................
Total additions

—
76,354,576*

24,318,030

76,354,576

24,527,156

78,027,922

—

209,126

Deductions from current net earnings:
Loss on foreign exchange (n e t)..................................................
Loss on sales of United States Government securities and Federal
agency obligations (net) ............................................................
All other ......................................................................................

34,318,309
7,362,326

50,330,254
1,315,286

Total deductions

119,708,557

51,645,540

Net deductions............................................................................

43,353,981

27,118,384

Assessment for the Board of Governors......................................

16,066,500

15,742,400

Net earnings available for distribution

4 ,1 73 .0 89,006

3,1 29 ,4 34,445

18,797,197
12,676,500

17,866,143
16,122,050

4,141,615,309

3,095,446,252

4 ,1 73,0 89,006

3 ,1 29,4 34,445

Surplus— beginning of y e a r ........................................................
Transferred from net earnings....................................................

306,006,800
12,676,500

289,884,750
16,122,050

Surplus— end of year

3 1 8 ,6 83,300

3 06 ,006,800

Distribution of net earnings:
Dividends paid ............................................................................
Transferred to su rp lu s................................................................
Payments to United States Treasury (interest on
Federal Reserve notes)................................................................
Net earnings distributed

SUR PLUS A C CO U N T

* Includes $75,731,032 of contingent expenses and interest received from the Federal Deposit Insurance Corporation
in connection with assumed indebtedness of Franklin National Bank.

S T A T E M E N T O F C O N D IT IO N
In dollars

D E C . 3 1 , 1981

D E C . 3 1 , 1980

3,160,256,297

3,012,103,748

951,000,000

665,000,000

18,029,133

23,700,869

4,129,285,430

3,700,804,617

Advances ..................................................................

559,300,000

663,470,000

Acceptances held under repurchase agreements

194,755,208

776,489,237

Bought outright* .....................................................

37,188,008,336

31,009,393,835

Held under repurchase agreements .........................

3,216,090,000

2,029,250,000

Bought outright .......................................................

2,656,642,982

2,271,605,538

Held under repurchase agreem ents.........................

268,910,000

525,050,000

44,083,706,526

37,275,258,610

Cash items in process of collection ......................................

705,454,435

2,350,527,303

Bank p re m ise s........................................................................

22,742,263

19,765,150

Due from Federal Deposit Insurance Corporation
for indebtedness assu m ed.......................................................

428,000,000

A s se ts

Gold certificate account ...........................................
Special Drawing Rights certificate account .............

Total

United States Government securities:

Federal agency obligations:

Total loans and securities

Other assets:

All otherf ............................................................................

2,253,678,634

2,126,696,299

3,409,875,332

4,496,988,752

656,060,339

2,859,073,335

5 2 ,2 7 8 ,9 2 7 ,6 2 7

4 8 t3 3 2 t 1 2 5 ,3 1 4

953,835,000

387,395,000

Total other assets
Interdistrict settlement acco u n t...............................................
T o ta l A s s e t s

* Includes securities loaned— fully secured ..............................................
t Includes assets denominated in foreign currencies revalued monthly at market rates.

S T A T E M E N T O F C O N D IT IO N
In dollars

Liabilities

d e c . 3 1 , 1981

d e c . 3 1 , 1 98 0

Federal Reserve notes (net) ...................................................

39,632,632,296

35,601,390,747

Reserves and other deposits:
Depository institutions ............................

5,075,029,515

6,521,343,106

United States Treasury— general account

4,300,773,123

3,062,266,692

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

266,904,089

145,508,759

Other .......................................................

540,482,761

435,619,614

10,183,189,488

10,164,738,171

Deferred availability cash items

949,428,750

1,384,300,095

All other* ................................

876,310,493

569,682,701

Total other liabilities

1,825,739,243

1,953,982,796

Total Liabilities

51,641,561,027

4 7 ,72 0,111,71 4

Foreign— official accounts

Total deposits

Other liabilities:

Capital Accounts

Capital paid in . . .
Surplus ................

318,683,300

306,006,800

318,683,300

306,006,800

Total Capital Accounts

637 ,3 66,600

6 1 2 ,0 13,600

Total Liabilities and Capital Accounts

5 2 ,2 7 8 ,9 2 7 ,6 2 7

4 8 ,33 2,125,31 4

★ Includes exchange translation account balances reflecting the monthly revaluation of outstanding foreign exchange
commitments.

Changes in Directors and Senior Officers
in
d i r e c t o r s . In November 1981, the Board of Governors of the
Federal Reserve System redesignated Robert H. Knight as Chairman of the
board of directors and Federal Reserve Agent for the year 1982. Mr. Knight,
Senior Partner of the New York law firm of Shearman & Sterling, has been serv
ing as a Class C director since February 1976 and as Chairman and Federal
Reserve Agent since January 1978; he also served as Deputy Chairman in 1976
and 1977. Also in November, the Board of Governors reappointed Boris Yavitz
as Deputy Chairman for the year 1982. Dr. Yavitz, Dean of the Graduate School
of Business at Columbia University, has been serving as a Class C director
since June 1977 and as Deputy Chairman since January 1978. At the same time,
the Board of Governors reappointed Gertrude G. Michelson a Class C director
of the Bank for the three-year term ending December 31, 1984. Mrs. Michelson,
a Senior Vice President of R.H. Macy & Co., Inc., New York, N.Y., has been
serving as a Class C director since February 1978.
In December 1981, member banks in Group 3 reelected Edward L. Hennessy,
Jr., a Class B director for the three-year term ending December 31, 1984. Mr.
Hennessy, Chairman of the Board of Allied Corporation, Morristown, N.J., has
served as a Class B director since March 18, 1980.
In January 1982, member banks in Group 3 elected Robert A. Rough a
Class A director for the three-year term ending December 31, 1984. Mr. Rough,
President of The National Bank of Sussex County, Branchville, N.J., succeeded
James Whelden, President of Ballston Spa National Bank, Ballston Spa, N.Y.,
who had served as a Class A director from April 19, 1978 through Decem
ber 31, 1981.
c h a n g e s

Buffalo Branch. In October 1981, the board of directors of this Bank redesig
nated Frederick D. Berkeley as Chairman of the Branch board for the year
1982. Mr. Berkeley, Chairman of the Board and President of Graham
Manufacturing Co., Inc., Batavia, N.Y., has been a director of the Branch
since February 1977 and has been serving as Chairman of the Branch board
since January 1979. At the same time, the Bank’s board appointed Edward
W. Duffy a director of the Buffalo Branch for a three-year term ending
December 31, 1984. Mr. Duffy, Chairman of the Board of Marine Midland
Bank, N.A., Buffalo, N.Y., succeeded Robert J. Donough, President of Liberty
National Bank and Trust Company, Buffalo, N.Y., who had been a director of
30

the Branch since August 1978. In November 1981, the Board of Governors
of the Federal Reserve System reappointed George L. Wessel a director of the
Buffalo Branch for a three-year term ending December 31, 1984. Mr. Wessel,
President of the Buffalo AFL-CIO Council, Buffalo, N.Y., has been a director
of the Branch since January 1979.

The following changes in official staff at
the level of Vice President and above have occurred since the publication of the
previous Annual Report:
Geri M. Riegger, Vice President, was appointed Vice President and Automa
tion Adviser, effective March 2, 1981 and assigned supervisory responsibility
for the Security and Control Staff.
Israel Sendrovic, formerly Assistant Vice President, was appointed Vice
President, effective March 20, 1981, and assigned as the officer in charge of
the Systems Development Function.
Alan R. Holmes, Senior Policy Adviser, retired effective August 1, 1981.
Mr. Holmes joined the Bank’s staff in 1948 and became an officer in 1958.
From February 1975 to August 1979, Mr. Holmes served as Executive Vice
President in charge of the Foreign and Open Market Operations Functions and
as Manager of the System Open Market Account.
Scott E. Pardee, Senior Vice President, resigned from the Bank effective
August 31, 1981. In that connection, the Federal Open Market Committee ter
minated Mr. Pardee’s designation as Manager for Foreign Operations of the
System Open Market Account effective August 7, 1981. Mr. Pardee joined the
Bank’s staff in 1962 and became an officer in 1967.
Sam Y. Cross, Senior Vice President, was assigned responsibility for the
newly established Foreign Group, consisting of the Foreign Exchange Function
and the Foreign Relations Function, effective August 7, 1981. Effective the
same date, the Federal Open Market Committee designated Mr. Cross Manager
for Foreign Operations of the System Open Market Account.

c h a n g e s

s e n io r

o f f ic e r s

Effective January 1, 1982:
Marcelle V. Arak, formerly Assistant Vice President, was appointed Vice
President and assigned to the Research and Statistics Function.
Jeffrey R. Shafer, formerly Assistant Vice President, was appointed Vice
President and assigned to the Research and Statistics Function.

Stephen G. Thieke, formerly Assistant Vice President, was appointed Vice
President. He has been assigned to the Bank Supervision Function.
Effective January 16, 1982, Neal M. Soss, Vice President, formerly assigned
to the Bank Supervision Function, was granted a leave of absence to permit him
to serve as Special Assistant to Chairman Volcker of the Board of Governors
of the Federal Reserve System.

Directors of the Federal Reserve Bank of New York
D IRECTORS

Term expires Dec. 31 Class Group

G o r d o n T . W a l l i s ...............................................................................................................................................
Chairman of the Board, Irving Trust Company, New York, N.Y.

1982

P e t e r D . K i e r n a n ...............................................................................................................................................
Chairman and President, United Bank Corporation, Albany, N.Y.

1983

R o b e r t A . R o u g h ............................................................................................................................................
President, The National Bank of Sussex County, Branchville, N.J.

1984

W il l ia m S. C o o k .................................................................................................................................................
President, Union Pacific Corporation, New York, N.Y.

1982

J o h n R . O p e l .........................................................................................................................................................
President and Chief Executive Officer, International Business Machines Corporation, Armonk, N.Y.

1983

E d w ar d L . H e n n e s s y , J r ...................................................................................................................................
Chairman of the Board, Allied Corporation, Morristown, N J .

19 8 4

R o b e r t H . K n i g h t , C hairm an and F ederal R eserve A g e n t ...........................................................
Senior Partner, Shearman & Sterling, Attorneys, New York, N.Y.

1983

B o r i s Y a v i t z , D ep u ty C h a ir m a n ................................................................................................................
Dean, Graduate School of Business, Columbia University, New York, N.Y.

198 2

G e r t r u d e G . M i c h e l s o n ...............................................................................................................................
Senior Vice President, R.H. Macy & Co., Inc., New York, N.Y.

198 4

D IR E C T O R S— BUFFALO BRANCH
F r e d e r i c k D . B e r k e l e y , C h a ir m a n ...........................................................................................................
Chairman of the Board and President, Graham Manufacturing Co., Inc., Batavia, N.Y.

1982

M . J a n e D i c k m a n ...............................................................................................................................................
Partner, Touche Ross & Co., Buffalo, N.Y.

1982

A r t h u r M . R i c h a r d s o n ..................................................................................................................................
President, Security Trust Company, Rochester, N.Y.

1982

J o h n R o l l in s B u r w e l l ..................................................................................................................................
President, Rollins Container Corp., Rochester, N.Y.

1983

C ar l F . U l m e r ....................................................................................................................................................
President, The Evans National Bank of Angola, Angola, N.Y.

1983

E dw ar d W . D u f f y ............................................................................................................................................
Chairman of the Board, Marine Midland Bank, N.A., Buffalo, N.Y.

1984

G eo r g e L . W e s s e l ...............................................................................................................................................
President, Buffalo AFL-CIO Council, Buffalo, N.Y.

1984

M EM BER O F FEDERAL ADVISORY COU NCIL---- 1 9 8 2
D o n a ld C . P l a t t e n ..........................................................................................................................................
Chairman of the Board, Chemical Bank, New York, N.Y.

1982

Officers of the Federal Reserve Bank of New York
A n th o n y M . S o lo m o n , President
THOMAS M . TlMLEN, First Vice President

SAM Y . CROSS, Senior Vice President
Foreign Group
P e t e r F o u s e k , Senior Vice President
and Director of Research
Research and Statistics
R o n a ld B. G r a y , Senior Vice President
Bank Supervision

P a u l B. H e n d e r s o n , J r ., Senior Vice President
Operations Group
J a m e s H . O l t m a n , General Counsel
T h o m a s C . S lo a n e , Senior Vice President
and Senior Adviser
Bank Services; Management Planning Group
P e t e r D. S t e r n l i g h t , Senior Vice President
Open Market Operations

A U D IT

B A N K S E R V IC E S

J o h n E. F la n a g a n , General Auditor
L e o n R. H o lm e s , Assistant General Auditor
W il l ia m M . S c h u l t z , Assistant General Auditor
R o b e r t J. A m b ro s e , Manager,
Auditing Department
L o r e t t a G . A n s b ro , Manager,
Audit Analysis Department

THOMAS C. S lo a n e , Senior Vice President
and Senior Adviser
B r u c e A. C a s s e l l a , Bank Services Officer
E u g e n e P. E m o n d , Bank Services Officer

ADMINISTRATIVE SERVICES GROUP
H e n r y S. F u j a r s k i , Vice President
A C C O U N T IN G

J o h n M . E ig h m y , Assistant Vice President
D o n a l d R. A n d e r s o n , Manager,
Accounting Department
K a t h l e e n A . O ’N e i l, Manager,
Accounting Department
B U I L D I N G S E R V IC E S

R a lp h A . C a n n , HI, Vice President
M a t t h e w C. D r e x l e r , Manager,
Building Operating Department
S E R V IC E

R ic h a r d V o l l k o m m e r , Vice President
L o u is J. B r e n d e l , Assistant Vice President
R o n a ld E . L o n g , Manager,
Records, Printing, and Postal Services Department
R o b e r t V. M u r r a y , Manager,
Protection Department
R u t h A n n T y l e r , Manager,
Service Department

B A N K S U P E R V IS IO N

R o n a ld B. G r a y , Senior Vice President
A. M a r s h a l l P u c k e t t , Vice President
F r e d e r i c k C . S c h a d ra c k , Vice President
* N e a l M. Soss, Vice President
S te p h e n G . T h ie k e , Vice President
E d w a rd F . K i p f s t u h l , Chief Examiner
L e o n K o ro b o w , Assistant Vice President
B e n e d ic t R a f a n e l l o , Assistant Vice President
J o h n M . C a sa z z a ,
Assistant Chief Examiner
G e o r g e R . J u n c k e r , Manager,
Consumer Affairs and
Bank Regulations Department
F r a n k l i n T . L o v e, Manager,
Supervision Support Department
A. J o h n M a h e r,
Assistant Chief Examiner
T h o m a s P. M c Q u e e n e y ,
Assistant Chief Examiner
W illia m L. R u t le d g e , Manager,
Domestic Banking Applications Department
D o n a l d E . S chm id, Manager,
Bank Analysis Department
B e ts y B u t t r i l l W h it e , Manager,
Banking Studies Department
E C O N O M IC A D V IS E R

*On leave of absence.

R ic h a r d G . D a v is, Senior Economic Adviser

Officers

(Continued)

FOREIGN GROUP
Sam Y. CROSS, Senior Vice President
F O R E IG N E X C H A N G E

M a r g a r e t L. G r e e n e , Vice President
C h a r l e s M . L u c a s, Assistant Vice President
T h o m a s J. C a m p b e ll, Manager,
Foreign Exchange Department, and
Assistant Secretary
P a t r i c i a H . K u w a y a m a , Manager,
Foreign Exchange Department
P a t r i c i a A . R e v e y , Senior Economist
F O R E IG N R E L A T IO N S

H . D a v id W i l l e y , Vice President
J o h n H o p k in s H e ire s , Adviser
G e o r g e W . R y a n , Assistant Vice President
G e o r g e R. A r r i n g t o n , Manager,
Foreign Relations Department
G e o r g e H . B ossy, Manager,
Foreign Relations Department
F r a n c is J. R e is c h a c h , Manager,
Foreign Relations Department

LEGAL

J a m e s H . O l t m a n , General Counsel
E r n e s t T . P a tr ik is , Deputy General Counsel
D o n N. R in g s m u th , Assistant General Counsel
D o n a l d L. B i t t k e r , Assistant Counsel
R o b e r t N. D a v e n p o r t , J r ., Assistant Counsel
B r a d le y K. S a b e l, Secretary
and Assistant Counsel
M in d y R. S ilv e r m a n , Assistant Counsel
WALKER F . T odd, Assistant Counsel
R a le ig h M . T o z e r , Assistant Counsel
L O A N S A N D C R E D IT S

C h e s t e r B. F e l d b e r g , Vice President
G a r y H a b e rm a n , Manager,
Credit and Discount Department
R o b e r t C. P lo w s , Manager,
Credit and Discount Department

MANAGEMENT PLANNING GROUP
THOMAS C. Sloane, Senior Vice President
and Senior Adviser
PERSONNEL

R o b e r t a J. G r e e n , Vice President
T e r r e n c e J. C h e c k i, Assistant Vice President
M i c h a e l J. L a n g to n , Manager,
Personnel Department
C l i f f o r d N . L ip sco m b , Manager,
Personnel Department
R o b e r t C . S c riv a n i, Manager,
Personnel Department

P LA N N IN G A N D C O N T R O L

S u z a n n e C u t l e r , Vice President
R o b e r t T . F a l c o n e r , Assistant Vice President
R o b e r t M . A b p la n a lp , Manager,
Management Information Department

O P E N M A R K E T O P E R A T IO N S

P e t e r D. STERNLIGHT, Senior Vice President
P a u l M e e k , Monetary Adviser
I r w i n D. S a n d b e rg , Vice President
M a r y R. CLARKIN, Senior Trading Officer
F r e d J. L e v in , Manager,
Securities Department
J o a n E . L o v e t t , Securities Trading Officer
A n n -M arie M eu le n d y k e ,
Research Officer and Senior Economist
E d w a rd J. O zog, Manager,
Securities Department
O F F IC E O F T H E P R E S ID E N T

C a th y E . M in e h a n , Assistant Vice President

OPERATIONS GROUP
P a u l B. H e n d e r s o n , J r ., Senior Vice President
G e r i M. RlEGGER, Vice President and
Automation Adviser
C A S H P R O C E S S IN G

W h itn e y R. I r w i n , Vice President
JOSEPH P. BOTTA, Assistant Vice President
JOHN C h o w a n s k y , Adviser
H e n r y F. W ie n e r , Assistant Vice President
J o s e p h F. D o n n e l l y , Manager,
Currency Services Department
T h o m a s E . N e v iu s, Manager,
Currency Department
D a v id S. S la c k m a n , Operations Analysis Officer
C H E C K P R O C E S S IN G

Ja m e s O. A s to n , Vice President
R o b e r t C. T h o m a n , Vice President
(Utica Office)
F r e d A . D e n e s e v ic h , Regional Manager,
Cranford Office
J o s e p h M. O ’C o n n e l l , Regional Manager,
Jericho Office
J o h n F . S o b a la , Assistant Vice President
E d w a rd H . D e n h o f f , Operations Officer,
Utica Office
D o n a l d R . M o o r e , Manager,
Check Processing Department
A n t h o n y N . S a g lia n o ,
Operations Analysis Officer
C a r l W . T u rn ip s e e d , Manager,
Check Adjustment and Return
Items Department; Electronic
Payments Staff
J a n e t L. W y n n , Operations Analysis Officer

Officers

(Continued)

D A T A P R O C E S S IN G

H e r b e r t W . W h ite m a n , J r ., Vice President
♦ H o w a rd F . C ru m b , Adviser
PETER J. F u l l e n , Assistant Vice President
CATHY E . M in e h a n , Assistant Vice President
Ja m e s H . G a v e r, Manager,
Analytical Computer Department
M ic h a e l H e l l e r , Manager,
Technical Services Department
G e o r g e L u k o w ic z , Manager,
Telecommunications Operations Department
R ic h a r d P. P a ss a d in , Manager,
General Purpose Computer Department
J e r o m e P. P e r l o n g o , Manager,
Computer Operations Support Department
B a rb a ra L. W a l t e r , Manager,
Analysis and Administrative Support Staff
G O V E R N M E N T B O N D A N D S A F E K E E P IN G

E d w in R . P o w e r s , Vice President
J o r g e A . B r a t h w a i t e , Assistant Vice President
F r a n k C. E ise m a n , Assistant Vice President
H . J o h n C o s t a lo s , Manager,
Securities Clearance Department
J o s e p h J. G rim s h a w , Manager,
Savings Bond Department
A n g u s J. K e n n e d y , Manager,
Government Bond Department
JOHN J. STRICK, Manager,
Safekeeping Department
S E C U R IT Y A N D C O N T R O L

G e r i M . R ie g g e r, Vice President and
Automation Adviser

B a r b a r a R. B u t l e r , Manager,
Data Systems Department
V ie r a A . C r o u t , Manager,
Operations Systems Department
H a r r y Z. M e l z e r , Manager,
Common Systems Department

P U B L IC I N F O R M A T IO N

P e t e r B a k s ta n s k y , Vice President
R ic h a rd H . H o e n ig , Assistant Vice President
R ES EA R C H A N D S T A T IS T IC S

PETER FOUSEK, Senior Vice President
and Director of Research
R o g e r M . K u b a r y c h , Vice President
and Deputy Director of Research
M a r c e l l e V . A r a k , Vice President
J e f f r e y R. S h a f e r , Vice President
R ic h a rd J. G e l s o n , Assistant Vice President
M . A k b a r A k h t a r , Manager,
International Research Department
N a n c y B e rc o v ic i, Manager,
Statistics Department
S te p h e n V . O. C l a r k e ,
Research Officer and Senior Economist
E d n a E. E h r l i c h , International Adviser
E d w a rd J. F r y d l , Manager,
Financial Markets Department
W illia m J. G a s s e r , Manager,
External Financing Department
G e r a l d H a y d e n , Manager,
Research Support Department
L e o n a r d G . S a h lin g , Manager,
Domestic Research Department
J o h n W e n n in g e r , Manager,
Monetary Research Department

S Y S TEM S DEVELO PM EN T

ISRAEL S e n d ro v ic , Vice President
SUSAN C . Y o u n g , Assistant Vice President
C a r o l W. B a r r e t t , Manager,
Data Systems Department

S E C R E T A R Y ’S O F F IC E

B r a d le y K . S a b e l, Secretary
and Assistant Counsel
T h e o d o r e N . O p p e n h e im e r, Assistant Secretary

OFFICERS—BUFFALO BRANCH

J o h n T. K e a n e , Vice President and Branch Manager
PETER D . L u c e , Assistant Vice President
G a r y S. W e in tr a u b , Cashier
A C C O U N T I N G ; B A N K S E R V IC E S A N D
P U B L IC IN F O R M A T IO N ; C H E C K

C O L L E C T IO N , L O A N S , A N D F IS C A L A G E N C Y ;
P E R S O N N E L ; S E R V IC E

R o b e r t J. M c D o n n e l l , Operations Officer

G a r y S. W e i n t r a u b , Cashier

B U I L D I N G O P E R A T IN G ; C A S H ; P R O T E C T IO N

H a r r y A . C u r t h , J r ., Operations Officer

M A N A G E M E N T IN F O R M A T IO N

P e t e r D . L u c e , Assistant Vice President
*On leave o f absence.

Full text of Annual Report of the Federal Reserve Bank of New York : Annual Report : 1981

FRASER