Full text of Annual Report of the Federal Reserve Bank of New York : Seventy-Fourth Annual Report for the Year Ended December 31, 1988

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank
of New York

SEVENTY-FOURTH
ANNUAL REPORT
For the Year
Ended
December 31, 1988

Second Federal Reserve District

F E D E R A L R E S E R V E B A N K OF N E W Y O R K

April 27, 1989
To the Depository Institutions in the
Second Federal Reserve District
I am pleased to transmit the Seventy-Fourth Annual Report of the Federal Reserve
Bank of New York. This year’s Annual Report contains an essay which deals with what I
regard to be the most formidable problem facing the U.S. and the global economy over the
next three to five years, namely, our ability to substantially reduce, if not essentially eliminate,
the massive and unsustainable imbalances that currently characterize the U.S. and the global
economy, while maintaining noninflationary growth here and elsewhere. As such, the essay
builds on and elaborates a theme which has been the subject of a number of addresses I have
given over the past several years.
Using a framework of analysis built on the U.S. “ export-import” gap, its
“ spending-production” gap, and its “ savings-investment” gap, the essay’s principal author,
Mr. Akbar Akhtar, forcefully illustrates the nature of the current problem—the risks to the
U.S. and global economy that may arise if these imbalances are not corrected in the period
ahead—and he outlines some of the directions in which public policy here and abroad should
move in an effort to contain and gradually eliminate these imbalances.
Of the many important implications of the essay, two stand out: first, for a variety
of reasons, including capacity constraints in at least some segments of U.S. manufacturing
industries, it will probably take four to five years to wind down the U.S. external deficits in an
orderly fashion; and second, the elimination of the U.S. budget deficit over the same time
frame is a necessary, but not sufficient, condition for eliminating or essentially eliminating the
“gaps” cited in the essay.
The essay is part of a broader effort by our research staff to assess the economic
implications of external deficits, and many issues raised here are more fully examined in the
Bank’s upcoming Quarterly Review, to be released early next month.
I hope you find this perspective on the external adjustment problem interesting.

Contents:

Page

ADJUSTMENT OF U.S. EXTERNAL IM BALANCES.............

EVOLUTION OF EXTERNAL DEFICITS.............................................................

The Export-Import G ap..........................................................................................

The Output-Spending G ap.......................................................................................

The Saving-Investment Gap.....................................................................................

The International Dimension....................................................................................

FINANCIAL CONSEQUENCES OF EXTERNAL DEFICITS.................................

RECENT PROGRESS AND THE NEED FOR FURTHER ADJUSTMENT...........

The Current Situation.............................................................................................

The Need for Adjustment........................................................................................

POLICY OPTIONS FOR EXTERNAL ADJUSTMENT...........................................

Necessary Conditions...............................................................................................

Looking to the Future: The Policy Mix Question......................................................

Facilitating the Adjustment Process.........................................................................

A SUMMARY VIEW OF THE ADJUSTMENT PROBLEM...................................

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

Changes in Directors and Senior Officers.................................................................

List of Directors and Officers..................................................................................

Seventy-fourth Annual Report
Federal Reserve Bank o f New York
ADJUSTMENT OF U.S. EXTERNAL IMBALANCES
M .A . A khtar

Vice President and
Assistant Director o f Research

In the wake of the October 1987 stock market crash, the U.S. economy was expected
to show very slow growth during 1988, the sixth year of the current economic expansion.
Actual economic performance, however, easily exceeded those earlier expectations.
Employment increased strongly during the year, bringing the total number of jobs
added since the trough of the last recession to about 17 million, and the unemployment
rate fell to its lowest level in the last 15 years. Real GNP advanced at an annual rate
of almost 3 percent, despite considerable adverse output effects of the drought. In
early 1989 the economy appeared to be operating very close to its full employment
utilization level of resources. Even so, inflationary pressures have accelerated only
moderately, although the risk of significantly higher inflation has risen in recent months.
Progress was also made on external imbalances. In particular, the overall international
trade deficit of the United States fell substantially in both real and nominal terms. The
improvement in the international sector, however, represents only the initial, and
perhaps the easiest, stage of the adjustment process. Our external deficits remain very
large and the adjustment so far has not eliminated, or even substantially reduced, the
need for further adjustment.
Against the background of these recent developments, this essay provides a longer
term perspective on the external adjustment process and problems. Specifically, it
reviews the nature and evolution of U.S. external imbalances since 1982 relative to
earlier time periods in terms of broadly based macroeconomic relations. That same
general macroeconomic framework is then used to assess the need for further external
adjustment and to consider various policy options.
The primary message of this essay is that our international trade deficit is closely
related to important imbalances in domestic consumption, saving, and investment, and
that a correction of those imbalances is necessary to achieve a satisfactory adjustment
on the external side. The economy has experienced exceptionally high levels of con
sumption and low levels of net saving and net investment over the last six years as

compared with its earlier history. Without major economic policy changes, domestic
imbalances and the international deficit will almost certainly continue and court a clear
and increasing risk to financial and economic stability over time. Even if economic
shocks can be avoided, these imbalances will undermine our future productivity and
living standards.

EVOLUTION OF EXTERNAL DEFICITS
The U.S. international deficit as measured by the current account balance accumulated
to nearly $700 billion over the last six years, averaging about $115 billion, or about
23A percent of GNP, on an annual basis. Even after substantial improvement during
1988, the current account deficit in the fourth quarter of the year was still above the
annual average of the last six years. Both the size and persistence of the external deficit
are historically unprecedented in absolute dollar terms, although relative to GNP, other
countries have run even larger deficits and for longer periods.
To examine the nature and evolution of external deficits, we look at the national
income accounting framework, which allows for different perspectives by providing
equivalent and complementary ways of defining the external balance. This approach
is particularly helpful in highlighting important elements in the major departure of
external balances from the past. It also has the advantage of showing explicitly that
certain conditions must be met in order to achieve adjustment, regardless of immediate
or ultimate sources of the external deficit.
From the national income accounts, the external balance can be defined in three
technically equivalent ways: (1) the difference between national exports and imports
of all goods and services, (2) the difference between national output and spending,
and (3) the difference between national saving and investment. At the highest level
of aggregation, the three gaps—the export-import gap, the output-spending gap, and
the saving-investment gap—are approximately equal by definition.1 The three gaps
may be viewed as representing different perspectives on the external balance, and the
details underlying them allow us to identify important elements of change in the
evolution of imbalances. In what follows we look at the components of the three gaps

•Strictly speaking, the reported data on balances across accounts differ due to various statistical discrepancies
and some differences in the treatment o f certain items. All three measures, however, show essentially the
same picture, espcially in a longer run context.
8

to ascertain unusual features in the post-1982 period relative to earlier periods and to
assess the depth and breadth of imbalances.

The Export-Import Gap
This section begins with a brief overview of the current account balance—normally
regarded as the most comprehensive measure of the gap between exports and imports
of all goods and services — but its main focus is on details of “net exports” as defined
in the National Income and Product Accounts. The medium- and long-term movements
of the two measures closely approximate each other, and differences in their coverage
are fairly modest.2 The use of net exports allows us to relate the external imbalance
more directly to domestic macroeconomic magnitudes but the choice has no effect on
our interpretation of facts and conclusions.
The current account balance moved into a large deficit in 1983 and rapidly worsened
during the next several years. This development was in marked contrast to a near
balance position over 1981-82 and, on average, over the whole postwar period through
1982 (Chart 1). On an annual basis, the current account deficit reached a peak at
$154 billion, or close to 3l/ i percent of GNP, in 1987 and has fallen significantly during
1988. In the fourth quarter of last year, the overall deficit was about $128 billion, or
somewhat above 2Vi percent of GNP.
The deterioration in the current account balance over 1982-87 was more than fully
accounted for by the merchandise trade component, which largely consists of manu
facturing goods. The increase in the merchandise trade deficit reflected both a sharp
weakening of export performance and a more rapid expansion of imports than in the
earlier period. The net international investment income component, by contrast, continued
to show significant surpluses until 1987, cushioning the deterioration in the external
balance. Without this net investment income, the external deficit from 1982 to 1987
would have been some $23 billion larger on an annual average basis. The balance on
other services such as transportation and tourism showed no significant change, on
average, over the 1982-87 period relative to the earlier postwar period.
With rising service costs on the rapidly accumulating external debt, the balance on
international investment earnings is now in the process of turning into a deficit. This
deficit will grow over time as U.S. external debt increases and will become an increasingly
important drag on the external balance.
2The current account differs from net exports due largely to differences in the treatment of unilateral transfers,
trade with Puerto Rico and the Virgin Islands, and certain items on international investments.

C h a rt 1.

UN ITED S TA T ES I N T E R N A T IO N A L DEFICITS

In a m a j o r d e p a r t u r e f r o m t he past,
the Un i t e d States has e x p e r i e n c e d h u g e
e x t e r n a l deficits since 1982 . . .

. . . l a r g e l y d u e to a w o r s e n i n g in the
m an ufac turin g tra de performance . . .

Billions
of current
dollars

0
-50

-10 0

-150

1948-82

1968-82

1983-87

1988

-2 0 0
19 6 7

. . . across m a j o r w o r l d r egi on s
a n d countries.

. . . for a b r o a d r a n g e of go od s . . .

Billions
of current
dollars
50

U.S. Trade B ala nce s
M ajo r Regions and Countries
Europe

0
-50
-10 0
-150

Asia

l l l Il l I 1 1 I l I l I I i l l l I I

Ge rmany

0
-50
-10 0
LI
1967

U I...I L I 1.1 1 I I 1 I I I 1 1 I I
70

Sources: U.S. Bureau of the Census, "Highlights of the U.S. Export a n d Import T r a d e , ” Report FT990;
U.S. Bureau of Economic Analysis; FRBNY estimates.
Note: All figure s a r e on a National Income a n d Product Accounts basis except the current account deficit
(Bala nce of Payments basis) a nd the reg io n al trade ba la n ce s (c.i.f. b asis for imports).
* A s i a n newly industrialized economies include Hong Kong, Sing ap or e, South Ko re a , a nd Taiwan.

The worsening of U.S. merchandise trade performance through 1987 was widely
spread across most major commodity groups (Chart 1). At the broad end-use category
level, there seem to be only two significant exceptions: imports of petroleum and
related products have declined substantially since the early 1980s because of the sharp
drop in oil prices, although increases in oil import volume in recent years have offset
a part of the earlier decline; and the balance on industrial supplies and materials has
not shown any significant change on average, judged in terms of its longer history,
but it has deteriorated relative to the 1980-82 period.
The trade deficit on consumer goods tripled from 1982 to 1987, and the deterioration
of the balance on auto trade was even more severe over that same period. For both
commodity groups, substantially faster-than-trend growth of imports as well as a sharp
slowdown in export growth contributed to the increase in deficits. The once huge U.S.
trade surplus on capital goods had virtually disappeared by 1987 and only a modest
fraction of the lost ground was regained during 1988; capital goods imports now make
up about one-third of total domestic spending on producer durables. U.S. agricultural
exports declined by more than one-fifth over the period 1982-87, in part because of
rising food production abroad and protectionist policies toward food production and
trade.
The decline in U.S. trade performance through 1987 is also widely spread across
major world regions, as has been a partial reversal of the trend during 1988 (Chart 1).
Over the period 1982-87, the U.S. deficit with Japan increased by about $40 billion
to reach $60 billion in 1987, while the deficit with other Asian countries increased by
a somewhat smaller amount. The deterioration in U.S. trade with the latter group
occurred at a particularly rapid pace, reflecting a major weakening in our trade position
against such newly industrialized economies as South Korea and Taiwan, which have
become highly competitive producers of a broad range of capital and consumer goods.
In 1981, the United States had small surpluses with Europe and Latin America, but
those surpluses had turned into substantial deficits by the mid-1980s. U.S. exports to
Latin American countries were considerably hurt by the international debt crisis, which
severely constrained those countries’ capacity to import to the special detriment of the
United States, the region’s major trading partner.
Overall, the external imbalance is largely an imbalance in the trade of manufactured
goods; on average, the manufacturing trade deficit has accounted for more than fourfifths of the total merchandise trade deficit since 1982 (Chart 1). Like the overall
international deficit, the manufacturing trade deficit emerged in 1983 and expanded
rapidly over a relatively short period through 1987, in sharp contrast to the small

surpluses or roughly balanced position over much of the earlier period. The manufacturing
trade balance improved moderately during 1988.
Since the trade deficit is widely distributed across a broad range of commodities
and major world regions, special factors such as country- and commodity-specific
developments and the developing country debt problem appear to have played only a
limited role in the worsening of our trade performance. Moreover, the heavy concentration
of the deficit toward manufacturing goods indicates an important role for changes in
demand conditions and prices. These considerations are consistent with a view that
our poor trade performance has been driven largely by macroeconomic forces, making
it particularly important to examine other parts of the national income accounting
framework.

The Output-Spending Gap
Since the external deficit is about equal, by definition, to the excess of domestic
spending over domestic output, we have been spending, as a nation, considerably
more than we have been producing since 1982 (Chart 2). Behind the large outputspending gap has been a more rapid growth of overall spending relative to GNP during
the current expansion than during any earlier prolonged expansion. The cumulative
growth differential between domestic spending and output continued to widen to
mid-1986 in real terms and to late 1987 in nominal terms, reaching a peak of about
4Vi percent of GNP in real terms. More recently, the growth differential has narrowed,
but it is still between IVs and 3 percent of GNP in both real and nominal terms.
The national output-spending gap since 1982 reflects a major break from the past
on the spending side, but not on the output side. The growth of nominal GNP over
the last six years averaged quite close to the average for the whole postwar period.
Real GNP growth was, in fact, about one-half percentage point higher, on average,
in the recent period relative to the whole postwar period.
Of the three main aggregate components of domestic spending on goods and services—
private consumption, investment, and government purchases—only private consumption
has grown at a much faster pace in recent years relative to the pre-1982 period. The
other two components as GNP shares have not shown significant changes, on average,
during the current expansion from the average levels over the earlier period. Developments
in the three components thus seem to imply that the external imbalance problem is
limited to consumer spending alone. This is quite misleading, however, and a closer
look at relevant details reveals a substantially more complex picture of the problem.
12

Chart 1

. DOMESTIC

SPENDING A N D G N P

U n d e r l y i n g the i n t e r n a t i o n a l de f ic it h a t be en a n e x c e p t i o n a l l y r a p i d p a c e of
do m es ti c s p e n d i n g . . . .

Percent

1
0
-1
1983

1984

1985

1986

1987

1988

. . . W e h a v e been spen ding m ore than

. . . H ig h e r c o n s u m e r s p e n d i n g has

w e h a v e b e e n p r o d u c i n g , with a l a r g e r

h e lp ed boo st o u r l i v i n g s t a n d a r d s .

s h a r e d e v o t e d to c o n s u m p t io n . . . .

Percent

Domestic S p e n d i n g

of G N P

--------

100

95
70

Consumer Spending

60
1948-82

* Fourth

1968-82

1983-87

q u a r t e r 1 9 8 7 to four th q u a r t e r 1 9 8 8

1948-82

1988

1968-82

1983-87

1988*

growth.

Private consumption expenditures relative to GNP have clearly been unusually high
during the present recovery relative to postwar history. As a nation, we have consumed,
on average, two and a half percentage points more of total output since 1982 than the
average over 1948-82, and three to three and a half percentage points more than during
the late 1970s (Chart 2). Reflecting, at least in part, this upward shift in the share of
consumer spending in total GNP, real per capita consumption has grown at a 3 percent
average annual rate during the last six years, about 75 percent faster than the rate over
1968-82.
As noted above, total government purchases on goods and services relative to GNP
have not been significantly larger in recent years than in the earlier period, with the
federal government share, in fact, now lower than the average over 1948-82. Government
spending on goods and services, however, accounts for less than 60 percent of total
public sector outlays. The remainder represents various types of government transfer
payments to the private sector, including entitlements and other mandatory spending
programs, and interest on government debt. On a consolidated basis, these outlays
reflect federal activities since the combined transfer payments of state and local gov
ernments are generally less than federal grants-in-aid.
For the federal government, only about one-third of total outlays is used to purchase
goods and services while the bulk of the remainder represents transfers to individuals
in the form of social security benefits, medicare and medicaid payments, and a range
of other entitlement programs (Chart 3). All government expenditures contribute to
private spending through increases in incomes, but federal transfer payments to individuals
are a particularly important source of household consumption expenditures. These
transfer payments are almost fully and immediately converted by recipients into con
sumption spending, leading to higher total private consumption expenditures than
would otherwise be the case. Viewed in this way, close to 15 percent of private
consumption spending in recent years has resulted from federal transfer payments to
individuals. More generally, the point is that federal government transfer payments,
which have been substantially greater since the early 1980s than in the earlier period,
do not add to output but they do add to purchasing power and domestic spending.
The share of gross investment in GNP since 1982 has averaged about the same as
the average level over the whole postwar period through 1982 but is somewhat lower
than the average over the 1970s. In real terms, the share of gross investment in GNP
has, in fact, risen relative to its longer history. But one cannot draw much comfort
from these figures because the rate of capital formation, measured by investment net
of depreciation, has proceeded much more slowly in recent years relative to the earlier
period. As a result of a shift toward capital goods with shorter life, more investment
14

C h a r t 3 . FE DERAL O U T L A Y S
F e d e r a l o u t l a y s r e l a t i v e to G N P h a v e
b e e n m u c h h i g h e r in t h e 1 9 8 0 s
th a n b e f o r e . . . .
Percent
of GNP

. . . W h i l e t h e s h a r e o f G N P s p e n t on
governm ent purchases of goods and
s e rv ic e s h a s not c h a n g e d , . . .

Percent

0
1948-82

1968-82

1983-87

1988

1948-82

. . . o u t la y s fo r social s e r v ic e s a n d o th er
tra n sfers h a v e in creased v e r y
sub stan tially, . . .

1983-87

1988

. . . w ith in c r e a s e d b en e fits fo r the
h o u se h o ld sector,

Percent

of G N P

1968-82

Tr ansf er s to I ndi vi dua l s

1948-82

1968-82

1983-87

1988

has been required to provide for replacement of the existing capital stock, making
gross investment a deceptive indicator of the additions to capital stock.
During the present recovery, the level of net investment as a ratio to GNP has
averaged about 5 percent, nearly two percentage points below the postwar average
level through 1982 and almost one and a half percentage points below the average
over the more recent 1968-82 period (Chart 4). Net investment picked up somewhat
during 1988 but it remains well below the average levels in the earlier period. As
compared with the 1962-82 period, all of the decline comes from the business sector,
and slightly more than half is attributable to the manufacturing sector. In fact, net
manufacturing investment showed no increase from 1982 through 1987 and edged up
only slightly in 1988.
Net investment figures in terms of current dollars seem to exaggerate the recent
weakness of capital formation, however. Since 1982, the ratios of both real net business
investment and its manufacturing component to total output have averaged somewhat
higher than their counterpart nominal ratios, with the difference largely attributable to
a decline in computer costs. The disparity between real and nominal net investment
shares of output is not significant enough to alter the basic pattern that investment
performance has been much weaker in recent years than in the earlier period. But it
does suggest that changes in capital stock are difficult to measure precisely and that
net investment data should be viewed only as rough estimates of those changes. In
any event, our poor investment performance has important implications for external
adjustment, future productivity, and living standards, which are pursued below in the
section on the need for adjustment.
The reduced share of net investment spending in GNP has been accompanied by
greatly increased financing of investment from foreign sources of funds, that is, by
borrowing from abroad. Our foreign borrowing reflects, of course, the need to finance
the external deficit and makes up, by definition, the shortfall of domestic saving relative
to investment. Viewed from this perspective, more than half of our net private investment
since 1982 has been financed by net foreign savings inflows to the United States for
purchases of financial and nonfinancial assets. As a result, total foreign holdings of
American assets—physical assets, equity securities, bonds, and other financial in
struments—have risen very sharply in recent years. These holdings can be thought of
as representing gross foreign claims, either direct or indirect, on our capital stock; the
total amount of such holdings is now equivalent to almost 13 percent of the U.S.

C h a rt 4.

NET PR IV A T E I N V E S T M E N T

S i n c e 1 9 8 2 net p r i v a t e i n v e s t m e n t h a s
p e r f o r m e d p o o r l y r e l a t i v e to G N P . . . .

. . . T he r e s i d e n t i a l n e t i n v e s t m e n t
co m p o n e nt has held s te a d y , . . .

Percent
of GNP

\\\\\
1948-82

1968-82

1983-87

1988

. . . b ut t h e b u s i n e s s inv<
h as declined g r e a tly . . .

. . . a n d the m a n u fa c tu r in g in v e stm e n t
component has stagnated.

Percent
of G N P

1
0
1948-82

1968-82

1983-87

1988

1948-82

1968-82

1983-87

1988

C h a r t 5.

G R O S S F O R E I G N C L A I M S O N U NI TE D STATES C A P I T A L S T O C K

R efle ctin g h e a v y fin a nc in g of in v e s tm e n t by b o rro w in g s from a b r o a d ,
A m e ric a n a ss e ts h eld b y fo r e ig n e r s h as m ore than d o u b le d since 1 9 8 2 .

th e s h a r e o f

Percent
of tot al
capital
stock

0
1987

capital stock, compared with only 6 percent in 1982 (Chart 5).3 The bulk of foreign
holdings are in the form of various types of financial assets, with the share of foreignowned direct investment stock accounting for only about 3 percent of our total capital
stock.4 U.S. capital stock with foreign direct or indirect claims contributes to labor
income and productivity just the same as capital stock owned by Americans. Foreign
claims on U.S. capital stock, however, will yield future investment income to foreigners
and not to Americans, thus lowering our future income and possibly our living standards.
3The net external position, the difference between foreign holdings of U .S. assets and U .S. holdings of
foreign assets, is discussed below in the section on financial consequences.
4Foreign direct investment is defined as ownership by a single foreign direct investor of at least 10 percent
o f the voting securities, or the equivalent, in a U .S. enterprise.

The Saving-investment Gap
The national saving rate—the average rate for all sectors including dissaving of the
federal government—dropped markedly during the 1980s and more than fully accounts
for the saving-investment gap. From an average of about 6 x/2 percent of GNP in the
1968-82 period, net national savings fell by about two-thirds to an average of about
2Vi percent of GNP in the 1983-88 period; the rate fell below 2 percent in 1986 and
1987 but recovered somewhat during 1988 to just above the average level over the
last six years (Chart 6 ). Of course, without the recent decline in the ratio of net
investment to GNP, the saving-investment gap would have been even larger.
Both private and public sector sources of savings have contributed to the decline in
the national saving rate. On the private sector side, the rate of corporate saving has
shown no significant change, on average, during the present expansion from the
preceding 15 years, but the household saving rate has dropped sharply in recent years.
Reflecting the decline in household saving, total net private saving as a ratio to GNP
averaged about two percentage points below the level over the 1968-82 period (Chart
6 ). Household saving as a ratio to GNP fell to the lowest levels in the postwar period
during 1986 and 1987, and averaged only about 3lA percent over 1983-87, compared
with 5 V a percent over 1968-82. In 1988, the household saving rate recovered somewhat
but not enough even to match the already low average of the preceding five years.
The largest contribution to the decline in national saving as a ratio to GNP has come
from the unprecedented increase in dissaving generated by federal budget deficits since
the early 1980s (Chart 6 ). Nearly 70 percent of the decline in net national saving from
the 1968-82 period to the 1983-87 period is attributable to the rise in federal budget
deficits. For the public sector as a whole, however, this adverse effect on national
saving was partially offset by the increase in state and local government surpluses
resulting from a rapid growth of pension fund contributions.
To some extent, the decline in the level of net investment relative to GNP reflects
unusually high private consumption spending and the corresponding decline in the
household saving rate. The persistently larger federal deficit, however, bears much
greater responsibility for the reduced rate of private capital formation. Since the federal
budget deficit must be financed regardless of the level of interest rates, it has pulled
away resources from the private sector. Specifically, increased federal government
borrowing against the small pool of private saving has contributed significantly to the
weak performance of private investment. The adverse effects of the federal deficit on
capital formation would have been considerably greater were it not for substantial U.S.
borrowings from abroad (that is, the inflow of foreign savings), which attenuated those

C h a r t 6.

NET S A V I N G
. . . r e f l e c t i n g b o th a d e c l i n e in t h e
private sav in g rate and . . .

The national s a v in g r a te h a s d e clined
m a r k e d l y since the e a r l y 1 9 8 0 s , . . .

Percent
of GNP

Percent
of G N P

Total

Pri vate

0
1948-82

1968-82

1983-87

1988

1948-82

. . . a h u g e r i s e in t h e f e d e r a l
b u d g e t deficit. . . .

Percent
of G N P

1968-82

1983-87

1988

. . . In crea sed sta te a nd local g o v e r n m e n t
s u r p lu s e s h a v e m o d e r a t e d th e d e cline
som ew hat.

Federal

ofG N P

State a n d

Local

-2

- 4

-6
1948-82

1968-82

1983-87

1988

1948-82

1968-82

1983-87

1988

effects in part by helping to keep U.S. domestic interest rates lower than otherwise
would have been the case.
During the last two years or so, the federal budget deficit has fallen very substantially
to about 3 percent of GNP in 1988. It is, however, still very large by historical standards;
in the postwar period until 1982, the actual federal budget deficit exceeded 3 percent
of GNP only in the 1975 recession period. Put differently, the 1988 federal budget
deficit was still large enough to offset fully all household savings.

The International Dimension
Our historical review of the three gaps clearly indicates that macroeconomic forces
have played a central role in the development of external imbalances. To emphasize
the main point, the external deficit has been closely associated with exceptionally high
levels of domestic spending on consumption and with a sharp decline in the national
saving rate. Both overspending on consumption and undersaving in the economy are
driven by the household and the federal sectors. At the same time, despite continued
excess domestic demand, the rate of capital formation, or spending on net investment,
has declined markedly in recent years.
Any overview of the evolution of the U.S. external deficit would be incomplete
without some consideration of two other factors: the pace of overall demand and
economic growth in our major trading partners, and the dollar exchange rate. Developments
in these two factors over the period 1982-86, interacting with, and to some extent
reflecting, our domestic spending and saving imbalances, have contributed significantly
to the size and persistence of our international deficit.
By increasing the demand for imports, our historically high levels of household and
overall domestic spending increased our external deficits directly. Moreover, those
high levels of domestic spending came at a time of sluggish demand growth in major
foreign industrial countries. Domestic spending growth abroad underwent a significant
slowdown over 1982-86 from the earlier period, in part because of restrictive fiscal
policies in some countries (Chart 7). The slowdown in domestic spending abroad
contributed substantially to the weak performance of U.S. exports over this period. It
also created additional incentives in foreign countries for increasing exports to the
United States; this may help account for the fact that major foreign industrial countries,
as a group, exported a larger share of their output to the United States over the period
1982-86 than in the preceding 15 years (Chart 8).
A disproportionate share of domestic and foreign spending was shifted from U.S.

C h a r t 7.

D E M A N D CONDITIONS A B R O A D

C o n t r i b u t i n g to o u r e x t e r n a l d e f i c i t w a s a s l o w d o w n in d o m e s t i c s p e n d i n g g r o w t h
a b r o a d during 1 9 8 3 - 8 6 . . .
Percent

6
4

0
-2
- 4
1968-82

1983-86

1987-88

1968-82

1983-86

1987-88

1968-82 1983-86

1987-88

. . . r e f l e c t i n g , in p a r t , r e s t r i c t i v e f i s c a l p o l i c i e s in s o m e c o u n t r i e s ; c e n t r a l g o v e r n m e n t
d e f i c i t s in J a p a n a n d G e r m a n y f e l l in r e l a t i o n to G N P . . .

Percent
C e n t r a l G o v e r n m e n t Def i c i t as a S h a r e of G N P

United

States

5
4

Germany

Japan
-

10
-1

1-----------------------'
1976-82

1983-86

1987-88

1
1976-82 1983-86

Es t i ma t e

1987-88

1976-82 1983-86

1987-88

E st i mat e

. . . a n d r e l a t i v e to n e t s a v i n g .

Percent

C e n t r a l G o v e r n m e n t Defi ci t as a S h a r e of N e t Savi ngs" t"

United

States

150

100

0
-5 0
1976-82

1983-86

1987-88

1976-82

1983-86

Est i mat e
* Weighted

average

F r an ce , G e r m a n y , Italy, J a p a n ,

"fr C e n t r a l g o v e r n m e n t d e f i c i t s a r e o n a N a t i o n a l I n c o m e a n d
funds.

E x c l u d i n g s oc i a l security f u n d s , central g o v e r n m e n t

1983-86

and

the United

P ro d u c t A c c ou n t s basis a n d
budget

balances

may

1987-88

4 p e r c e n t w i t h o u t s o c i a l secur ity.

Kingdom.

i n c l u d e social security

be significantly different;

c e n t r a l g o v e r n m e n t deti ci t, as a s h a r e of G N P , d u r i n g 1 9 8 3 - 8 6

1% p e r c ent wi t h social secur it y a n d

1976-82

Es t i ma t e

of g r o w t h r at es o f C a n a d a ,

for e x a m p l e , t h e J a p a n e s e

1987-88

is e s t i m a t e d t o b e

C h a rt 8.

M A J O R F O R E I G N I N D U S T R I A L C O U N T R Y E X P O R T S T O TH E U N I T E D S TA TE S

S lug gi sh d e m a n d c o n di ti on s a b r o a d increased incen tives for e x p o r t s to the U ni t ed States.

a S h a r e of F o r e i g n G N P *

1968-1982

198 3-1986

* I nc l u d i ng C a n a d a , F r a n c e , G e r m a n y , Ital y, J a p a n , a n d t he U n i t e d

1987-1988

Kingdom.

goods to foreign goods because of the dramatic rise in the exchange value of the dollar
over the first half of the 1980s (Chart 9). By making foreign goods much cheaper
relative to American goods, the rise of the dollar contributed greatly to the decline in
U.S. international competitiveness, especially in the trade of manufacturing goods,
and was probably the biggest single factor in the acceleration of imports and stagnation
of exports.
To a considerable extent, however, the dollar’s movements have reflected the U.S.
macroeconomic imbalances, the excess of domestic spending over output, and the
shortfall of national saving relative to investment. Contributing greatly to the dollar’s
rise through the mid-1980s were exceptionally heavy demands on domestic credit
markets arising, to a substantial degree, from the federal government. From 1982
through 1986, the total funds borrowed in domestic financial markets as a ratio to
GNP were about one-third higher than the average level over the 1968-82 period and

C h a r t 9.

THE D O L L A R A N D D O M E S T I C CREDIT D E M A N D S

B y m a k i n g f o r e i g n g o o d s c h e a p e r r e l a t i v e to U.S. g o o d s , t h e d o l l a r ’ s r i s e d u r i n g 1 9 8 1 - 8 5
p l a y e d a n i m p o r t a n t r o l e in w e a k e n i n g o u r t r a d e p e r f o r m a n c e . . . .

. . . But t h e d o l l a r ’ s s t r e n g t h w a s a t t r i b u t a b l e , at l e a s t in p a r t , to g r e a t l y i n c r e a s e d U.S. c re d it
d e m a n d s , w i t h t h e f e d e r a l g o v e r n m e n t a c c o u n t i n g f o r a b o u t h a l f t h e r i s e in t o t a l b o r r o w i n g s .

Percent
of G N P

Borrowing

Percent

b y U. S.

of G N P

Federal Borrowings

N o n f i n a n c i a l Sect or s

1948-82

Sources:

1968-82

Morgan

1983-86

Guaranty

for b r o a d

i n d e x ( 14 i n d u s t r i a l c o u n t r i e s ) .

1987-88

index

1948-82

( 4 0 countries); F R B N Y

1968-82

staff f or n a r r o w

1983-86

1987-88

almost double the level over the entire postwar period through 1982 (Chart 9). The
federal government accounted for about one-half of the increase in borrowings, acquiring
on average close to one-third of the total funds borrowed over 1982-86, up from
15 percent over 1968-82. In any event, the record levels of borrowing against the
limited pool of domestic private saving played an important role in pushing up the
dollar’s exchange value against other currencies by keeping U.S. real interest rates
high by historical standards.

FINANCIAL CONSEQUENCES OF EXTERNAL DEFICITS
Since the excess of domestic spending over output must be financed by borrowings
from abroad, the export-import gap is approximately equal to the net inflow of capital
from foreign countries into the United States. From another perspective, looking at
the other side of the national accounts identity, this simply means that the shortfall of
national saving relative to domestic investment must be met by foreign savings inflows.
Thus, the net capital inflow into the United States is the mirror image of the external
deficit, that is, of the three essentially equal gaps in the national income accounts.
Reflecting the continued external deficit, U.S. borrowings abroad have averaged
about $100 billion on an annual basis over the last six years. (The net capital inflow
has been smaller than the current account deficit due to the positive statistical discrepancy
that represents errors and omissions in the balance of payments accounts.) The ultimate
source of our financing is the savings of foreign countries with external surpluses,
primarily other industrial countries. For the period as a whole, our borrowings used
up about 14 percent of total net savings of all other industrial countries, with the ratio
peaking at about 18 percent in 1985 (Chart 10).
From 1983 to 1985, all of the external financing was provided by private capital
inflows. More than four-fifths of those inflows consisted of bank financing and securities
acquisitions by foreigners, while direct investment flows accounted for only about
15 percent of the overall financing requirement (Chart 10).
Since 1986, private sources have financed significantly less than the full amount of
the external deficit, with increases in net official holdings of dollar assets making up
the shortfall. The official contribution to financing was particularly large in 1987 when
central bank purchases of U.S. dollar assets were almost equal to our entire external
deficit. This contribution is understated in the reported data, however, because official
purchases of dollar assets from private financial institutions abroad are not recorded

C h a r t 10.

F I N A N C I N G O F THE C U R R E N T A C C O U N T DEFICIT

To p a y fo r the ex c e s s of d o m e s t ic s p e n d i n g o v e r outp ut, th e U n it e d Stat es h a s b o r r o w e d
a c o n s i d e r a b l e p o r t i o n o f net s a v i n g s of f o r e i g n i n d u s t r i a l c o u n t r ie s in
r ecent y e a r s . . . .

. . . O u r b o r r o w i n g s a b r o a d w e r e a l m o s t f u l l y f i n a n c e d t h r o u g h p r i v a t e i n f l o w s f r o m 1983- 85,
but o ff i c i a l f i n a n c i n g h a s p l a y e d a s ig n i f i c a n t r o l e in t h e s u b s e q u e n t p e ri o d .

Bi l l ions of
dollars

Bi l l ions of

U. S. C u r r e n t A c c o u n t F i n a n c i n g

Components

of U . S . N e t P r i v a t e I n f l o w

dollars

2 00

N e t of fi ci al
i nflows

180

Net

private

~ |

| U.S. b a n k s

Net private
inflows

Net capital

140

Securities

120

Direct i n ve s t m e n t

inflows

Errors a n d

140

160

deficit

i nflows

160

Current account

120

100

-2 0
1983-85

1986

Average

^Includes

1987

1988

1983-85

Preliminary

Average

C a n a d a , Fr ance, Italy, J a p a n , S w i t z e r l an d , U n i t e d

" ( "incl udes all O E C D

c o un t r i es e x c e p t t h e U. S.

Kingdom, and

1987

1988
Preliminary

West G e r m a n y ,

as official inflows in the U.S. balance of payment statistics; instead, such purchases
usually appear under private bank inflows since official deposits put in the banks abroad
are channeled through the interbank market back to the United States. In 1988, the
official sector played a much less important role in financing the external deficit, and
the reported data probably overstate the extent of official financing due to a partial
reversal of the 1987 effect, as some government reserves abroad were redeposited in
the United States.
Reflecting continued large borrowings abroad, the U.S. external debt has accumulated
rapidly in recent years. Taking account of holdings of both financial and nonfinancial
assets, the United States has moved from a net creditor status of $140 billion in 198182 to a position as the world’s largest debtor by far, with an outstanding net external
debt of nearly $500 billion at end 1988 (Chart 11). This major shift in the net international
investment stock position corresponds to our cumulative borrowings from abroad since
1982, adjusted for net valuation effects mostly reflecting changes in the dollar exchange
rate and prices of security holdings. (Net valuation adjustments can be substantial on
a year-to-year basis but are normally less important over a longer period.) In any
event, because of difficulties in measuring market values of U.S. assets abroad and
foreign assets here, the net external investment position is not a precise statistical
measure but a rough indication of the indebtedness.5
The composition of assets underlying the net international investment position has
been an important factor in moderating the deterioration in our net investment income
balance, despite rapidly accumulating net external indebtedness. Specifically, the share
of direct investment in U.S. assets abroad is significantly larger than the direct investment
share of foreign assets in the United States. In effect, this has meant that our net direct
investment position, even after substantial deterioration, has remained positive through
1988. This positive position, together with higher rates of return on long-established
U.S. investments abroad relative to newer foreign direct investments here, has resulted
in a more gradual deterioration of our net investment income than of the overall net
investment stock position.

5The actual level of our net external investment position may be significantly different from the reported
level, but the direction of the difference is difficult to determine. For example, U .S. direct investment
abroad is carried at book value, resulting in an understatement of our foreign assets. On the other side, the
large cumulative statistical discrepancy is generally thought to consist primarily o f unrecorded capital inflows
that lead to an understatement of foreign assets in the United States. While the level of net indebtedness
may be in question, the direction of change is clear.

C h a r t 11.

U N I TE D ST ATE S E X T E R N A L I N DE BTE DNE SS

H a v i n g i n c r ea s ed r a p i d l y since 1982, t h e U. S . e x t e r n a l debt is n o w close to f i v e - h u n d r e d
bill io n d o ll a r s , or a b o u t 10 pe rce nt of G N P . . . .

B i l l i o n s of

U. S. N e t E x t e r n a l

dollars

Indebtedness

N e t I nvestment Assets/Li abil iti es

200
100

0
-1 0 0

-20 0
-3 0 0

-4 0 0

-5 0 0
1982

1985

1987

1988
Es t i mat e

Es t i mat e

. . . W h i l e the U.S. sit uat io n is u n i q u e in so m e i m p o r t a n t respects, o u r e x t e r n a l i n d e b te d n e s s
is not p a r t i c u l a r l y h i g h , j u d g e d in rela tio n to ot h er h i g h d e b t o r cases.

Percent
L a r g e D e b t o r Pos i t i ons , Histori cal E x a m p l e s
N e t E x t e r n a l I n v e s t m e n t Li abi l i ti es as P e r c e n t of G N P

U .S .t
1873

0
-20

G E k t
1926

CAN

AUS

DEN

SWE*

ARG *

1987

1986

1985

1987

B Z *
1987

M EX*
1987

—

- 4 0

- 6 0

- 8 0

D oes not include fo re ig n

1"E s t i ma t e s .
28

direct i nvestment.

In absolute dollar terms, the U.S. external debt is the largest in the world. But
judged in relation to GNP, our external debt of 10 percent at end 1988 was neither
particularly large nor historically unprecedented. In recent years, other countries have
recorded much higher levels of external indebtedness relative to GNP, and in the distant
past, both the United States and other countries have experienced this condition (Chart 11).
Most other instances of high debt, however, appear to have been special cases of
one kind or another with differing economic consequences. Major wars usually leave
heavy debt burdens, but these debts are paid off or otherwise settled over time.
Historical examples of war debt abound but reliable data are difficult to piece together;
German indebtedness arising from the First World War fit this pattern. The post-Civil
War economic boom in the United States, with heavy emphasis on the railroad expansion,
was largely financed by foreign capital and ended in the financial panic of 1873,
followed by several years of economic depression. Natural resource countries have
historically relied on foreign capital for economic development although the dependence
on foreign capital usually falls or at least stabilizes as the countries become developed.
In a long-run context, Canada and Australia exemplify this situation to some extent,
but both countries have experienced significant periods of balance of payments difficulties
as well. Some small developed open economies, such as Denmark and Sweden, have
attempted to supplement their domestic spending by borrowing from abroad, as have
several developing countries in recent years; these countries have frequently found it
very difficult to sustain their debt burdens over the long run and have experienced a
substantial, if not complete, loss of independence in domestic policies.
These other cases of high debt burdens would appear to have only a limited relevance
to judging the viability of the current U.S. situation. The present high level of U.S.
external debt and its persistently strong rising trend are unique for a large industrial
country unaffected by a major war. Moreover, to appreciate the magnitude of our debt
problem, we must keep in mind that the United States is not just a large industrial
country but the largest economy in the world by far; U.S. GNP accounts for about
one-fourth of the world’s GNP and is roughly equal to the combined GNP of Japan,
Germany, France, and the United Kingdom. This means that our large external debt
has substantial economic and political consequences not only for us but also for the
rest of the world.
Viewed from this perspective, the current level of our external debt and its increasing
trend are much more problematic than would be the case for any other country in a
similar situation. While it may be possible for the United States to live for a long time
with the present or perhaps even higher levels of external debt relative to GNP, there

are clearly significant and increasing costs associated with this outcome. In any event,
an increasing level of external debt is not sustainable over time and, at a minimum,
the external debt to GNP ratio will need to stabilize in the long run.

RECENT PROGRESS AND THE NEED FOR FURTHER
ADJUSTMENT
Since 1986 the federal budget deficit has fallen by almost two percentage points to
3 percent of GNP in 1988. Foreign domestic demand growth has accelerated, reversing
a part of the gap between U.S. and foreign growth built up over the first four years
of the present recovery. The dollar has declined, in both nominal and real terms, to
around or even below its 1980 average level against the other currencies, and largely
as a result of the lower dollar, U.S. manufacturing competitiveness has improved and
exports have recovered substantially over the last seven or eight quarters.
The reversal of the macroeconomic forces underlying the external deficit is far from
complete, however. The household sector and the federal government continue to drive
the U.S. spending-output imbalance. And our national saving rate has not shown a
significant recovery so far, largely because of the persistent federal budgetary dissaving.
Reflecting both overspending on consumption and undersaving in the economy, U.S.
net investment as a share of total output remains very low by historical standards.

The Current Situation
Because of the amelioration in the underlying macroeconomic imbalances, all measures
of our trade performance have shown considerable improvement during the last two
years or so. The current account deficit is now running in the range of $125 billion
to $135 billion, with the corresponding merchandise trade deficit about $10 billion
smaller. The overall external deficit is generally projected to fall somewhat further
during this year but, on present expectations, it will remain above $100 billion at least
through next year. By definition, the continuing large external deficit will approximate
the national output-spending gap and the national saving-investment gap, reminding
us of different aspects of the problem.
Also by definition, the net external debt of the United States will increase further
over time by the cumulative amount of the deficit. With accumulating external debt,
30

interest costs will continue to rise automatically. In other words, this component of
the international balance is driven essentially by the level of external debt and is hard
to influence directly by normal economic policy choices. In looking to the future,
therefore, it is more useful to focus on the current account deficit net of service payments
on external debt—the primary deficit on international transactions. Until recently, this
primary deficit was considerably larger than the overall current account deficit, reflecting
the surplus on the net investment income component. The two deficits are now about
the same, but with increasing interest payments on external debt, the current account
deficit will become gradually larger than the primary deficit.
The magnitude of our present external imbalances and future developments in them
must be viewed in the context of several important features of the current economic
situation:
• First, the economy is operating very near full utilization of its industrial capacity
and labor resources. Real economic growth, therefore, cannot exceed the potential
growth rate if inflationary pressures are to be avoided. The potential growth rate
is probably in the range of 214 to 2 3A percent, significantly less than growth performance
in recent years.
• Second, the federal budget deficit, at 3 percent of GNP, is still very large by
historical standards; it remains a major drag on national saving and continues to
contribute substantially to the excess of domestic spending over output.
• Third, net private investment relative to output is at a historically low level; the
rate of capital formation has been particularly slow in the manufacturing sector
over the last several years. In addition, more than half of recent net investment
spending has been financed by savings inflows from abroad, significantly increasing
the foreign share of total U.S. assets.
• Fourth, the willingness of private foreign investors to finance the continuing large
external deficits over time is quite uncertain—more so in the future than before
because of the already unprecedently large foreign holdings of U.S. debt—and
could pose serious problems for interest and exchange rate movements and economic
stability down the road.
Against this background, a continuation of large external imbalances poses a most
serious threat to the medium- and long-term health of the U.S. and global economy.

The international deficit, therefore, appears to us to be one of America’s most pressing
economic problems, which must be reduced much further, or perhaps even eliminated,
in coming years.

The Need for Adjustment
At a purely technical level, the current primary international deficit of about
$135 billion at an annual rate is not sustainable in the long run.6 With any plausible
set of assumptions for interest rates, real growth, and inflation, a deficit of this size
implies continuously and rapidly rising levels of external debt, both in absolute dollar
terms and as a ratio to GNP. If, for example, both nominal GNP growth and interest
rates are assumed to be at 7 percent, a continuation of today’s primary international
deficit would lead to external debt of $3.5 trillion, or close to 32 percent of GNP, in
2000; by 2010 the level of debt would approach $8.7 trillion, or about 40 percent of
GNP (Chart 12). The corresponding overall current account deficit would stabilize at
around 3]A percent of GNP but it would continue to increase in dollars terms, reaching
$350 billion in 2000 and nearly $700 billion in 2010.
The simple arithmetic of technical sustainability, by itself, tells us nothing about
the underlying economic issues and their importance, even though it logically implies
the need for a substantial reduction in the international deficit over the long run. The
main issues concern, of course, the short- and long-term economic consequences of
continuing large external deficits. In that context, there are at least three compelling
economic reasons for adjustment of external imbalances.
First, we need to stop and reverse a disturbing sharp decline in the level of net
investment relative to GNP, and we need to do this in a context in which the bulk, if
not all, of our investment is financed from domestic sources instead of capital inflows
from abroad. The amount of net investment represents additions to the stock of productive
capital of a nation, and some increases in that stock are necessary just to keep pace
with a growing labor force in order to avoid a weakness in labor productivity. Further
increases in capital stock are needed to raise productivity and to advance living standards
because technological developments are usually incorporated in the production process
through new machinery and equipment.
6The preliminary 1988 estimate for the primary deficit is about $138 billion, $3 billion larger than the
corresponding current account deficit; both deficits were somewhat lower in the second half of the year.
The starting point for calculations of various illustrations and future scenarios is a primary deficit of
$135 billion.

Cha rt 12.

U N I T E D S TA TES C U R R E N T A C C O U N T DEFICIT A N D E X T E R N A L IN DEBTEDNESS:
A N IL L U S T R A T I O N

If o u r o v e r a l l i n t e r n a ti o n a l deficit, net of interest p a y m e n t s , c on tin ue s at its pres en t level,
the e x t e r n a l d e bt cou ld rea ch o v e r ei ght a n d o n e - h a l f t r i ll io n do llar s b y 2010, . . .

. . . a m o u n t i n g to ab o u t 4 0 percent of G N P .

Real net business investment in relation to GNP has been substantially weaker during
the last six years than over the earlier period, with the manufacturing investment
component averaging only about one-tenth of 1 percent of GNP. As a result of the
slowdown in capital formation, the amount of capital per worker in both the whole
economy and the manufacturing sector has been essentially flat since 1982, representing
a significant shift relative to the earlier postwar period (Chart 13). If, for example,
capital per worker in the manufacturing sector had continued to advance at the trend
rate of the 1968-82 period, it would have been about 25 percent higher in 1988. These
developments clearly indicate a major investment problem, although it is difficult to
assess the exact extent of slowdown in the rate of capital formation because of the
imprecise nature of data on real net investment and capital stock.
The slower growth of capital stock has also meant that the economy’s capacity to
produce goods and services has increased more slowly in recent years relative to the
earlier period. In particular, manufacturing capacity growth has averaged about
23/4 percent per year during the present recovery, down from more than 3V2 percent in
the preceding 15 years (Chart 13). Even this lower recent growth of manufacturing
capacity may be overstated because it implies that new capital of recent vintage has
been unusually more productive than the old capital it replaced. Specifically, since
both capital stock and employment in the manufacturing sector have increased very
slowly, the estimated capacity growth indicates that production technology in recent
years has advanced at an exceptionally rapid pace of more than 2 percent per year, a
rate faster than most estimates for the 1948-73 period. Some economists argue, however,
that the manufacturing capital stock has in fact been higher than reported because
measurement problems in computer machinery have led to an overstatement of computer
costs and capital goods prices. Alternately, it is possible that the capital stock estimate
is about right but that industrial capacity growth, which is also difficult to measure,
is overstated.
Whatever the final resolution of these controversies, they appear to suggest that
manufacturing capacity growth in recent years is unlikely to have been much higher
than the reported rate of about 23/4 percent. This low capacity growth implies a significant
decline in the long-range trend growth performance of the manufacturing sector. More
generally, the decline in the rate of capital formation and slow capacity growth, if not
reversed, would most likely have significant unfavorable effects on productivity and
living standards.
Future American living standards may also be adversely affected because of continued
heavy financing of U.S. investment by net foreign savings inflow, which is equal by
definition to the external deficit. Reflecting the increased foreign financing of domestic
34

C h a r t 13.

CAPITAL FO R M A T IO N A N D C A PA C IT Y G R O W T H

In sha rp contrast to t h e e a r li e r p e r i o d , capital pe r w o r k e r since 1982 has not
i ncr eas ed v e r y m u c h , es p e ci a l ly in the m a n u f a c t u r i n g sector, . . .

1982=100

110

100

. . . a n d in d u s t r i a l c a p a c i t y has a d v a n c e d
at a s i g n i f ic a n t ly s l o w e r pace tha n be for e.
Percent

Growth

of C a p a c i t y

in M a n u f a c t u r i n g

1
0
1948- 82

1968-82

1983- 87

1988*

* Fourth quarter 1987 to fourth quarter 1988 growth.

investment, total foreign claims on U.S. capital stock have risen very sharply in recent
years and will continue to mount rapidly over time as long as large external deficits
persist. As noted earlier, this shift has no implications for productivity and labor
incomes; U.S. capital stock with foreign claims contributes to productivity and labor
incomes just the same as capital stock owned by Americans. But investment income
from foreign claims on U.S. capital stock will not accrue to Americans. Thus, increasing
foreign claims on our capital stock could reduce our future income and living standards
significantly relative to what would have been the case in the absence of those claims.
Reducing the external deficit would, by definition, lower the offsetting capital inflows
from abroad required to finance the excess of domestic spending over output or the
shortfall of domestic saving relative to investment. This would reduce the amount of
U.S. investment financed by foreign savings inflows. And the falling rate of foreign
holdings of U.S. assets would over time lead to a decline in the share of U.S. capital
stock claimed by foreigners.
However, reducing the external deficit by itself would not increase the overall
investment spending relative to GNR In fact, there is no unique relationship between
the share of investment in GNP and the external balance or its complement, the domestic
saving-investment balance: a reduction in the saving-investment gap is fully consistent
with either a decline or a rise in the investment share. Put differently, the excess of
domestic spending over output can be generated as much by spending on investment
as by spending on consumption.
The present external deficit, as noted earlier, reflects overspending on consumption
and undersaving in the economy, which are driven by the household and federal sectors.
The external adjustment problem, therefore, concerns the need to curb overspending
on consumption and to raise the level of national saving. An adjustment of the consumption
and saving imbalances would reduce the excess of domestic spending relative to output
while simultaneously increasing the supply of national saving. The resulting availability
of domestic resources would help raise the share of investment in GNP. Eliminating
the domestic macroeconomic imbalances is all the more important because we can no
longer run the economy above its long-range potential growth rate to provide both
higher saving and higher consumption.
A second important reason for adjusting external imbalances is that potential difficulties
in financing the international deficit pose major risks, ultimately centered on falling
confidence in the dollar, to economic and financial stability. The United States has
borrowed about $600 billion over the last six years, and at this stage we are considerably
dependent on foreign capital inflows to maintain orderly conditions in foreign exchange,
money and capital markets. Continued borrowings at rates of $100 billion annually
36

will impose significant economic costs in coming years and could, at some later date,
lead to instability in financial markets.
The share of U.S. dollar assets in portfolios of many foreign, particularly Japanese,
financial institutions has increased considerably in recent years. The willingness of
foreign private investors to continue to add substantially to their U.S. dollar holdings
could be quite uncertain. To a considerable extent, this may depend on whether the
share of dollar assets in foreign portfolios continues to rise over time. But the large
absolute size of dollar holdings abroad may also contribute to the reluctance of foreign
private investors to increase their dollar assets, more so because many of them have
suffered significant losses from the dollar depreciation in recent years. Shifts in foreign
investor confidence are unpredictable, but unfavorable sentiment toward dollar assets
is not just a theoretical possibility. Indeed, we have already had periods in recent years
when private capital inflows essentially ceased for a while, with considerable adverse
effects on the dollar and domestic interest rates.
It is clear that foreign confidence in U.S. dollar investments will be undermined
over time if large external deficits persist; the longer we borrow large amounts from
abroad, the greater the threat to confidence. It is also clear that private foreigners will
continue to hold and accumulate claims on the United States only if the expected
returns are sufficiently attractive relative to nondollar assets. Under these circumstances,
continued large amounts of U.S. borrowings may not be feasible without significant
downward pressures on the dollar or increases in domestic interest rates. And the
possibility of a loss of confidence in foreign exchange and domestic financial markets
cannot be ruled out.
Even without a loss of confidence, the resulting pressures on exchange and interest
rates could damage economic stability considerably. At the very least, price increases
associated with the dollar depreciation would complicate the task of maintaining low
inflation, and higher domestic interest rates would tend to discourage domestic investment.
To be sure, pressures on exchange and interest rates will not be eliminated even if the
external deficit is on a declining path. But such pressures and the risks of a loss of
foreign investor confidence will be much greater if the external deficit is not reduced
further.
Whatever the extent of financing strains, a continued large spending-output gap is
a significant threat to price stability, and this is yet another important reason for external
adjustment. Until recently, the excess of spending over output had not resulted in an
acceleration of U.S. inflation primarily for two reasons: the U.S. economy has been
able to maintain output growth significantly above its long-term potential rate by
employing idle resources, factories and workers; and import price increases have

remained relatively moderate, to a significant extent, because of spare industrial capacity
abroad, despite substantial depreciation of the dollar in recent years. Both factors now
appear to be on the wane. For the United States, capacity utilization in manufacturing
is close to the prior cyclical peaks in 1973 and 1979, and the unemployment rate has
fallen to its lowest level during the last 15 years. Abroad, capacity utilization levels
in our major trading partners are now substantially higher than before, although foreign
countries as a group still have more unused capacity than we do.
In recent years, both U.S. output and domestic spending growth rates have exceeded
the economy’s long-run growth potential, widely estimated to be 2lA to 23A percent at an
annual rate. With present resource constraints, future domestic spending and output
growth in excess of this potential would lead to an upsurge in inflation and in any
case could not be long maintained. More severe limits on potential growth and,
therefore, stronger inflationary pressures could result if recent low rates of capital
formation and industrial capacity growth were to slow future productivity growth and
output performance significantly.
In any event, to avoid inflationary pressures, the domestic output-spending gap must
be reduced by lowering spending and not by increasing output. That is, the growth
of U.S. domestic spending must slow down sufficiently to bring GNP growth back
into line with potential. If this does not occur, we could end up with a higher external
deficit and higher inflation as the excess domestic demand spills over into the external
market, on the one hand, and leads to strains in domestic labor and product markets,
on the other. Moreover, a slowdown in domestic spending just enough to keep the
external deficit from going up may not prove adequate to contain inflationary pressures.
With the U.S. economy operating at or near full capacity and most of our major trading
partners experiencing only moderate amounts of spare capacity, continuing large U.S.
excess demand will eventually lead to an acceleration in inflation and inflationary
expectations. A significant reduction in the excess of U.S. domestic spending over
output would therefore appear to be necessary to contain price pressures.

POLICY OPTIONS FOR EXTERNAL ADJUSTMENT
In pragmatic terms, the external deficit cannot be fully eliminated in the near term,
at least not without a severe recession and other major disruptions in the economy.
Achieving the needed adjustment will take several years because, even with significant
policy initiatives, the underlying macroeconomic forces cannot be reversed immediately.
38

Moreover, it is probably not feasible to eliminate our overall international deficit on
the current account balance even in the medium term: because of rising debt service
payments, eliminating the current account deficit would require a considerable surplus
on the primary balance, the current account balance net of interest payments on the
external debt.
The elimination of the primary external deficit over the medium term, say about
five years, would appear to be a more realistic and concrete target. One cannot be at
all sure about the appropriate length of the adjustment period, but a five-year interval,
on top of 1988, seems reasonable in that it would allow for a somewhat gradual reversal
of the macroeconomic imbalances that were built up over five or six years.
To meet the adjustment target, the 1988 primary deficit of about $135 billion would
have to be reduced by $25 billion to $30 billion on an annual average basis from now
through 1993. This is a slower rate of improvement than that achieved last year but
it is sufficiently rapid to maintain confidence in the adjustment process. The adjustment
path also may prove to be gradual enough to avoid a serious interruption of economic
growth or a significant rise in inflation.
Under this adjustment scenario, the current account deficit would fall to around
$40 billion or roughly one-half of 1 percent of GNP by 1993 (Chart 14). The shortfall
of domestic saving relative to investment would, of course, go down in line with the
improvement in the current account balance. U.S. external debt would continue to
increase in dollar terms through 1993 but as a ratio to GNP it would reach a peak of
about 13 percent in 1991-92 and decline somewhat in 1993 as the external deficit fell
further. The peak level of external debt at 13 percent of GNP is not intended as an
optimal level; it results from eliminating the primary deficit over the next five years.

Necessary Conditions
Theoretically, there is no unique policy approach to reducing the external deficit. Many
different policies or combinations of policies can accomplish the task, although some
of them may do more harm to the economy even as they achieve the needed reduction
in the deficit. Regardless of policy choices and their effects on the economy, however,
several conditions must be met at a macroeconomic level, almost as a matter of
arithmetic, for the external adjustment to materialize. These necessary conditions are
invariant with respect to immediate or ultimate sources of the external deficit and
highlight different aspects of the adjustment problem as reflected in the national income
accounts.

C h a r t 14.

EXTERNAL ADJUSTMENT

E l i m i n a t i n g the p r i m a r y e x t e r n a l deficit o v e r the n e x t fi ve y e a r s w o u l d sta bi li ze
t he ratio of e x t e r n a l debt to G N P , a l t h o u g h the ab so lut e d o ll a r a m o u n t w o u l d
con tinue to rise o v e r t i m e . . . .

Billions of
dollars

50 0

0
-500

-1000

-1500
. . . Th e domestic s a v i n g - i n v e s t m e n t g a p
w o u l d n a r r o w to a b ou t o n e - h a l f of
1 pe rc e nt of G N P a n d wi ll h a v e to be
m a t c h e d b y a decline in the fe d er al deficit
or a rise in the p r i v a t e s a v i n g rat e.

Sources:

Economic Report of the President, Sur ve y of Current Business, and FRBNY staff projections.

* Data for 1 9 8 9 through 1 9 9 3 are b a s e d on an assumed adjustment scenario.
Current account bal a n ce , net of interest payments on external debt.

Perhaps the most obvious necessary condition is that our exports of goods and
services must grow substantially more rapidly, on average, than our imports over the
next five years, and that the economy must have sufficient capacity to accommodate
both the continued export expansion and domestic demand for home output. As a
practical matter, this means, among other things, that imports must increase much
more slowly in coming years than in the past, since otherwise the required growth in
exports would simply be impossible to achieve. If, for example, imports were to grow
at the postwar trend rate of about 12 percent from now through 1993, exports would
have to advance at an annual average rate of about 17 percent to close the trade gap.
The implied rate of export expansion is almost double the average pace during the
postwar period and does not appear to be very plausible.
The bulk of the deficit reduction must come from the trade balance in manufacturing
goods, given that the manufacturing sector accounts for more than four-fifths of the
cumulative external deficit since 1982. Our other international transactions— agricultural
exports, oil imports, and trade in services such as tourism and transportation— are
likely to make only a modest contribution to the adjustment process. Under somewhat
optimistic conditions, those transactions collectively might reduce the international
deficit by about $25 billion or so over the next five years.
For the manufacturing sector to close about 80 percent of the trade gap, industrial
output would have to increase by at least 4 percent at an annual rate over the next
five years, assuming that GNP growth does not stray very far from the 2lA to 23A percent
potential growth range for the economy. This calculation assumes that domestic purchases
of manufacturing goods will increase at the same pace as the overall domestic demand,
about 13A percent per year, and that eliminating the primary external deficit in nominal
terms would require roughly a $130 billion improvement in real net exports. With
present resource constraints for the economy as a whole, the increased manufacturing
output would be adequate for diverting resources to exports and/or to replace imports
with domestic production.
With manufacturing capacity utilization near historical peak levels, output growth
cannot be expected to exceed capacity growth for long if inflationary pressures are to
be contained. Since manufacturing capacity has advanced only about 2 3A percent at an
annual rate in recent years, output growth at the required 4 percent rate over the next
five years is not feasible unless capacity growth accelerates. Eliminating our international
deficit, therefore, will be possible only if there is a significant shift of resources to
the manufacturing sector. In particular, manufacturing investment and capital stock
will have to increase much more rapidly in the future than in recent years to ensure
adequate capacity levels.

A second necessary condition is that the resource diversion into trade and manufacturing
activities be accomplished by eliminating the excess of domestic spending over output.
The movement toward balance in our international transactions requires a drag on
domestic spending and living standards—just as a rising international deficit allowed
us to spend more than we produce, boosting our living standards. At the aggregate
level, over the next five years, the cumulative growth of domestic spending would
have to be two and a half to three percentage points less than GNP growth, and this
implies significant changes in the use of resources.
Theoretically, some of the resource diversion could come from a reduction in investment
spending, as a share of GNP, in nonmanufacturing business and housing sectors. In
recent years, however, net business investment in nonmanufacturing activities has also
declined significantly as a percent of GNP, while net housing investment has barely
held steady. As a result, there does not appear to be much scope for resource diversion
from these sectors at present. To the contrary, and as noted above, investment in both
manufacturing and nonmanufacturing sectors must increase appreciably if we want to
avoid a decline in productivity growth and living standards.
The resource diversion must come, therefore, entirely from changes in spending by
the household and public sectors. In particular, the combined share of consumption
spending and government purchases in GNP would have to be reduced very substantially
between now and 1993, by as much as three and three-fourths percentage points in
total, or about three-fourths of a percentage point per year. With the external deficit
at 2Vi to 3 percent of GNP, this estimate simply restates the adjustment burden in terms
of the combined total of consumption expenditures and government purchases, which
accounts for slightly more than four-fifths of GNP.
Ultimately, all of the external adjustment will be reflected in our consumption of
goods and services, or living standards. For the five-year period as a whole, this implies
that given GNP, consumption would be 4 to 5 percent less in total than what it would
have been without the external adjustment. Assuming that consumption would have
grown at a 2Vi percent average annual rate from now through 1993— roughly in line
with potential growth— the external adjustment would reduce consumption spending
to around IV2 percent at an annual rate. At the current pace of population growth of
around 1 percent, this implies an increase of only about one-half of 1 percent in annual
consumption on a per capita basis, suggesting that the adjustment would be very
difficult but not impractical. In theory, the drag on living standards could be reduced
somewhat by running the economy at a higher rate relative to potential. But this would
clearly risk much higher inflationary pressures since the economy is already near full
employment utilization level of resources.
42

A third necessary condition is that the national saving-investment balance must
improve to match the decline in savings inflows from abroad as the external deficit is
reduced. Over the whole five-year period, the implied improvement in the national
saving-investment balance is essentially equal to the reduction in the external deficit,
on the order of 2Vi to 3 percent of GNP. Since a decline in the ratio of investment to
GNP is highly undesirable, all of the adjustment must come from increases in private
saving and/or reductions in the public sector dissaving/deficit. Some pickup in the
private saving rate is possible but the prospects for a significant recovery appear to be
low. Moreover, the combined state and local government surplus is expected to remain
roughly stable, or perhaps decline somewhat, in relation to GNP. As a practical matter,
therefore, the bulk of the required adjustment to the national saving-investment balance
will have to fall on the federal sector.
Finally, sufficient overall demand expansion in the rest of the world is necessary to
accommodate the external adjustment. A decline in the U.S. international deficit must
obviously be offset by a drop in the external surplus abroad, with most of the adjustment
burden falling on Europe, Japan, and other surplus countries. This would mean faster
growth of foreign domestic spending relative to foreign GNP and implies a significant
diversion of foreign demand and resources away from the trade sector and exportoriented industries and toward home consumption.
In summary, four important conditions must be met for the United States to achieve
external adjustment over the next five years:
• First, our exports must grow much more rapidly than our imports, with the latter
increasing at a substantially slower pace than in the past. The bulk of the contribution
to adjustment must come from trade in manufacturing goods and will require a
significant shift of resources to the manufacturing sector to ensure adequate capital
stock and productive capacity.
• Second, in order to eliminate the domestic spending gap and leave room for the
resource shift to investment in manufacturing capacity, consumption and government
expenditures must grow much more slowly than in the recent past and must
decline relative to GNP.
• Third, the decline in foreign savings inflow, reflecting the improvement in the
external deficit, must be offset by adjustments in the domestic saving-investment
balance; this would require increases in private saving and/or reductions in the
public sector deficit.

• Fourth, the external surplus in the rest of the world must fall to match the decline
in our external deficit; this requires that foreign domestic spending grow at a
faster pace than foreign GNP.

Looking to the Future: The Policy Mix Question
The above discussion suggests a succinct formulation of the external adjustment problem:
To eliminate the export-import gap, we need to improve the trade performance
of the manufacturing sector. And to achieve that improvement, the excess of
domestic spending over production must be reduced in a way that the output share
of net investment spending increases over time, while economic growth continues
broadly in line with the long range potential, thus preventing a significant acceleration
in inflationary pressures. Reducing the output-spending gap in these circumstances
will require that the household and the government sectors reduce their spending
and increase their saving, as GNP shares, in coming years. And to complete the
circle, foreign domestic demand must rise faster than GNP even as both are
maintained at sustainable noninflationary rates.
This formulation of the adjustment problem clearly indicates that we must simultaneously
deal with all three gaps— the export-import gap, the output-spending gap, and the
saving-investment gap. In particular, it emphasizes that achieving a balance on international
transactions will require us to reduce domestic spending on private consumption and
government purchases in order to increase the shares of both national saving and
investment in the economy.
Looking at the adjustment problem in terms of the need to address all three gaps
simultaneously leaves no doubt that the appropriate U.S. macroeconomic policy response
must be to eliminate the federal budget deficit. Importantly, however, the budget deficit
reduction must be aimed at shifting resources to investment spending by lowering
public and private expenditures on other activities. To eliminate the primary external
deficit in the context of stronger investment performance, the size of budget deficit
reduction in the next two years or so will have to be very substantial; for the medium
term, a balanced budget strategy, or perhaps a budgetary surplus, would appear to be
necessary.

A lower budget deficit will help reduce the excess of domestic spending over output,
with the exact manner of that reduction depending on particular fiscal measures adopted.
If the federal budget deficit is brought down by cutting the share of federal government
spending on goods and services, the output-spending gap will be narrowed directly.
If the budget deficit is brought down by raising taxes and/or by lowering government
transfer payments, the output-spending gap will be reduced through lower private
spending.
By reducing dissaving in the economy, a lower budget deficit will directly increase
national saving by the full amount of the deficit reduction, resulting in a larger pool
of domestic funds available for private investment. At the same time, because the
financing needs of the federal government will be smaller, total borrowings will decline
relative to the available supply of funds in domestic financial markets, leading to lower
interest rate pressures than would otherwise be the case— assuming, of course, that
other things remain the same. Some federal budgetary measures, such as tax incentives,
may also have a favorable effect on the private saving rate. But our postwar experience
provides little encouragement in this direction; the only sure way in which the government
can raise the national saving rate is by eliminating its own deficit or even running a
budgetary surplus.
Of course, monetary policy has an important role to play in the adjustment process.
It must aim at avoiding inflationary overheating while attempting to maintain economic
growth broadly in line with the long-range potential of the economy. Monetary policy
is not at all well suited, however, to the task of increasing the investment share of
GNP while closing the domestic output-spending gap. More generally, monetary policy
cannot effectively increase savings or switch resources from consumption into investment
and the international trade sector.
The suggested fiscal/monetary policy mix has no unambiguous implications for the
dollar exchange rate. Changes in the domestic spending and saving/investment imbalances
resulting from the policy mix may prove adequate to achieve a balance on our primary
international deficit without any significant change in the average medium-term exchange
value of the dollar. That is, the recent real dollar exchange rate, which is around or
somewhat below the 1980 average level, may be consistent with accommodating the
required shift in the share of total world spending to U.S. goods and services from
foreign goods and services. We do not know, of course, what level of the dollar over
time will be associated with full external adjustment. It will be determined by a broad
range of factors such as inflation rates here and abroad, relative productivity performance,
and actual or perceived improvements in the U.S. macroeconomic imbalances. Depending
on developments in those factors, the level of the dollar that will be eventually associated

with complete external adjustment may turn out to be lower or higher than its present
value.
However, by themselves, further sharp drops in the exchange value of the dollar at
a time of high capacity utilization will probably not make a significant net positive
contribution to the adjustment process. Indeed, such drops can cause a great deal of
harm: they will surely contribute to inflation and inflationary expectations, reinforcing
domestic wage and price pressures; they can also push up interest rates, discouraging
domestic investment. More generally, they may disrupt financial markets and economic
stability.
Overall, it seems clear that the fiscal/monetary policy mix along the lines suggested
here offers, by far, the best course for achieving external adjustment while maintaining
continued economic and financial stability. The main point is that without a major shift
in federal budgetary policy, it will not be possible to accomplish the task of external
adjustment with continuing economic stability. Put somewhat differently, combinations
of monetary policy and exchange rate changes will simply not produce a satisfactory
adjustment of our domestic spending and saving/investment imbalances. Even with
the budget deficit reduction in place, the adjustment process may not prove to be
smooth. The time path of adjustment will most likely be uneven and there are bound
to be setbacks along the way. Uncertainties about the extent and timing of policy
effects entail considerable risks as does the fact that an interruption of economic
expansion cannot be ruled out.

Facilitating the Adjustment Process
As the U.S. export-import gap declines, the external surplus of the rest of the world—
and of foreign industrial countries in particular— will drop, leading to lower foreign
GNP growth. The adjustment process will be facilitated if this external sector drag on
foreign output is offset by sufficient domestic demand so as to maintain a sustainable
pace of overall noninflationary economic growth. This will require a policy mix abroad
that directs output away from the external sector and toward home demand, leading
to faster increases in living standards in the surplus countries.
Continued foreign economic growth, supported by a significant contribution from
domestic demand, would result in a larger improvement in international imbalances
than if the external sector drag on foreign growth were not offset. This approach would
also reduce the risk to the stability of financial markets and the world economy.
Nevertheless, economic policy changes abroad to offset the external sector drag on
46

foreign economic growth will not resolve the U.S. domestic imbalances of overspending
on consumption and undersaving/underinvestment in the economy. Similarly, selective
trade policy initiatives, such as measures to encourage other countries to move toward
greater openness and liberalization of their markets, would be helpful during the
adjustment process. But they too will not deal with our domestic macroeconomic
imbalances. In any event, although the favorable effects of such measures on our
international balance over the next few years would appear to be modest in economic
terms, they will be large enough in the context of efforts to contain protectionist
tendencies here in the United States.

A SUMMARY VIEW OF THE ADJUSTMENT PROBLEM
On present expectations, our overall external deficit will improve somewhat over the
next several quarters, but it will remain in excess of $100 billion at least through 1990.
The persistence of large external deficits over the last six years has already done
considerable damage to the long-term foundations of the economy, and the corrosive
effects are now accumulating at a rapid pace. In the period ahead, continuing large
deficits will also pose a growing threat to financial and economic stability since the
economy is now operating very near full capacity utilization of its resources.
The international deficit, which reflects overspending on consumption and undersaving/
underinvestment in the U.S. economy, must be essentially eliminated over time in a
context in which the net investment share of output is rising and noninflationary
economic growth continues broadly in line with the long range potential. The rise in
the investment share is necessary to stop and reverse the corrosive effects of the recent
decline in the rate of capital formation relative to output on future productivity and
living standards.
Automatic forces by themselves will not produce the desired result on the adjustment
problem, although sooner or later those forces might well eliminate the international
deficit at the cost of creating major disruptions in the economy. After all, a nation
cannot spend more than it produces forever: Moreover, even with major policy initiatives,
to expect the external deficit to be eliminated over the next year or two would be
unrealistic. It will take a number of years to eliminate the international deficit, and
the adjustment process will have to be sufficiently gradual to sustain continuing economic
growth and price stability.
Macroeconomic policy options to deal with the adjustment problem are quite limited.

Monetary policy cannot effectively increase savings or switch resources from consumption
into investment and the international trade sector. The only reasonable course, therefore,
is to plan on eliminating the federal budget deficit over the next few years. This would
greatly help in increasing national saving and would relieve congestion in domestic
financial markets as demands for borrowing go down relative to the supply of domestic
funds.
If the adjustment process is to work out in an environment of continuing economic
growth abroad and financial stability in the world economy, the foreign industrial
countries as a group would have to offset the external sector drag on their economic
growth. This will facilitate the adjustment process and reduce the risk to financial and
economic stability in the world economy. But the maintenance of significant economic
growth abroad will not resolve our domestic saving and investment imbalances.
In sum, reducing and eventually eliminating the U.S. federal budget deficit is
necessary, although not sufficient, to deal with the external adjustment problem. Viable
policy alternatives simply do not exist, and to count on private forces to shift a large
amount of resources smoothly from consumption into saving, investment, and the
international sector seems impractical; history clearly provides no support for this
expectation. To minimize the risk of failure, a credible plan to eliminate the budget
deficit over the next few years must be set up sooner rather than later. Even with a
budget deficit plan, the adjustment process will be slow and difficult. Nevertheless,
it would offer us the best hope of achieving external adjustment with continuing
noninflationary growth and with significantly higher levels of investment needed for
the long-term well-being of the economy. This adjustment path would also help maintain
confidence in America’s economic strength and leadership, which remain critical for
worldwide peace and prosperity.

Financial Statements
STATEMENT OF EARNINGS AND EXPENSES FOR
THE CALENDAR YEARS 1988 AND 1987 (InDollars)
1988

1987

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

6,380,785,220

5,610,066,755

Net expenses*.........................................................................

166,458,976

Current net earnings

6,214,326,244

171,855,794
5,438,210,961

Additions to current net earnings:
Profit on sales of United States government
securities and federal agency obligations (net)............................

7,264,559

Profit on foreign exchange..........................................................

13,476,274
434,830,746

Allother..................................................................................

990,764

Total additions.........................................................................

8,255,323

149,447
448,456,467

Deductions from current net earnings:
Loss on foreign exchange..........................................................

134,871,105

Allother...................................................................................

6,058,959

------7,915,250

Total deductions.......................................................................

140,930,064

7,915,250

Net additions (deductions)

(132,674,741)

440,541,217

Board expenditures....................................................................

22,217,800

20,642,300

Federal Reserve currency costs...................................................

53,879,756

53,905,512

Total assessments

76,097,556

74,547,812

Assessment by the Board of Governors:

Net earnings available for distribution

6,005,553,947

5,804,204,366

Distribution of net earnings:
Dividends paid.........................................................................

33,109,144

30,455,531

Transferred to surplus................................................................

24,741,350

75,044,550

Payments to United States Treasury
(interest on Federal Reserve notes)...........................................
Net earnings distributed

5,947,703,453
6,005,553,947

5,698,704,285
5,804,204,366

Surplus account
Surplus - beginning of year........................................................

541,045,900

466,001,350

Transferred from net earnings....................................................

24,741,350

75,044,550

Surplus - end of year

565,787,250

541,045,900

* Includes a $70 million credit for the Federal Reserve System in 1988 and a $49 million credit for the 12 Reserve Banks
in 1987, resulting from the implementation of FASB87 — Employers’ Accounting for Pensions — effective January 1987.

STATEMENT OF CONDITION
In Dollars
Assets

DEC. 3 0 ,19 8 8

DEC. 3 1 , 1 9 8 7

Gold certificate account..............................................................

3,309,987,701

3,177,290,421

Special drawing rights certificate account.....................................

1,489,000,000

Coin........................................................................................

14,119,621

16,279,966

Total

4,813,107,322

4,682,570,387

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

33,700,000

2.786.700.000

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

79,854,640,160

70,429,481,550

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

4,760,465,000

3.645.235.000

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

2,380,814,655

2,430,086,784

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

2,100,735,000

1.315.470.000

Total loans and securities

$89,130,354,815

80,606,973,334

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

1,234,629,280

934,827,927

Bank premises.........................................................................

31,911,552

33,425,781

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

4,461,809,404

3,444,024,737

Total other assets

5,728,350,236

4,412,278,445

113,601,755

1,448,815,867

99,785,414,128

91,150,638,033

2,382,700,000

926,730,000

United States government securities:

Federal agency obligations:

Other assets:

Interdistrict settlement account....................................................
Total assets

‘ Includes securities loaned—fully secured.....................................

flncludes assets denominated in foreign currencies revalued monthly at market rates.

STATEMENT OF CONDITION
In Dollars
Liabilities

DEC. 3 0 ,19 8 8

DEC. 3 1 , 1 9 8 7

78,077,575,955

70,471,503,947

Depository institutions................................................................

9,198,734,175

11,652,719,955

United States Treasury - general account.....................................

8,656,496,496

5,312,879,052

Foreign - official accounts..........................................................

236,550,840

130,344,855

310,581,213

437,345,892

18,402,362,724

17,533,289,754

Federal Reserve notes (net)........................................................
Reserve and other deposits:

Total deposits

Other liabilities:
Deferred availability cash items...................................................

795,092,310

875,600,715

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

1,378,808,639

1,188,151,817

Total other liabilities

2,173,900,949

2,063,752,532

Total liabilities

98,653,839,628

90,068,546,233

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

565.787.250

541.045.900

Surplus....................................................................................

565.787.250

541.045.900

Total capital accounts

1,131,574,500

1,082,091,800

Total liabilities and capital accounts

99,785,414,128

91,150,638,033

Capital accounts

Includes outstanding foreign exchange commitments revalued at market rates.

Changes in Directors and Senior Officers
CHANGES IN DIRECTORS. In May 1988, the Board of Governors of the Federal
Reserve System appointed Maurice R. Greenberg a Class C director for the unexpired
portion of the term of John Brademas ending December 31, 1988, and in September
reappointed him for the three-year term beginning January 1, 1989. Mr. Greenberg is
President and Chief Executive Officer of American International Group, Inc., New
York, N.Y. Dr. Brademas, President of New York University, resigned as a Class C
director on April 30, 1988, having served as a Class C director since January 1983
and as Chairman and Federal Reserve Agent from 1983 to 1986.
In September 1988, the Board of Governors appointed Ellen V. Futter Deputy
Chairman for the remaining portion of the year 1988, and in December reappointed
her Deputy Chairman for the year 1989. Ms. Futter, President of Barnard College,
New York, N.Y., has been serving as a Class C director since January 1988.
Also in September, the Board of Governors appointed Cyrus R. Vance a Class C
director, effective January 1, 1989, for the unexpired portion of the term of John R.
Opel ending December 31, 1989, and designated him Chairman of the board of directors
and Federal Reserve Agent for the year 1989, also succeeding Mr. Opel. Mr. Vance
is the presiding partner in the New York law firm of Simpson Thacher & Bartlett. Mr.
Opel, Chairman of the Executive Committee of International Business Machines Cor
poration, New York, N.Y., had been serving as a Class C director and as Chairman
and Federal Reserve Agent since January 1987; he also served as a Class B director
from January 1981 through December 1986.
In December 1988, member banks in Group 1 reelected John F. McGillicuddy a
Class A director, and Richard L. Gelb a Class B director, both for three-year terms
beginning January 1, 1989. Mr. McGillicuddy, Chairman of Manufacturers Hanover
Trust Company, New York, N.Y., has been serving as a Class A director since February
1988. Mr. Gelb, Chairman of Bristol-Myers Company, New York, N.Y., has been
serving as a Class B director since January 1986.

Buffalo Branch. In September 1988, the Board of Governors of the Federal Reserve
System reappointed Mary Ann Lambertsen a director of the Buffalo Branch for a threeyear term beginning January 1, 1989, and the board of directors of this Bank redesignated
her Chairman of the Branch board for the year 1989. Mrs. Lambertsen, Vice PresidentHuman Resources of Fisher-Price, Division of The Quaker Oats Company, East Aurora,
N.Y., has been a director of the Branch and Chairman of the Branch board since
January 1986.
52

At the same time, the board of this Bank appointed Richard H. Popp a director of
the Buffalo Branch for a three-year term beginning January 1, 1989. Mr. Popp, Operating
Partner of Southview Farm, Castile, N.Y., succeeded Donald I. Wickham, President
of Tri-Way Farms, Inc., Stanley, N.Y., who had served as a Branch director since
January 1983.
Also in September, the board of this Bank appointed Robert G. Wilmers a director
of the Buffalo Branch for a three-year term beginning January 1, 1989. Mr. Wilmers,
Chairman of Manufacturers and Traders Trust Company, Buffalo, N.Y., succeeded R.
Carlos Carballada, President and Chief Executive Officer of Central Trust Company,
Rochester, N.Y., who had served as a Branch director since January 1986.
CHANGES IN SENIOR OFFICERS.
The following changes in the official staff at
the level of Vice President and above have occurred since the publication of the previous

Annual Report:
James H. Oltman, formerly Executive Vice President and Special Counsel, was
appointed to the position of First Vice President and Chief Administrative Officer,
effective July 1, 1988, for the unexpired portion of the five-year term of Thomas M.
Timlen ending February 28, 1991. Mr. Timlen elected early retirement effective July
1, 1988, after completing more than 32 years of distinguished service with the Bank,
including 12 years as First Vice President.
Effective January 1, 1989:
Om P. Bagaria, formerly Assistant Vice President, was appointed Vice President
and assigned to the Systems Development Function.
Paul B. Bennett, formerly Senior Research Officer, was appointed Vice President
and Economic Adviser and assigned to the Research Function.
Joseph P. Botta, Vice President, was assigned responsibility for the new Technical
Development Staff of the Operations Group.
Kathleen A. O’Neil, formerly Chief Financial Examiner, was appointed Vice President
and Chief Financial Examiner and assigned to the Bank Examinations Function, reporting
to Robert A. O’Sullivan, Vice President.
Effective February 2, 1989, Susan C. Young, Vice President, elected deferred early
retirement.

Directors of the Federal Reserve Bank of New York
Term expires Dec. 31

D IR E C T O R S

A lb e r t o M . P a r ac c h in i ...................................................................................................................

Class

1989

1990

1991

1989

1990

1991

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

1989

E l l e n V. F u t t e r , D ep u ty Chairm an ..........................................................................................

1990

1991

Chairman of the Board and President, Banco de Ponce, Ponce, Puerto Rico

J. K irby F o w ler

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

President and Chief Executive Officer, The Flemington National Bank and Trust Company,
Flemington, N .J.

J ohn F. M c G il lic u d d y .....................................................................................................................
Chairman of the Board, Manufacturers Hanover Trust Company, N ew York, N Y .

J ohn A . G eo r g es ................................................................................................................................
Chairman of the Board, International Paper, Purchase, N Y .

J oh n F. W e l c h , J r ................................................................................................................................
Chairman o f the Board, GE, Fairfield, Conn.

R ic h a rd L . G el b

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

Chairman of the Board, Bristol-Myers Company, N ew York, N Y .

C yrus R . V a n c e , Chairm an a n d F ederal R e serve A g e n t
Presiding Partner, Simpson Thacher & Bartlett, N ew York, N.Y.

President, Barnard College, N ew York, N.Y.

M a u r ic e R. G r e e n b e r g

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

President and Chief Executive Officer, American International Group, Inc., N ew York, N.Y.

D IR E C T O R S — B U F F A L O B R A N C H

M atth ew A u g u s t i n e .........................................................................................................................

1989

President and Chief Executive Officer, Eltrex Industries, Inc., Rochester, N.Y.

H arry J. S ull iv a n

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

1989

President, Salamanca Trust Company, Salamanca, N.Y.

P a u l E . M c S w e e n e y .........................................................................................................................

1990

Executive Vice President, United Food and Commercial Workers District Union (Local 1), AFL-CIO,
Amherst, N.Y.

N orm an W. S i n c l a i r .........................................................................................................................

1990

Chairman of the Board, Lockport Savings Bank, Lockport, N.Y.

M ary A nn L a m b e r t s e n , Chairm an ............................................................................................

1991

Vice President-Human Resources, Fisher-Price, Division of The Quaker Oats Company, East Aurora,
N.Y.

R ich a rd H . P o p p ..................................................................................................................................

1991

Operating Partner, Southview Farm, Castile, N.Y.

R ob er t G . W i l m e r s ............................................................................................................................
Chairman o f the Board, Manufacturers and Traders Trust Company, Buffalo, N.Y.

1991

Advisory Groups

FEDERAL ADVISORY COUNCIL
SECOND DISTRICT MEMBER AND ALTERNATE MEMBER
W i l l a r d C . B u t c h e r , M em ber
Chairman of the Board, The Chase Manhattan Bank (National A ssociation), N ew York, N.Y.

THOMAS
LaBRECQ UE, A lternate M em ber
President, The Chase Manhattan Bank (National Association), N ew York, N.Y.

ADVISORY COUNCIL ON
SMALL BUSINESS AND AGRICULTURE

ROBERT
BlT Z , Chairman
President, Plainville Turkey Farm, Inc., Plainville, N.Y.
G eo rg e E . A l l e n
Manager and President, Allenwaite Farms, Inc., Schaghticoke,
N.Y.
I r v in g S . C a p l a n
President, National Army Stores Corp., Malone, N.Y.
H arry G . C h arlsto n
President, Apollo Audio-Visual, Ronkonkoma, N.Y.
Judy C o lum bus
President, Judy Columbus Inc., Realtors, Rochester, N.Y.

P a tr ic ia
D u n can son
President, Duncanson Electric C o., Inc., Long Island City, N.Y.
Jerri S h e r m a n H e sso l
President, Jerri Sherman Ltd., N ew York, N.Y.
C h a r l e s L . L a in
President, Pine Island Turf Nursery, Inc., Sussex, N .J.

Jam es
Shaw
President, Shaw Aero D evices, Inc., Wainscott, N.Y.

THRIFT INSTITUTIONS ADVISORY PANEL

D a v id
A . C arson
President, People’s Bank, Bridgeport, Conn.
S pe n c e r S . C row
Chairman and President, Maple City Savings and Loan
Association, Hornell, N.Y.
B e a t r ic e R . D ’A g o s t i n o
President and Chief Executive Officer, N ew Jersey Savings
Bank, Somerville, N .J.
H e n r y D r e w it z
Chairman and President, Astoria Federal Savings and Loan
Association, Jackson Heights, N.Y.

John
M organ
Chairman, American Savings Bank, FSB, White Plains, N.Y.

G e r a ld
M urph y
President, Garden State Corporate Central Credit Union,
Hightstown, N .J.
R o b e r t B . O ’B r i e n , J r .
Chairman and President, Carteret Savings Bank, FA,
Morristown, N .J.
P a u l A . W il l a x
Chairman, Empire of America, FSB, Buffalo, N.Y.

Officers of the Federal Reserve Bank of New York
E . G e r a l d C o r r i g a n , President
JAMES H . OLTMAN, First Vice President

SAM Y . CROSS, Executive Vice P resident
Foreign

FREDERICK C . SCHADRACK, Executive Vice President
Bank Supervision

SUZANNE C u t l e r , Executive Vice President
Operations

PETER D . S t e r n LIGHT, Executive Vice P resident
Open Market

E r n e s t T. PATRIKIS, Executive Vice President
and G eneral Counsel
Legal

STEPHEN G. T hIE K E , Executive Vice President
Credit and Capital Markets

ACCOUNTING

SYSTEMS DEVELOPMENT

R a l p h A. C a n n , III, Vice President
R i c h a r d J. G eL SO N , Vice President
L e o n R. H o l m e s , A ssistan t Vice President
DONALD R. A n d e r s o n , Manager, Accounting D epartm ent
JANET K. R o g e r s , M anager, Accounting D epartm ent

Om P. B a g a r i a , Vice President

AUDIT
JOHN E . F l a n a g a n , G eneral Auditor
ROBERT J. A m b r o s e , A ssistan t G eneral Auditor
L o r e t t a G. ANSBRO, Audit Officer
E l i z a b e t h S . iR W IN -M cC A U G H EY , M anager, Auditing
D epartm ent
IRA LEVINSON, Manager, A udit Analysis D epartm ent

AUTOMATION AND ELECTRONIC
PAYMENTS GROUP
ISRAEL SENDROVIC, Senior Vice President

DATA PROCESSING
PETER J. FU LLEN , Vice President
RONALD J. C l a r k , A ssistan t Vice President
JAMES H . G aV E R , A ssistan t Vice President
GEORGE LuKOWICZ, A ssistan t Vice P resident
PETER M . G o r d o n , M anager, O perations and
Comm unications Support D epartm ent
GERALD H a y d e n , Manager, General Com puter Operations
D epartm ent
JOHN C. HEIDELBERGER, M anager (Evening Officer)
KENNETH M . LEFFLER, M anager, Contingency Operations
D epartm ent
LENNOX A. M YRIE, M anager, Fedwire and Comm unications
O perations D epartm ent

PATRICIA Y . J u n g , A ssistan t Vice P resident
MONIKA K. N o V IK , A ssistan t Vice President
CLAUDIA H . C o u c h , Manager, Funds Transfer System s
D epartm ent
VlERA A. CROUT, M anager, Common System s D epartm ent
CHRISTOPHER M . K e l l , System s D evelopm ent Officer
JOSEPH E. MCCOOL, M anager, Funds Transfer System s
D epartm ent
MARIE J. V e i t , M anager, Funds Transfer System s
D epartm ent
MlRIAM I. W lEBOLDT, M anager, D ata System s D epartm ent

BANK SUPERVISION GROUP
FREDERICK C. SCHADRACK, Executive

Vice P resident

BANK EXAMINATIONS
CHESTER B . FELDBERG, Senior Vice President
R o b e r t A. O ’S u l l i v a n , Vice President
K a t h l e e n A. O ’N e i l , Vice P resident and C hief Financial
Examiner
W i l l i a m L. R u t l e d g e , vic e President
JAMES K . HODGETTS, C hief Compliance Examiner
ISRAEL B eR K M AN , Examining Officer, M ultinational Banking
D epartm ent
MARGARET E. B r u s h , A ssistan t C hief Examiner,
Compliance Examinations D epartm ent
BARBARA A. K l e i n , Examining Officer, International
Banking D epartm ent
A. JOHN M a h e r , A ssistan t C hief Examiner, Specialized
Examinations D epartm ent
THOMAS P. M cQ U E E N E Y , A ssistan t C hief Examiner,
International Banking D epartm ent

Officers

(Continued)

GERALD P. M lN E H A N , A ssistan t C h ief Examiner,
M ultinational Banking D epartm ent
ALBERT T o s s , A ssistan t C h ief Examiner, D om estic Banking
D epartm ent
WALTER W. ZUNIC, Examining Officer, International
Banking D epartm ent

EQUAL EMPLOYMENT OPPORTUNITY

BANKING APPLICATIONS

FOREIGN e x c h a n g e

CHESTER B . FELDBERG, Senior Vice P resident
W i l l i a m L . R u t l e d g e , Vice P resident
JOHN S. CASSIDY, A ssistan t Vice P resident
JAMES P. B a r r y , M anager, Supervision Support D epartm ent

MARGARET L. G r e e n e , Senior Vice President
DAVID L. R o b e r t s , A ssistan t Vice P resident
W lLLENE A. JOHNSON, Manager, Foreign Exchange
D epartm ent, and A ssistan t Secretary
MICHAEL J . PA U LUS, Foreign Exchange Trading Officer

DONALD R . M o o r e , Equal E m ploym ent O pportunity Officer

FOREIGN GROUP
SAM Y . CROSS, E xecutive Vice P resident

BANKING STUDIES AND ANALYSIS

A n d r e w SPINDLER, Vice P resident
BETSY BUTTRILL W h i t e , Vice President
L e o n KOROBOW, A dviser
PETER S. H o l m e s , Banking R esearch Officer
DONALD E . S c h m id , M anager, Bank Analysis D epartm ent

CREDIT AND CAPITAL MARKETS GROUP
STEPHEN G . T h IE K E , Executive Vice P resident

DEALER SURVEILLANCE
B a r b a r a L . W a l t e r , Vice President
G a r y HABERMAN, Adviser
EDWARD J. OZOG, A ssistan t Vice P resident

FOREIGN RELATIONS
IRWIN D. SANDBERG, Senior Vice President
TERRENCE J . CHECKI, Vice President
G e o r g e W. R y a n , Vice P resident
CARL W. TURNIPSEED, A ssistan t Vice P resident
GEORGE H . B o s s y , M anager, D eveloping N ations S ta ff
HlLDO N G . JAMES, M anager, Foreign R elations D epartm ent
FRANCIS J . REISCHACH, M anager, Foreign R elations
D epartm ent

FUNDS AND SECURITIES GROUP
CATHY E. M lN EH A N , Senior Vice P resident
ELECTRONIC PAYMENTS

INTERNATIONAL CAPITAL MARKETS
CHARLES M . L u c a s , Senior Vice P resident
CHRISTINE M . CUMMING, A ssistan t Vice President
CHRISTOPHER J. M c C u r d y , A ssistan t Vice President
ANDREW T. H o o k , Senior International Econom ist

C a r o l W . B a r r e t t , Vice P resident
D a n i e l C . B oLW E L L, A ssistan t Vice President
H . JOHN COSTALOS, A dviser
HENRY F. W i e n e r , A ssistan t Vice P resident
ANDREW H eIK A U S , M anager, Funds Transfer D epartm ent
PATRICIA H lL T -L U PA C K , M anager, Securities Transfer
D epartm ent

LOANS AND CREDITS
ROBERTA J. G r e e n , Senior Vice President
JOHN W e n n i n g e r , A ssistan t Vice P resident
FRANKLIN T. L o v e , M anager, Credit and D iscount
D epartm ent

FISCAL SERVICES
W h i t n e y R . I r w i n , Vice P resident
PAULINE E. C h e n , Manager, Governm ent Bond D epartm ent
JOHN J . STRICK, M anager, Savings B ond D epartm ent
JO A N NE M . VALKOVIC, M anager, Safekeeping D epartm ent

PAYMENTS SYSTEM STUDIES
ROBERTA J . G r e e n , Senior Vice P resident
G e o r g e R . J u n c k e r , Vice President
ANDREW T. H o o k , Senior International Econom ist

Officers

(Continued)

LEGAL

PRICING AND PROMOTION

ERNEST T. PATRIKIS, Executive Vice P resident and General
Counsel
T h o m a s C. B a x t e r , J r . , A ssociate General Counsel
JOYCE E. M oTYLEW SKI, A ssociate G eneral Counsel
D o n N . R i n g s m u t h , A ssociate G eneral Counsel
B r a d l e y K. S a b e l , Counsel
R a l e i g h M . T o z e r , Counsel
PETER RYERSON F i s h e r , A ssociate Counsel
ERIC A . M a r t i n , A ssociate Counsel
W e b s t e r B . W h i t e , A ssociate Counsel

HOWARD F. C r u m b , Senior Bank Services Officer
B r u c e A. CASSELLA, Bank Services Officer

SERVICE
J o h n M . E ig h m y , Vice P resident
R o b e r t V. M u r r a y , Vice P resident
WILLIAM J . K e l l y , Manager, P rotection D epartm ent
J e r o m e P. PERLONGO, M anager (N ight Officer)
JOSEPH R. PRANCL, J r . , M anager, Food and Office Services
D epartm ent

OPEN MARKET GROUP
P e t e r D . S t e r n l i g h t , Executive Vice President
JOAN E . L o v e t t , Vice P resident
R o b e r t W. D a b b s , A ssistan t Vice President
K e n n e t h J. GUENTNER, A ssistan t Vice President
DONALD T. VANGEL, A ssistan t Vice President
SANDRA C . KRIEGER, M anager, Open M arket D epartm ent
A N N -M A R IE M EULENDYKE, M anager, Open M arket
D epartm ent

OPERATIONS GROUP

TECHNICAL DEVELOPMENT
JOSEPH P. BOTTA, Vice P resident
T h o m a s J. L a w l e r , M anager

PERSONNEL
JAMES O . A s t o n , Vice P resident
R o b e r t C. SCRIVANI, A ssistan t Vice P resident
EVELYN E . KENDER, M anager, Personnel D epartm ent
ELAINE D. M aURIELLO , M anager, Personnel D epartm ent

SUZANNE C u t l e r , E xecutive Vice P resident
PLANNING AND CONTROL
BUILDING SERVICES
JOHN M . ElGHMY, Vice President
JASON M . S t e r n , A ssistan t Vice P resident
PAUL L . M c E v iL Y , A ssistan t Vice P resident
JOSEPH D . J. D eM a R T IN I, M anager, Adm inistrative
Support Services D epartm ent
JOSEPH C . M e e h a n , M anager, Building Services
D epartm ent

R a l p h A. C A N N , III, Vice P resident
NlRM AL V . MANERIKAR, A ssistan t Vice P resident
NATHAN B eD N A R SH , M anager, M anagem ent Information
D epartm ent

PUBLIC INFORMATION
P e t e r BAKSTANSKY, Vice President
R i c h a r d H . H oE N IG , A ssista n t Vice President

CASH PROCESSING
R o b e r t M . A b p l a n a l p , Vice President
M a r t i n P. C uSIC K , A ssistan t Vice P resident
EDWARD J. CHURNEY, M anager, Paying and Receiving
D epartm ent
L lLLIE S . W e b b , M anager, Currency Verification D epartm ent
MICHAEL L . ZIMMERMAN, M anager, O perations Support
D epartm ent

CHECK PROCESSING
R o b e r t M . A b p l a n a l p , Vice P resident
JOHN F. SOBALA, Vice P resident
FRED A . DENESEVICH, R egional M anager (Cranford Office)
S t e v e n J . GAROFALO, A ssistan t Vice P resident
A NG US J. K e n n e d y , Regional M anager (U tica Office)
ANTHONY N . SAGLIANO, R egional M anager (Jericho Office)
MATTHEW J. PUGLISI, M anager, Check Services D epartm ent

RESEARCH AND STATISTICS GROUP
RICHARD G . D a v i s , Senior Vice President and D irector o f
Research

RESEARCH
M . AKBAR AKHTAR, Vice President and A ssistan t D irector
o f Research
PAUL B . B e n n e t t , Vice President and Econom ic A dviser
EDWARD J . FRYDL, Vice President and A ssistan t D irector o f
Research
LAWRENCE J. RADECKI, Senior R esearch Officer
A. STEVEN E n g l a n d e r , R esearch Officer and Senior
E conom ist
ARTURO E s t r e l l a , R esearch Officer and Senior Econom ist
SUSAN A . HlCKOK, R esearch Officer and Senior E conom ist

Officers

(Continued)

ROBERT N . M c C a u l e y , R esearch Officer and Senior
E conom ist
CHARLES A . PiGOTT, R esearch Officer and Senior Econom ist
DOROTHY M . S o b o l , R esearch Officer and Senior
Econom ist

SECRETARY’S OFFICE
M i c h e l e S . G o d f r e y , Secretary
W lLLEN E A . JOHNSON, M anager, Foreign Exchange
D epartm ent, and A ssistan t Secretary
THEODORE N . OPPENHEIMER, A ssistan t Secretary

STATISTICS
SUSAN F. M o o r e , Vice P resident
N a n c y BeRCOVICI, A ssistan t Vice President
PAULA B . SCHWARTZBERG, M anager, International R eports
and Support D epartm ent

SECURITY CONTROL
H e r b e r t W . W h i t e m a n , J r . , Security A dviser
RICHARD P. PASSADIN, Security Officer

OFFICERS — BUFFALO BRANCH
JOHN T . K e a n e , Vice President and Branch M anager
PETER D . L u c e , A ssistan t Vice P resident

BANK SERVICES AND PUBLIC INFORMATION; PERSONNEL;
PROTECTION

BUILDING OPERATING; CHECK; SERVICE
D a v id

SCHWARZMUELLER, O perations Officer

R o b e r t J. M c D o n n e l l , O perations officer

CASH; CENTRAL OPERATIONS; CREDIT, DISCOUNT, AND
FISCAL AGENCY
G a r y S . W EINTRAUB, Cashier

THE SECOND FEDERAL RESERVE DISTRICT

CANADA

PLATTSBURG
OGDENSBURG

WATERTOWN
GLENS FALLS
UTICA
SCHENECTADY
SYRACUSE
ROCHESTER
#

NEW YORK

MASS.

A LBANY

BUFFALO
BINGHAMTON

CONN.

POUGHKEEPSIE

ELMIRA
JAMESTOWN

BRIDGEPORT

NEWARK
;

jCRANFORD®

NEW*BRUNSWICK

JERICHO

HEAD OFFICE TERRITORY
BUFFALO BRANCH TERRITORY

Full text of Annual Report of the Federal Reserve Bank of New York : Seventy-Fourth Annual Report for the Year Ended December 31, 1988

FRASER