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m To Ox ir Member Hanks: W e are pleased to present the Annual Report o f the Federal Reserve Bank o f Richm ond fo r 1969. The report features a review o f background factors affecting interest rates in the 1960’s. Also in cluded are the Bank’s annual financial statements, a brief summary o f the highlights o f the year’s operations, and a current list o f officers and directors at our Richmond, Baltimore, and Charlotte offices. On beh alf o f our directors and staff, we wish to thank you fo r the splendid cooperation and support you have extended to us throughout the past year. Sincerely yours, Chairman of the Board Pr es ide nt THE FEDERAL RESERVE BANK OF RICHMOND Fifty-Fifth A nnual Report Contents ■ SOME BACKG ROUN D FA CTO R S A F F E C T IN G IN TE RE ST R A T E S IN THE 196 0 ’S 4 The Domestic Economy 6 The External Accounts and the Foreign Sector 8 The Changing Institutional Pattern 10 The Policy Environment 14 The Course o f Rates 20 ■ HIGH LIGHTS OF 1969 25 Summary o f Operations 29 ■ C O M P A R A T IV E S T A T E M E N T S 30 Condition 30 Earnings and Expenses 31 DIRECTORS 32 ■ ■ ■ OFFICERS 33 B R A N C H DIRECTORS 34 SOME BACKGROUND FACTORS AFFECTING INTEREST RATES IN THE lQdO'S The Soaring Sixties have now passed into history, leaving behind a m ixed record o f econom ic and financial perform ance that will no doubt long occupy and intrigue econom ic theorists as well as business annalists. It is, o f course, premature to evaluate the legacy o f this ten-year period at this close range. Y et even a cursory review o f the record invites the temptation to label it one o f the most interesting decades in the country’s econom ic history. W hile this applies to the overall perform ance of the econom y, it seems preem inently applicable to the financial vicissitudes o f the period and especially to the behavior o f interest rates over the final half o f the decade. F or a generation prior to the Sixties, U. S. financial markets had becom e accustom ed to interest rate levels which, by historical standards, w ere extrem ely low. Through the depressed 1930’s, with business credit demands at a low ebb, most market rates were frequently under 3 per cent and yields on some short-term Government obligations were often under 1 per cent. During W orld W ar II easy m oney policies to facilitate w ar financing kept rates at close to these unusually low levels even in the fa ce o f heavy Treasury borrow ing and grow ing busi ness demands fo r credit. F or six years follow in g termination o f the war, the Federal Reserve continued the policy, instituted in 1942, o f pegging the prices o f Government bonds at close to the low coupon rates com m on at that time. This policy led to large increases in bank reserves, with correspondingly large increments in credit supplies that kept rates from rising significantly even in the fa ce o f grow ing de mands fo r credit. In M arch 1951 the Treasury-Federal Reserve A ccord form ally ended the policy o f pegging the prices o f Governments, although the Federal Reserve publicly acknow ledged a commitment to intervene in the m arket w henever disorderly conditions threatened to develop. F ollow ing the A ccord , yields on m arket instruments began to reflect 4 more closely changing demand conditions in the several markets fo r loan funds, as well as basic supply conditions as m odified by credit policy measures. In particular, they exhibited a classical cyclical pattern, moving upward in periods o f strong business expansion, when credit demands were heavy, and dow nw ard in periods o f slack busi ness, when credit demands eased o ff and policy restraints were being relaxed. This was the typical pattern throughout the rem ainder o f the decade o f the 1950’s. Most rates drifted upward substantially in the business expansions o f 1950-53, 1954-57, and 1958-59, with the movements reversed sharply in the business recessions o f 1953-54 and 1957-58. Nevertheless, the general trend o f rates over this period was m oderately upward and a w eighted average o f rates in the 1950’s would show substantial increases over com parable figures for 1940 and fo r the second half o f the decade o f the 1930’s. Com pared with experience in the preceding 30 years, interest rate behavior in the 1960’s was dramatic indeed. Although virtually all the drama was confined to the last half of the decade, it seems likely that in many quarters the Soaring Sixties will be rem em bered best for soaring interest rates. By the end o f the decade, yields in many sectors o f the money and capital markets reached levels that had not been seen in more than a century. The factors that figure in the dram atic behavior o f rates in the 1960’s are multifarious and com plex and cannot be adequately analyzed in the brief scope of this report. The Vietnam W ar and sizable Federal deficits clearly played a m ajor role, although no attempt is made to evaluate their effects here. It is equally clear that the gen eral behavior of rates was heavily conditioned by a number o f other broad background factors that may not have been given sufficient at tention in the contem poraneous com mentaries o f market analysts. Taking a longer-run viewpoint, fo r exam ple, it is not possible to under stand the behavior o f rates in the 1960’s without reference to the un precedented business prosperity o f the decade and the burgeoning credit demands generated by this prosperity. Similarly, the behavior o f rates in domestic markets was obviously influenced in an im portant way by a number o f developments in the international econom y and, perhaps more immediately, by important innovations in the international financial system. Finally, although certainly not exhaustively, certain institutional changes in domestic financial markets, including important new departures in com m ercial banking, probably exercised significant background effects on rate behavior in the period. The sections o f this report that fo llo w are concerned primarily with these three broad background influences on rates in the 1960’s. A supplem entary section considers the vicissitudes o f credit policy in the decade, with some observations on the general role played by policy in influencing broad swings in yields. 5 he Domestic Economy Despite the general feeling that interest rate behavior in the ten years ended last D ecem ber was som ehow unusual, the general cyclical pattern o f market yield movements in the decade was not essentially different from that noted for the 1950’s. This is to say that rates generally m oved dow nw ard in periods o f business recession and then came under strong upward pressure in periods o f business expansion. The essential difference between the tw o decades is not to be found in dissimilar patterns o f rate movements but rather in the relative intensity and duration o f general business cycle swings. For while the 1950’s produced three nearly com plete cycles, with three distinct periods o f expansion and tw o short but sharp recessions, the 1960’s experienced less than one com plete cycle, with a shallow re cession at the beginning o f the decade follow ed by an unprecedented 106-month expansion. PROSPERITY AND CREDIT DEMANDS The 1960’s began inauspiciously enough, with the econom y in the late stages o f the short business expansion that dated from early 1958. This cyclical m ove ment peaked in the second quarter o f 1960, and fo r the next four quarters real output— i.e., the Gross National Product measured in constant dollars— receded in a gentle decline from this high point. From that cyclical trough, reached in February 1961, business activity took o ff on a historic expansion, not yet ended, which made the 1960’s by all odds the most prosperous decade in the nation’s history. Measured in current dollars, the Gross National P roduct rose from $484 billion in 1959 to $932 billion in 1969, a gain o f 93 per cent. Corrected for price changes, so that the figure reflects only the change in real output, the gain was 53 per cent. Over the same period, popula tion increased only about 14 per cent and, accordingly, GNP per capita grew at a rapid rate. In real terms the gain per head came to over one-third. Industrial output, measured by the Federal Reserve In dustrial Production Index, clim bed 64 per cent. Total em ploym ent rose to 78.2 million, an increase o f 13.5 million, or 21 per cent, from ten years earlier. The number o f new job s created exceeded the net addi tion to the labor force by more than one and a quarter million, and the unemployment rate, which averaged 5 i/2 Per cent ten years earlier, averaged only 3*4 per cent in 1969. The w ell-know n tendency fo r interest rates to move up in periods o f prosperity was all the stronger in the 1960’s fo r the un usual vigor and duration o f the business advance. Credit demands generated in the private sector by the rapid escalation o f activity were enormous. W ith consumer incomes rising rapidly and the grow th spilling over to em brace hitherto low -incom e groups, sales o f consumer durables, financed mainly on credit, grew at record rates. By the end of 1969 consumer credit outstanding reached $120 billion, nearly two 6 G R O S S N A T IO N A L P R O D U C T $ Billion Source: index 1958=100 U. S. Department of Commerce. and a quarter times its level at the beginning o f 1960. Private resi dential m ortgage credit outstanding rose at only a slightly slow er pace, just about doubling in the course o f the decade. Responding to grow ing demands fo r all kinds o f goods and services, businessmen made record outlays fo r new plant and equipment to expand production facilities. Expenditures fo r this purpose, financed in large part through borrow ing, m oved up at a sharp pace after the first quarter o f 1963 and in 1969 amounted to more than tw ice their level in 1959. Similarly grow ing business inventory requirements, made necessary by large increases in sales, further augmented business credit demands. A PERIOD OF STABLE G RO W TH Growth in the econom y, and in credit demands, did not proceed at a uniform pace over the decade. As noted earlier, 1960 was a year o f mild recession. At the end o f the year the unemployment rate stood at 7 per cent and the capacity utilization rate in manufacturing was only slightly above 80 per cent. The ensuing expansion can be studied conveniently in tw o distinct chronological periods: one running from early 1961 through the end o f 1964 and the other from the beginning o f 1965 to the end o f 1969. The first of these was a period o f rem arkably stable and balanced grow th. A ggregate demand, as measured by the GNP in current dol lars, grew at an average annual rate o f about 6 1/2 per cent, while real output (GNP in constant dollars) increased at an average annual rate o f slightly over 5 per cent. Output gains thus kept fairly closely in step with spending increases and the substantial real growth of the period was achieved with little upward pressure on prices. Growth Y cut steadily into the margin o f unused resources and at the end o f 1964 the unemploym ent rate had been reduced to 5 per cent and the capacity utilization rate in manufacturing was up to 90 per cent. Both private and governm ent credit demands grew substantially, but savings and credit growth kept supply increases in line with demand expansion and only the mildest upward pressures were introduced on the interest rate structure. In general, the 1961-64 period was characterized by stable and balanced econom ic grow th, with more or less m atched ex pansion o f credit demands and credit supplies and extraordinary stability in both price and interest rate levels. A HALF DECADE OF INFLATION This pattern was altered sharply in the last half o f the decade. Beginning early in 1965, aggregate de mand grow th accelerated sharply, under the double stimulus o f the delayed effects o f the 1964 tax cut and step-by-step escalation o f the Vietnam W ar. For the five-year period, GNP in current dollars rose at an average annual rate o f more than 8 per cent, with little inter ruption except in the brief “ mini-recession” o f the first half 1967. The step-up in the pace o f spending occurred against a background o f a rapidly disappearing margin o f unused resources, as the unemployment rate fell below 4 ^ per cent by the end of 1965 and m oved steadily dow nw ard to a low o f 3.3 per cent in early 1969. In this context, grow th in real output began to encounter bottlenecks. Real grow th averaged 4 % per cent per year fo r the five-year period, but tapered o ff substantially in the final three years. F or these three years the average annual rate was only 3% per cent and fo r the final year o f the decade it was 2.9 per cent. W ith spending increases accelerating and output gains slowing, inflation soon becam e a serious problem . Measured by the im plicit GNP deflator, the rate o f inflation m oved up sharply and steadily, from 1.9 per cent in 1965 to 3.2 per cent in 1967 and 4.7 per cent in 1969. This developm ent was of great significance fo r interest rate behavior in the period, fo r it added a dimension to the demand fo r credit and introduced a new element o f reluctance in lender attitudes tow ard the comm itment o f funds. M oreover, the inflation problem and the related question o f the timing o f rem edial policy measures becam e important elements in a constellation o f factors that fostered the de velopm ent o f an unusual degree o f uncertainty in credit markets, with a corresponding degree o f volatility in yield movements. The External Accounts an J the Foreign Sector D evelopm ents in the international econom y and in the United States’ econom ic relations with the rest o f the w orld also played an im portant role in interest rate movements over the decade. This was in part an indirect consequence o f the U. S. balance o f payments problem , which had begun to assume serious proportions in the late 1050’s and which throughout the 1960’s proved frustratingly resistant to rem edial measures. Balance o f payments considerations figured importantly in both fiscal and credit policy decisions through most o f the decade and frequently influenced the adoption o f policy measures which in troduced upward pressure on the entire interest rate structure. M ore over, as the problem persisted through the decade, now worsening, now showing some promise o f improvement, it becam e a m ajor factor shaping market expectations patterns and contributing to the volatility o f these patterns. This was especially the case in view o f the close relationship between the U. S. balance o f payments position and con ditions in the international exchanges, in the w orld’s gold markets, and in international financial markets generally. THE CHANGING W ORLD ECONOMY The decade also witnessed a number o f fundamental changes in international econom ic relation ships that had important implications fo r both credit demands and credit supplies in domestic markets. The period was marked by a notable extension o f the movement tow ard international econom ic in tegration. The stage was set fo r this movement in the late 1950’s, with the establishment o f the European Econom ic Community and the res toration o f substantial currency convertibility by the leading trading nations. Especially through the first half o f the 1960’s, both ta riff bar riers and exchange restrictions were relaxed progressively and foreign trade and international flow s o f capital grew apace. The integrating tendencies that follow ed linked the U. S. econom y, and U. S. financial markets, to their foreign counterparts to a degree not known fo r a generation. W ORLD PROSPERITY Over the same period, the econom ies o f most o f the trading nations abroad were experiencing boom s com parable to that in the U. S. General prosperity in the w orld trading community gave a further fillip to w orld trade and to demands fo r credit to finance this trade. Probably more important, rapid grow th abroad, coupled with the elimination or relaxation o f many currency restric tions, provided a strong stimulus to U. S. foreign investment. Direct investments by U. S. firms seeking new and cheaper sources o f in dustrial materials or entry into increasingly lucrative markets m oved up sharply, especially in the first five years o f the decade. A t the same time, relatively high interest rates in many foreign markets proved increasingly attractive to U. S. lenders and portfolio investors, while borrow ers in capital-poor areas o f the w orld found U. S. loan and capital markets attractive com pared with the less w ell-developed markets abroad. Large outflow s o f capital becam e a matter o f con cern fo r the U. S. balance o f payments and led in the second half of the decade to controls on U. S. outflow s fo r direct investment and to 9 a program o f voluntary restraint on the foreign lending and investment of U. S. financial institutions. But the avenues opened up fo r international capital flow s by the increasing integration o f the w orld econom y were not one-way. The dynam ic o f Am erican business in the Sixties, the long record o f steady econom ic grow th and great political stability in this country com pared with the rest o f the w orld, the relatively high degree o f freedom from restrictions on foreign investors, and other factors com bined to make U. S. m oney and capital markets attractive outlets fo r foreign funds. Especially in the later years o f the decade, foreign funds m oved in sub stantial volume into U. S. markets, mainly through direct purchases of U. S. equities and indirectly through Eurodollar borrow ings and negotiable CD sales abroad by U. S. com m ercial banks. In brief, so fa r as U. S. financial markets are concerned, supply conditions as well as demand conditions were a ffected by the closer interlinkage o f the U. S. econom y with the rest o f the trading w orld. In the context o f this increasingly close interconnection o f the w orld ’s financial markets, interest rates in this country m oved into a tighter relationship with rates abroad and becam e more sensitive to foreign financial developm ents than at any time since the 1920’s. Precisely how the strengthened international tie a ffected the level and behavior o f rates in this country is problem atical. The large deficits in the capital account o f the U. S. balance o f payments over much o f the decade suggest that on the whole these international developm ents may have tended to keep dom estic rates higher than they w ould have been otherwise. M oreover, in the light o f the unusual volatility o f conditions in foreign financial markets, in the international exchanges, and in the w orld’s gold markets in the 1960’s, the strengthened con nection with these markets may well have added a dimension o f in stability to the U. S. interest rate structure. The Changing Institutional Pattern From the standpoint o f the financial historian, the decade o f the 1960’s was perhaps most notable fo r numerous significant changes in the institutional m achinery fo r bringing together demanders and sup pliers o f funds. Arrangem ents fo r m obilizing capital funds both at home and abroad and fo r channeling these funds into their ultimate uses reached new peaks o f efficien cy and this no doubt exercised some dam pening effect on the strong upw ard pressures on rates generated by the great business expansion. INSTITUTIONAL CHANGE IN INTERNATIONAL FINANCE A m ong the most significant instutional changes in the decade were those closely related to the international developm ents discussed in the pre ceding section. Facilities fo r trading in the m ajor currencies o f the w orld expanded rapidly, as com m ercial banks and other foreign ex- 10 changc dealers geared up to meet grow ing demands fo r international financial services. Many U. S. com m ercial banks with hitherto small or token international departments m oved aggressively to enlarge these departments, while numerous others entered the field anew. Parallel ing the increasing internationalization o f the operations o f many large nonfinancial businesses, bankers m oved in grow ing numbers to establish foreign branches or, via Edge A ct subsidiaries, to acquire foreign bases fo r their own expanded operations. Increasingly, too, nonbank financial institutions, notably insurance companies, brokerage houses and other securities firms, and sales finance companies, established facilities abroad which linked them directly to many foreign financial markets. This movement abroad by U. S. institutions was m atched by a com parable multiplication o f the U. S. offices o f foreign institutions, and by the middle o f the decade an elaborate multinational netw ork o f market functionaries linked together the m ajor financial markets o f the world. The decade was notable, too, fo r the grow th and developm ent o f foreign m oney and capital markets, and especially fo r the robust grow th in tw o relatively new international markets, the Eurodollar market and the Eurobond market. The evolution o f capital markets abroad, pri marily in Continental Europe, was given considerable impetus as a result o f U. S. capital restrictions im posed to help ameliorate the balance o f payments problem . The same restrictions, notably the In terest Equalization Tax o f 1963, the Voluntary Foreign Credit Restraint Program instituted in 1965, and the voluntary and m andatory controls on U. S. capital outflow s fo r direct investment, were instrumental in prom oting the em ergence and rapid developm ent o f the Eurobond market after the m id-1960’s. The Eurodollar market, in its infancy at the beginning o f the decade, quickly grew to m ajor dimensions and was a prim ary fa ctor in international finance before 1965. The full significance o f the developm ent o f these markets fo r the behavior o f U. S. interest rates is difficu lt to assess. A fter 1965 Eurobonds becam e an important source o f funds fo r U. S. corporations operating abroad, while in 1969 the Eurodollar market was a m ajor funds source fo r large U. S. com m ercial banks. O f more fundamental significance, through these markets convenient dollar-denom inated in com e-bearing claims, o f a large spectrum o f maturities and other liquidity characteristics, and with minimum foreign exchange risks, becam e readily available to investors over the entire trading w orld. Largely because of this fact, the markets quickly becam e important vehicles prom oting the international m obility o f capital and prime in stitutional links connecting the various national money and capital markets. By the close o f the decade, the Eurodollar market, es pecially, had com e to be recognized as a more than rudimentary mechanism through which the effects o f credit policy measures in one m ajor country might be transmitted to markets in other countries. 11 DOMESTIC DEVELOPMENTS IN COM M ERCIAL BAN K IN G Parallel ing these developm ents in the international area came equally sig nificant institutional changes in domestic money and capital markets. Rapid econom ic grow th and other secular developments at home in troduced grow ing and changing demands on the financial system and the system responded with a number o f significant institutional adjustments. Perhaps the most significant of these occurred in com mercial banking, which through the entire decade show ed itself to be a dy namic industry indeed. The ten-year period saw numerous changes in banking codes and regulations, and with the continuation o f the m erger and consolidation movement, significant changes in the structure of banking markets and in both the scale and scope o f operations o f in dividual institutions. In some measure, developm ents in banking rep resented an extension o f trends dating back to the earlier years o f the post-W orld-W ar era. But in addition the pressure o f grow ing credit demands in the 1960’s fostered among com m ercial banks an increasingly aggressive disposition to seek out new sources o f funds and to tap existing sources more intensively. Larger banks especially began to rely more heavily on the Federal funds market, and as market in terest rates m oved up, it becam e more costly fo r sm aller banks to hold reserves idle. As a result, the volume o f Federal funds trading ad justed upward substantially and this market assumed increased im portance as a m obilizer o f capital resources. Through most o f the decade, however, the m ajor fund-raising efforts o f banks centered primarily in the market fo r thrift deposits and in the m oney market. W ith successive relaxations in interest rate re strictions represented in Regulation Q, com m ercial banks raised rates payable on passbook accounts and also developed a variety o f new con sumer-type thrift certificates. Through these activities they brought themselves into sharper com petition with such savings intermediaries as mutual savings banks and savings and loan associations. At the same time, the large money market banks developed the negotiable certificate o f deposit as a device to tap portions o f the m oney market that had hitherto been left mainly to the U. S. Treasury and other large nonbank borrow ers. As a m oney m arket instrument, the negotiable CD caught on quickly and the em ergence o f a secondary m arket fo r trading in this instrument shortly after its introduction in 1961 has to be reckoned one o f the significant institutional developm ents o f the decade. Increasing reliance by bankers on relatively high cost thrift and m oney market funds was accom panied by important changes in bank loan and investment policies. Generally speaking, the adjustments in assets patterns made by banks in this period involved increased emphasis on relatively high-return assets, such as consumer loans, real estate m ortgages, and especially municipal securities. Except fo r the unusually tight m oney years 1966 and 1969, com m ercial banks con stituted the backbone o f the market fo r state and local securities after 1961. 12 In brief, com m ercial banks in the ly 6 0 ?s m oved vigorously to aiversiiy tneir opeiaLions miu in paiiicuiai lo inciease their efforts to serve as intermediaries through which savings funds and short-term contingency balances are channeled into loan and investment markets. F or more than a generation, com m ercial banks had been content to leave the bulk o f this kind o f financial intermediation to nonbank fi nancial institutions which, as a group, had grow n at an unusually rapid rate in the late 1940’s and throughout the 1950’s. Now, in the 1960’s, com m ercial banks entered into a keen com petition with mutual savings banks, savings and loan associations, and nonbank fund-raisers in the money market. In the later years o f the decade, the one-bank holding company em erged as a popular device through which some large banks sought to diversify their operations and expand their role as intermediaries. This consolidating device involved the establishment o f a parent com pany which could acquire controlling interest in a well-established com m ercial bank as well as a number o f specialized financial com panies such as insurance firms, sales finance companies, m ortgage companies, etc. Through the one-bank holding com pany device, a com m ercial bank could p roject itself into the leadership o f what came to be known in some quarters as a “ congeneric,” i.e., a closely inter related group o f financial companies with different— although som e times overlapping— specialties, centering around a large com m ercial bank. As the decade drew to a close, the future o f the one-bank holding com pany as a device through which com m ercial banks could diversify their activities was in doubt. A bill severely limiting the operations o f these com panies had passed the House o f Representatives but had not yet been acted on by the Senate. IN T E R M E D IA T IO N , D IS IN T E R M E D IA T IO N A N D INTEREST R ATES The aggressive move by com m ercial banks to expand their role as fi nancial intermediaries probably has to be counted one o f the important institutional developm ents o f the decade. The extent o f their success in this endeavor is reflected in the rapid grow th in the relative im portance o f their time and savings deposits. Such deposits represented 32 per cent o f total com m ercial deposits at the end o f 1960. This figure rose quickly after 1961, to 441/2 Per cent at the end o f 1965 and in mid-1969 it came to 47 per cent. Expansion in the com m ercial banks’ intermediation function, how ever, did not proceed evenly through the decade. As a matter o f fact, it experienced notable interruptions when market rates rose above Regulation Q ceilings and com m ercial banks found it difficult to com pete fo r either thrift funds or m oney m arket funds. In the tight m oney periods o f 1966 and again in 1969, com m ercial bank deposit losses, especially o f negotiable CD’s, were great, amounting to several billion dollars. To denote such large-scale run-offs o f time and savings deposits, as they a ffected both com m ercial banks and other depository institutions, the decade spawned the term “ disinterm ediation,” which 13 quickly becam e part o f the jargon o f the m arketplace. Disintermedia tion reached especially large proportions in 1969, when com m ercial banks experienced a run-off o f well over half the outstanding volume of their large-denomination negotiable CD’s. To recoup these heavy losses, many banks m oved aggressively to raise funds from other, socalled “ nondeposit,” sources. Large banks with good foreign connec tions borrow ed heavily in the Eurodollar market. Others, through subsidiaries and affiliates— including one-bank holding com panies— sold sizable amounts o f com m ercial paper and some resorted to sales of loans to nonbank customers. Precisely how the jerk y grow th o f financial intermediation by com m ercial banks impinged on the structure o f interest rates cannot be easily assessed. To the extent that com m ercial bank activity in this area im proved the efficiency with which thrift and m oney market funds were m obilized and channeled into their alternative uses, rates in some markets at least should have been held below levels that they might otherwise have reached. But it is not unlikely that increased intermediation by banks also had the effect o f channeling funds away from some markets and tow ard others, so that resulting yield pressures might have been dow nw ard in some markets and upward in others. A llocative effects were more conspicuous in periods o f disintermedia tion, when funds clearly were diverted aw ay from m ortgage markets with accom panying sharp upward movements in m ortgage rates. Environment M oney and credit policy is, o f course, a m ajor fa ctor conditioning the behavior o f interest rates in any period, although the relationship between policy changes and rate movements in given sectors o f the money and capital market is probably considerably more com plicated than it may appear at first glance. As a short-run matter, an easing o f policy is likely to lead to rate reductions and a tightening to rate increases, but it is a serious oversim plification to consider that the matter ends there. Generally speaking, policy changes a ffect the supply side o f credit markets and hence can be expected to influence the price o f credit via these effects. But as a short-run matter, these effects o f policy are likely to be concentrated in markets fo r short-term credit, w here supplies are highly sensitive to changes in bank reserve positions. Supply effects in long-term markets w ork out over a longer period o f time and are not nearly as clear-cut as those in short-term markets. But in addition to the immediate im pact o f policy changes on credit supplies, there are also effects on expectations patterns and hence on the attitudes o f both borrow ers and lenders. These expectational effects, w hich are often not predictable with any great degree o f con fidence, can exert a m ajor influence on both supply and demand in credit markets, both short-term and long-term . 14 As a longer-run matter, any assessment o f the interest rate im pact o f a policy change, or o f a given posture o f policy maintained over time, must take account o f the implications o f policy fo r prices and money incomes. This is true because changes in prices and incomes are among the more important determinants o f the demand fo r loan funds. As the effects o f a given policy change w ork themselves out over time, money and credit flow s in the econom y as a w hole are enlarged or diminished and demands fo r goods and services o f all kinds are a f fected. Eventually employment, production, prices, and money in com es are also likely to be affected, with credit demands adjusting to any changes in these magnitudes that may occur as well as to expectational shifts that may accom pany such changes. Hence a sudden easing o f policy, fo r example, may through its short-run im pact on credit supplies, low er some interest rates. But if, as the result o f such a move, prices and money incomes begin to rise, credit demands will likely increase and interest rates will come under upw ard pressure and tend to move back up tow ard the level prevailing before the easing move was made. For this reason, many economists, while conceding the im portance o f the short-run rate effects o f credit policy moves, question whether policy can in fa ct override the m arketplace as a determinant o f interest rates over the long pull. POLICY IN THE EARLY 1960’S For most of the first half o f the decade monetary policy was keyed primarily to prom oting domestic business expansion through keeping credit readily available on easy terms. Over the same period, how ever, policy makers were con fronted with a serious balance o f payments problem and a risk of sizable capital outflow s if short-term rates in this country fell sig nificantly below those abroad. A ccordingly, in the first years o f the decade efforts were made to supply reserves to the banking system through means that would introduce minimal dow nw ard pressure on short-term rates. In late 1960 and through 1961 the term “ Operation T w ist” was often applied to these efforts. As publicized in the fi nancial press o f the times, Operation Twist represented a policy of maintaining short-term interest rates at relatively high levels for balance o f payments purposes while trying to low er long-term rates in order to encourage domestic investment. From the standpoint of the manner in which m onetary policy was conducted, it represented efforts to shift the interest-depressing effects o f reserve-supplying operations from short-term markets, where they ordinarily focus, to long-term markets. To this end, the Federal Reserve m ade a number o f notable changes in the manner in which it used its tradional policy tools. Open m arket purchases, which had hitherto been concentrated chiefly in the market fo r short-term Governments, were shifted in part to the market fo r over one-year maturities. Similarly, small-step re ductions in reserve requirements were used to supply reserves for seasonal purposes. 15 Despite the persisting seriousness o f the balance o f payments problem , credit policy remained easy by almost any definition through 1964. It was especially easy through 1962. Reserves were supplied to the banking system in abundance. Net free reserves rose sharply after the first quarter in 1960, moving well past $500 million before the end o f the year and remaining close to that level through most of 1962. This marginal reserve measure drifted dow nw ard through 1963, how ever, and stayed mainly in a range o f $100 to $150 million from mid-1963 through 1964. This decline was accom panied by an increase in m em ber bank borrow ings at the discount w indow and reflects som e what less ease than existed in 1961 and 1962. Nevertheless, Federal Reserve credit supplied through open market operations continued to rise steadily and the mild firm ing in credit conditions after 1962 reflects chiefly increasing credit demands rather than a reduced pace o f sup ply grow th. As short-term market rates drifted upw ard in response to this firm ing, the discount rate was raised in July 1963 from 3 to 3*4 per cent. The reason fo r this action, however, was related more to balance o f payments pressures than to any effort to restrain domestic credit grow th. The discount rate was raised again in N ovem ber 1964, to 4 per cent, but again this second increase follow ed a sharp rise in both officia l and market rates in London and was designed to keep domestic rates in line with foreign money rates. F or the five-year period 1960-64 all the monetary aggregates show ed steady and substantial grow th. M ember bank reserves (a d justed to take account o f a number o f reserve requirement changes in the period) expanded at an average annual rate o f slightly more than 31/2 per cent. Total loans and investments o f all com m ercial banks grew at an average annual pace o f just under 8 per cent. The money stock grew at a rate slightly above 2 i/2 Per cent per year, but the money stock plus time deposits increased at an average annual rate o f 7 per cent. Time and savings deposits at com m ercial banks grew fa r faster than demand deposits reflecting the aggressive efforts o f com m ercial banks to tap thrift deposits and money market sources o f funds. The rapid acceleration in grow th o f com m ercial bank time and savings de posits was facilitated by three hikes in Regulation Q ceilings. These ceilings were raised in January 1962 and again in July 1963 and N ovem ber 1964. In general, grow th in all the m onetary aggregates proceeded at a considerably more rapid pace in the 1960-64 period than in the 1950’s. M oreover, fo r the first half o f the decade grow th in these aggregates, as shown in the charts on the follow in g page, was smooth and stable, with little year-to-year deviation from the average rates fo r the fiveyear period. THE TIG H T MONEY EPISODE OF 1965-66 The overall climate of credit policy in the second half o f the decade differed sharply from that in the first five years. The basic reason fo r the differen ce is the contrasting nature o f the problem s confronted by policy in the tw o 16 M EMBER BA N K RESERVES $ Billion BANK CREDIT AND MONEY SUPPLY Note: Source: Begin n in g July 1969, ban k credit d a ta are revised to include all b an k premises, subsidiaries an d other significant m ajority-ow ned dom estic subsidiaries; earlier d a ta are for com m ercial ban ks only. A lso b a n k credit com ponents are now reported gross of valuatio n reserves rather than net a s previously reported. Board of G overn ors of the Federal Reserve System. periods. The first half o f the decade was dom inated by problem s o f underemployment, retarded grow th, and balance o f payments deficits. The balance o f payments problem persisted in the second half o f the decade, which also witnessed several exchange and gold m arket crises w hich posed policy problems. On the dom estic scene, the problem s o f underemploym ent and slow grow th becam e after 1964 problem s o f overem ploym ent and an overheating econom y. The objectives of 17 policy were correspondingly transformed, m oving from goals of actively prom oting domestic grow th while contributing to balance o f payments improvement to goals o f restraining domestic inflation and shielding the international payments system from the shock waves o f a variety of international financial disturbances. Early in 1965 the Federal Open Market Committee m odified the posture o f credit policy by directing the New Y ork Reserve Bank to work through the Trading Desk fo r slightly firm er money market con ditions. For the rem ainder o f that year, the m arginal reserve measures reflected increasing restraint. Net free reserves o f $100 million early in the year becam e net borrow ed reserves o f more than $150 million by mid-year and fo r most o f the rem ainder o f the year m em ber banks’ bor rowings at the discount window , which rose substantially, exceeded member banks’ excess reserves. W ith some interruption in late 1965 and early 1966, this firm ing o f policy continued, culminating in the extrem ely tight m oney period o f the summer and early autumn o f 1966. W hile the Federal Reserve m oved progressively to restrain credit in 1965, it was not until D ecem ber o f that year that the discount rate was raised, from 4 per cent to 41/2 per cent. By this time, grow ing credit demands, coupled with the firm ing policy, had produced sharp rises in most m arket interest rates and it was clear that market rates remained under heavy upw ard pressure. In the period immediately follow in g the D ecem ber discount rate hike, the F ederal Reserve sup plied reserves generously through open m arket operations to smooth the transition to a higher level o f rates and to reassure increasingly nervous markets. This tem porarily slow ed the slide in the marginal reserve measures, but with credit demands remaining heavy, banks early in 1966 stepped up their borrow ings at the discount w indow and net borrow ed reserves m oved to the $400 million level by late summer. Interestingly, while late 1965 and early 1966, are generally re garded as the tight money prelude to the so-called “ credit crunch” o f late summer 1966, the m onetary aggregates over much o f this period grew more rapidly than in the preceding five years. A ggregate re serves o f m em ber banks, fo r example, rose at an annual rate o f more than 5 per cent in 1965 and more than 41/2 per cent in the first half o f 1966. The com parable rate o f grow th in 1960-64 was 3.8 per cent. Similarly, bank credit expanded at a 10.0 per cent rate in 1965 and a 9.0 per cent annual rate in the first half o f 1966, com pared with an average rate o f under 8.0 per cent in 1960-64. The money supply, w hich grew at an average rate o f slightly more than 2 1/2 per cent in 1960-64, expanded at an annual rate o f better than 41/2 per cent in 1965 and the first half o f 1966. The accelerated pace o f grow th of these aggregates suggests that the sharp upw ard movement o f rates in this period was due more to large increases in credit demands than to any curtailment o f credit supplies. The tight m oney situation o f 1966, how ever, is reflected in the behavior o f the m onetary aggregates in the second half o f that year. M em ber bank reserves in that half-year declined at an annual rate 18 o f over 2 .0 per cent while the annual rate o f increase o f bank credit fell from over 9.0 per cent in the first half to only 2.0 per cent in the second half. Grow th in the money stock began to taper o ff as early as April 1966 and was negative over most o f the rem ainder o f the year. For the second half, the money stock declined at an annual rate o f about 1.0 per cent. Growth in the money stock plus time deposits at com m ercial banks was also sharply curtailed, falling from an annual rate o f nearly 7.0 per cent in the first half to slightly over 2.0 per cent in the second half. RETURN TO EASE, 1967-68 In the course o f the tight m oney episode of 1966, long-term interest rates had moved to historic highs and the construction industry was especially hard hit by an acute shortage o f m ortgage funds. Consumer outlays on durables began to slow and as 1966 drew to a close it becam e clear that the pace o f the econom y’ s advance was m oderating. Some dampening o f business capital out lays was expected to follow suspension o f the 7 per cent investment tax credit in O ctober and a sizable inventory correction appeared imminent. In the fa ce o f these prospects fo r a further reduction in the pace o f the business expansion, policy began to m ove over to a distinctly easier posture beginning in N ovem ber 1966. From that time through most o f 1967, both the m arginal and the aggregate measures o f policy reflect a sharp easing. Free reserves m oved from a negative $300-$400 million in late 1966 to a positive $300 million by mid-1967 and remained near that level until the end o f the year. M em ber bank borrowings, which had averaged as high as $800 million around mid-year, quickly m oved down to normal levels. Member bank reserves rose at an annual rate o f nearly 11.0 per cent in the first half o f the year and 1 0 .0 per cent fo r the year as a w hole. Bank credit expanded nearly 12.0 per cent fo r the year, while the money supply increased almost 6 V2 per cent. As part o f the easing process, the discount rate was reduced from 4 ^ 2 per cent to 4.0 per cent in April 1967. Tow ard the end o f 1967, however, policy becam e distinctly less easy. This move tow ard restraint was led by a hike in the discount rate at the time o f the British devaluation in N ovem ber 1967. A t about the same time free reserves began to move down sharply, fa llin g to a nega tive $350 million by June 1968, while member bank borrow ings m oved up close to the levels prevailing in mid-1966. International financial disturbances in the w ake o f the British devaluation w ere a dominant consideration in policy decisions in early 1968 and, fo r the most part, dictated a definite firm ing. Discount rate increases in M arch and April, bringing this rate to 5!/2 Per cent, were related prim arily to these international disturbances. Despite this firm ing o f credit conditions, the m onetary a g gregates continued to expand at a relatively fast pace in early 1968, although they slow ed considerably from the sharp rate o f increase in the previous year. M em ber bank reserves in the first h a lf grew at 19 an annual rate just under 41/2 per cent while bank crcdit rose at a rate o f about 6 V2 per cent. Growth in the money stock, on the other hand, actually accelerated in the first half, m oving up to a rate of 6 .8 per cent com pared with 6.2 per cent in 1967. Shortly after passage o f the 10 per cent surcharge on the Federal incom e tax in June 1968, policy again m oved over to an easier posture. The discount rate was cut to 5% per cent in August and both the marginal and the aggregative reserve measures began to register easier credit conditions. Net borrow ed reserves declined to $150 million in Septem ber and m ember bank borrow ings fell to a range of $300-$350 million. Bank reserves grew at a rate o f over 9.0 per cent per year in the second half, while bank credit m oved up at a rate o f over 15 per cent per year and the money supply at a better than 6 per cent rate. T IG H T MONEY AG AIN , 1969 As it becam e apparent that the 10 per cent surcharge was not exerting the expected restraining effects on the econom y’s advance, policy was once again tightened in D ecem ber 1968. A t that time the discount rate was raised to 51/2 per cent and this was follow ed by another hike, to 6 per cent, in April 1969. Bank reserve grow th was brought under a tight rein. Net borrow ed reserves rose rapidly, surpassing the $1 billion mark in the second quarter and fluctuating in a range o f $700 million to $1.2 billion for the rest o f the year. Member bank borrow ings also rose rapidly, reach ing $1.5 billion in the summer months and remaining at or near record levels through the year. The aggregate measures also reflected a sharp tightening. G row th in bank reserves came to a virtual halt in the first half and in the remainder of the year reserves showed a substantial decline. G row th in bank credit also slow ed sharply in the first half and was negative over much o f the second half. The money stock showed virtually no net increase fo r the year. The behavior o f selected groups o f short-term and long-term rates during the decade is shown in the charts on pages 22 and 23. The in num erable ups-and-downs o f the several series cannot, o f course, be explained in terms o f the broad background factors discussed h e r e ; nor is it the purpose o f this report to provide an explanation o f these shortrun fluctuations in rates. These can be explained partly by short-run variations in credit demands not only o f businesses and consumers but also o f Federal, state, and local governments. In part, too they are explainable by short-run supply variations associated with shifts in market expectations as well as with policy changes. The general pat tern o f rate movements over the sweep o f the decade, however, can be discussed in terms of these background factors, although it may not be possible to identify the precise influence o f each factor separately. 20 A NOTABLE CONTRAST Perhaps the most striking feature o f the patterns shown in the charts is the contrast between rate movements in the first half o f the decade and those in the second. The contrast is especially sharp in the chart showing yields on long-term bonds. In this connection, the decade divides almost precisely in half. For the first half, rates generally show ed some tendency to drift gradually upward, although considering the magnitude o f the business expansion they remained rem arkably stable. Then after about the m iddle o f 1965 the upward m ovement accelerated and all across the maturity spectrum rates rose sharply. For the most part, this sharp upward movement continued throughout the remainder o f the decade, although there were tw o notable interruptions in this uptrend. The first cam e in the massive inventory adjustm ent o f the first half o f 1967, follow in g the so-called “ credit crunch” o f August-September 1966. The second fo l low ed enactment o f the 10 per cent surcharge on the F ederal incom e tax in June 1968. In both cases, a substantial easing o f Federal Re serve policy figured in the tem porary reversal o f the upw ard m ovement. Despite these interruptions, the general drift o f rates all across the board was sharply upward over the remainder o f the decade. In the final year o f the period, rates in many maturity sectors had m oved to levels not seen in this country in more than one hundred years. Yields on Treasury bills m oved to successive records— with three-m onth and six-month maturities reaching 8.10 per cent in D ecem ber— and the U. S. Treasury was having to pay more for borrow ed funds than at any time since before the Civil W ar. MOVEMENTS IN SHORT RATES The behavior o f short rates over the decade follow ed the general pattern described earlier, although yields in short-term markets m oved, as is usually the case, both more erratically and over a w ider range than did long rates. In addition to this, some effects o f a num ber o f the background fa ctors discussed earlier are more apparent in the behavior o f short rates than in the movement o f long rates. In the first half of the decade, fo r exam ple, the behavior o f short rates was heavily conditioned by the nation’s balance o f payments problem . These rates declined in the recession year, 1960, but they fell less in this recession than in most previous ones, mainly because o f officia l efforts to cushion the decline in order to minimize capital outflow s from this country. M oreover, much o f the upward movement in these rates between 1961 and 1965 follow ed discount rate hikes, in July 1963 and Novem ber 1964, w hich were dictated in large measure by balance o f payments considerations. To what extent the updrift o f short rates betw een 1961 and 1965 is related to the em ergence o f the large denom ination CD is problem atical. The CD quickly becam e a m ajor com petitor with com m ercial paper and Treasury bills and, as the chart shows, rates on these two money market instruments rose more than 100 basis points between the end o f 1961 and the end o f 1964. But clearly a large part o f this increase represents upward adjustments to the tw o dis- 21 M O N E Y RATES Per Cent Source: Board of G overnors of the Federal Reserve System. count rate hikes in the period. M oreover, as recovery from the 1960-61 recession proceeded, the general demand fo r short-term funds rose correspondingly. The movement o f short rates in the second half o f the decade cannot be analyzed separately from the burgeoning demand fo r funds in a boom ing, inflation-ridden econom y. But the sharp tem porary swing in these rates in the 1965-67 periods and their precipitous rise again in 1969 were associated with changes in credit p olicy as de scribed in an earlier section o f this report. A m ong the more interesting features o f short rate behavior in the last half o f the decade is the rapid-fire run-up, with tw o brief interruptions, in the prime rate, and the persisting tendency o f the Fed- 22 CAPITAL MARKET YIELDS Per Cent Source: Board of G overn o rs o f the Federal Reserve System. eral funds rate to remain well above the discount rate. Both reflect, in large measure, the grow ing pressure on banks to meet rising cus tom er demands. Through the 1950’s and early 1960’s it had becom e customary in many quarters to consider that the discount rate rep resented something o f a ceiling on Federal funds rates. But a F ed eral funds rate considerably higher than the discount rate becam e som ething o f a rule after 1965 and at times in 1969 Federal funds 23 traded as high as four full percentage points above the discount rate. In some measure, this phenomenon reflects the increasingly aggressive quest fo r loan funds among bankers as described in an earlier section o f this report. LONG RATES Long-term rates in the first half o f the decade were re m arkably stable, with only intermediate governments showing any pro nounced net upward movement between 1961 and 1964. Municipals especially showed rem arkable strength and stability through this period and at the end o f 1964 yields in this sector were low er than in 1961. In some large measure, this reflects the increasing participation o f com m ercial banks in the tax exempt market. In turn, this increasing participation was largely a by-product o f more aggressive efforts by banks to raise thrift funds and money market funds. In the early part o f this half-decade, too, official policy sought to maintain dow nw ard pressure on long rates, as discussed earlier. In the second half o f the decade, again as in the case o f short rates, credit demand was perhaps the paramount fa ctor behind the broad m ovement o f long rates. Swings in policy in 1965-67 and again in late 1968 and 1969 are reflected in the chart, but much less than in the m ovement o f short rates. As a matter o f fact, through much of the first half o f 1967, long rates rose in the fa ce o f a massive increase in bank reserves and bank credit and a pronounced slow dow n in busi ness grow th. The movement of these rates in this short period is ex plainable in part by heavy demands fo r long-term credit to restore liquidity positions eroded away in the extrem ely tight money period o f 1966. For the most part, rates in the several long markets over the last half o f the decade moved up in parallel. For a time in 1966 and again in 1969, however, rates on municipals rose at a more rapid pace than other long rates. One reason fo r this was the im pact o f dis intermediation on com m ercial bank investment policies. Just as intermediation tended to make com m ercial banks more willing buyers o f tax-exempts, so disintermediation tended to curtail sharply net com m ercial bank demand in the municipals market. Especially in 1969, disintermediation reduced com m ercial bank CD funds by more than 50 per cent, and while banks were able to recapture some o f these funds through tapping other so-called nondeposit sources, their net purchase operations in tax-exem pt markets were curtailed sharply. This was a m ajor fa ctor in the rise of tax-exem pt yields to record levels. 24 Net earnings b efore pay ments to the United States Treasury increased $41,956,750.02 to a record $224,141,078.92 in 1969. Six per cent statutory dividends totaling $2,008,397.94 were paid to Fifth District m em ber banks, and $220,778,680.98 was paid to the Treasury as interest on F ederal R e serve notes. EARNINGS A N D C A PITA L ACCOUNTS Capital stock rose $1,354,000.00 to $34,203,350.00 as m em ber banks increased their stockholdings by three per cent o f the rise in their capital and surplus. The Bank’s surplus account increased $1,354,000.00 to a total o f $34,203,350.00. On April 4, the Richmond Reserve Bank, with the approval o f the Board o f Governors, raised its discount rate from 5 i/2 Per cent to 6 per cent in an effort to check inflationary pressures. The 6 per cent rate is the highest on record at the Richm ond Bank. DISCOUNT RATI. OF FIFTH DISTRICT MEMBER BANKS Daily borrow ings o f m em ber banks in the Fifth District reached an alltime high during 1969. They clim bed to $132.7 million on May 23, rose to $137.7 million on June 27, advanced to $162.6 m illion on July 25, and peaked at a record $190.2 million on O ctober 24. There was also a significant increase during the year in the frequ en cy and amount o f borrow ings by m em ber banks using m unicipal securities and eligible customers’ paper as collateral. BORROW INGS Plans were com pleted during the year fo r the opening o f a regional check clearing center at the Balti- REGIONAL CLEARING CENTER 25 more Branch on January 2, iy'70. The center evolved from a jointly conducted three-year study by Federal Reserve staff members and com m ercial bankers from Northern Virginia, Suburban Maryland, and the cities o f Baltimore and W ashington. The clearing center serves about 90 banks located within a 40-mile radius o f W ashington, D. C. Included in the service area are the city o f W ashington; the city o f Baltimore and the counties o f Anne Arundel, Baltim ore, Calvert, Charles, H ow ard, M ontgom ery, and Prince G eorges in M aryland; and the cities o f Alexandria, Falls Church, and F airfax and the counties o f Arlington, Fairfax, Loudoun, and Prince W il liam in Virginia. The new center processes checks fo r banks that form erly pre sented them directly to other banks located in the same town or city, or to correspondent banks, clearinghouse associations, the Federal Re serve, or some combination o f these media. Each participating bank sends daily to the center all checks it has received which are drawn on other area banks and in turn receives from the center checks which are drawn on its own custom ers’ accounts. Concentrating the clearing function in a single regional clearing center easily accessible to area banks is expected to accelerate check collection and the return o f unpaid checks, give earlier credit on checks, help stem “ check kiting,” and reduce check “ floa t.” So fa r the center has processed an average o f almost 900,000 checks daily. This regional clearing center is the first operation o f its kind to be established by a Federal Reserve Bank and represents another step in the System’ s continuing effort to provide maximum efficien cy in check clearing operations. CULPEPER FACILITY The Communications and Records Center, Culpeper, Virginia, on which construction began in September 1966, was com pleted and occupied during the year. The facilities were dedicated on D ecem ber 10. In addition to serving as an em ergency relocation site and a records storage facility, the Culpeper installation will house the central switch fo r a com puter-operated communications switching system link ing together the nation’s Federal Reserve offices. Installation o f the new switch is expected in early 1970, and the com plete netw ork will go into full operation follow ing several months of testing. It is ex pected that the communications netw ork will greatly speed up the movem ent o f money, securities, and econom ic statistics. NEW MEMBER BAN K One Fifth District bank becam e a member o f the Federal Reserve System in 1969. Community Bank and Trust, Fairm ont, W est Virginia, a nonm em ber institution, converted to a na 26 tional charter and System membership on O ctober 15, under the title o f Community Bank and Trust, N.A. CHANGES IN DIRECTORS The election, by Fifth District m em ber banks, o f one Class A and one Class B director to three-year terms on the Richmond Board o f Directors was held in the fall. Hugh A. Curry, President, The Kanawha V alley Bank, Charleston, W est Virginia, was elected a Class A director succeeding Robert C. Baker, Chairman o f the Board, Am erican Security and Trust Company, W ashington, D. C. Elected as a Class B director was Robert S. Small, President and Chief Executive O fficer, Dan River Mills, Inc., Greenville, South Carolina. Mr. Small succeeded Thaddeus Street, President, Carolina Shipping Company, Charleston, South Carolina. W ilson H. Elkins, President, University of M aryland, College Park, Maryland, was redesignated Chairman o f the Board fo r 1970. Reappointed by the Board o f Governors to a three-year term as a Class C director and renam ed Deputy Chairman o f the Board was Robert W . Lawson, Jr., M anaging Partner, Charleston O ffice, Steptoe & Johnson, Charleston, W est Virginia. Arnold J. K leff, Jr., Manager, Baltimore Refinery, Am erican Smelting and Refining Company, Baltimore, Maryland, was reap pointed by the Board o f Governors to a three-year term as a mem ber o f the Board o f Directors at the Baltimore Branch. The Board o f G ov ernors appointed E. Craig W all, Sr., Chairman o f the Board, Canal In dustries, Inc., Conway, South Carolina, to a three-year term on the Charlotte Board o f Directors. Mr. W all succeeded James A. Morris, Commissioner o f Higher Education, The South Carolina Commission on H igher Education, Columbia, South Carolina. The Richmond Board appointed James R. C haffinch, Jr., Executive Vice President, The Denton National Bank, Denton, M ary land, as a director at the Baltimore Branch succeeding John P. Sippel, President, The Citizens National Bank, Laurel, M aryland. J. W illis Cantey, President, The Citizens & Southern National Bank o f South Carolina, Columbia, South Carolina, was re-elected to a three-year term as a director o f the Charlotte Branch. FEDERAL AD VISO RY COUNCIL The Board o f D irectors selected Robert D. H. Harvey, Chairman o f the Board and Chief Executive O f fice r o f Maryland National Bank, Baltimore, Maryland, to serve as the m em ber o f the Federal A dvisory Council representing the F ifth F ed eral Reserve District fo r the year 1970. Mr. Harvey succeeded J. Harvie Wilkinson, Jr., Chairman o f the Board, United Virginia B ank/State Planters, Richmond, Virginia. 27 CHANGES IN OFFICIAL STAFF A number o f changes were made in the officia l staff during the year. In the Examining Department, effective June 1, Fred L. Bagwell and W yatt F. Davis were prom oted to Examining O fficers. On July 1, H. Lee Boatwright, III joined the Baltim ore staff as a Vice President. Donald F. Hagner, Senior Vice President in charge o f the Balti more Branch, retired January 1, 1970, after 47 years o f distinguished service. He was succeeded by Mr. Boatwright, who was appointed Senior V ice President effective January 1, 1970. Also effective January 1, 1970, were the follow in g promotions and changes. John G. Deitrick was elevated to V ice President in charge o f Fiscal A gency and Securities, Joseph F. Viverette was named General Auditor, and G. Harold Snead was appointed Senior Adviser in the Auditing Department. W ilbur C. W ilson was named Assistant Cashier in Fiscal A gency and Securities and Joseph C. Ram age was made Assistant Cashier in Discount and Credit. V ice President A rthur V. Myers, Jr. was assigned the responsibility fo r the A ccounting and Bank Accounts Departments in addition to his present duties in the Bank and Public Relations Department. John F. Rand was named Vice President in charge o f com m unica tions at the Culpeper facility, Boyd Z. Eubanks was prom oted to A s sistant V ice President at the Charlotte Branch, and Charles P. Kahler was named Assistant Cashier at the Baltimore Branch. 28 Summary o CHECK CLEARING & COLLECTION 1969 1968 Dollar amount Commercial bank checks1 _______________________________ Government checks" ____________________________________ Return items ___________________________________________ 154,553,326,000 14,184,745,000 1,055,809,000 136,720,488,000 12,288,027,000 946,277,000 Number of items Commercial bank checks1 _______________________________ Government checks2 ____________________________________ Return items ___________________________________________ 499,162,000 66,058,000 5,898,000 488,551,000 63,728,000 5,397,000 3,046,362,299 150,655,860 1,087,116,889 1,079,930,385 2,832,717,000 150,002,776 961,121,222 1,030,628,600 4,235,021 764,219 4,025,893 724,813 10,698,050,400 57,452,742 112 3,897,413,600 21,286,430 89 Marketable securities delivered or redeemed Dollar amount __________________________________________ N um ber_________________________________________________ 13,969,235,175 352,267 14,239,513,644 270,329 Coupons redeemed Dollar amount __________________________________________ Num ber_________________________________________________ 86,260,506 304,453 98,283,112 333,885 Savings bond and savings note issues Dollar amount __________________________________________ N um ber_________________________________________________ 371,618,450 10,389,683 367,899,080 10,590,872 Savings bond and savings note redemptions Dollar amount __________________________________________ N um ber_________________________________________________ 546,468,910 12,309,004 464,444,138 10,606,335 Depositary receipts for withheld taxes Dollar am ount__________________________________________ Num ber_________________________________________________ 8,591,714,516 1,975,201 6,010,544,702 1,543,647 289,995,671,461 389,437 266,547,198,717 364,867 CURRENCY & COIN Currency disbursed— Dollar amount_____________________ Coin disbursed— Dollar am ount__________________________ Dollar amount of currency withdrawn for destruction .... Dollar amount of currency burned _____________________ Daily average of currency burned Dollar amount __________________________________________ Number _________________________________________________ DISCOUNT & CREDIT Dollar amount Total loans made during year _______________________ Daily average loans outstanding _____________________ Number of banks borrowing during the year _________ FISCAL AGENCY ACTIVITIES TRANSFERS OF FUNDS Dollar amount ______________________ ___________________ Num ber_________________________________________________ 1 Excluding checks on this Bank. 2 Including postal money orders. 29 r n \J .4J LP A 1 ? A T T fV P ' JL V ___' J . X X V .J - JL A j - -» -_ v STATEMENTS Condition DEC. 31,1969 ASSETS: Gold certificate account ________________________________ Federal Reserve notes of other Federal Reserve Banks Other cash ______________________________________________ Discounts and advances ________________________________ DEC. 31, 1968 5 926,579,929.99 67,815,864.00 6,414,018.09 12,150,000.00 5 861,188,243.08 82,832,052.00 12,704,406.20 3,310,000.00 U. S. Government securities: Bills ___________________________________________________ Certificates____________________________________________ Notes __________________________________________________ Bonds __________________________________________________ 1,664,937,000.00 1,409,622,000.00 2,347,358,000.00 261,448,000.00 2,157,409,000.00 411,436,000.00 TOTAL U. S. GOVERNMENT SECURITIES _____________ 4,273,743,000.00 3,978,467,000.00 TOTAL LOANS AND SECURITIES ______________________ 4,285,893,000.00 3,981,777,000.00 Cash items in process of collection ____________________ Bank premises ___________________________________________ Other assets _____________________________________________ 1,070,079,540.79 10,858,191.24 137,232,291.92 886,393,584.75 10,336,706.02 144,668,725.92 5,504,872,836.03 $5,979,900,717.97 Federal Reserve notes ______________________________________ $4,327,423,885.00 $4,142,317,669.00 Deposits: Member bank— reserve accounts ________________________ U. S. Treasurer— general account _____________________ Foreign ___________________________________________________ Other ______________________________________________________ 1,089,525,344.69 130,767,416.21 6,760,000.00 30,296,932.65 1,020,706,548.37 576,533.18 11,440,000.00 21,717,517.66 TO TAL ASSETS _____________________________ LIABILITIES: _____________________________________ 1,257,349,693.55 1,054,440,599.21 Deferred availability cash items _________________________ Other liabilities _____________________________________________ 808,930,309.66 42,762,247.82 687,570,410.44 29,873,339.32 TOTAL LIABILITIES ___________________________ 6,436,466,136.03 5,914,202,017.97 t o t a l d e p o s its CAPITAL ACCOUNTS: Capital paid in _____________________________________________ Surplus ______________________________________________________ TO TAL LIABILITIES AND C APITAL A C C O U N T S __________________________________ Contingent liability on acceptances purchased for foreign correspondents __________________________________ 30 34,203,350.00 34,203,350.00 32,849,350.00 32,849,350.00 $6,504,872,836.03 $5,979,900,717.97 $ $ 7,586,800.00 5,678,400.00 harnings and hxpenses E A R N IN G S : 1969 Discounts and advances _________________________________ Interest on U. S. Government securities ______________ Foreign currencies _______________________________________ Other earning’s ___________________________________________ t o t a l c u r r e n t e a r n i n g s __________________________ 1968 $ 3,404,671.02 236,068,720.12 6,333,270.83 ______ 49,694.63 245,856,356.60 $ 1,128,269.42 195,815,740.73 3,980,001.57 _______32,809.12 200,956,820.84 18,843,497.13 780,700.00 1,892,778.10 21,516,975.23 224,339,381.37 16,103,164.89 734,000.00 2,402,749.52 19,239,914.41 181,716,906.43 306,622.09 306,622.09 58,222.40 419,142.55 477,364.95 EXPENSES: Operating expenses (including depreciation on bank premises) after deducting reimbursements received for certain Fiscal Agency and other expenses _______ Assessments for expenses of Board of Governors _____ Cost of Federal Reserve currency _____________________ N ET E X P E N S E S ______________________________________ CURRENT NET EAR N IN G S ___________________ ADDITIONS TO CURRENT NET E A R N IN G S: Profit on sales of U. S. Government securities (net) __ All other __________________________________________________ TOTAL A D D IT IO N S ____________________________________ DEDUCTIONS FROM CURRENT NET E A R N IN G S: Loss on sales of U. S. Government securities (net) ____ All o th er__________________________________________________ TOTAL DEDUCTIONS _________________________________ N E T AD D ITIO N S OR DED U CTIO N S _________ N E T E A R N IN G S BEFORE P A Y M E N T S TO U. S. T R E A S U R Y ___________________________ Dividends p a id ____________________________________________ Payments to U. S. Treasury (interest on Federal Reserve notes) ________________________________________ Transferred to surplus __________________________________ TO T AL ____________________________________________ 448,948.42 55,976.12 _____________ 9,942.48 504,924.54 9,942.48 -198 ,3 0 2 .4 5 467,422.47 $224,141,078.92 $182,184,328.90 $ $ 2,008,397.94 1,909,325.95 220,778,680.98 1,354,000.00 $224,141,078.92 178,500,502.95 1,774,500.00 $182,184,328.90 $ 32,849,350.00 1,354,000.00 $ 31,074,850.00 1,774,500.00 $ 34,203,350.00 $ 32,849,350.00 $ 32,849,350.00 1,721,000.00 34,570,350.00 _____ 367,000.00 $ 31,074,850.00 1,905,500.00 32,980,350.00 _____ 131,000.00 $ 34,203,350.00 $ 32,849,350.00 SURPLUS ACCOUNT Balance at close of previous year _____________________ Addition account of profits for year ___________________ B ALA N CE A T CLOSE OF CURRENT Y E A R _________________________________________ CAPITAL STOCK ACCOUNT (Representing amount paid in, which is 50% of amount subscribed) Balance at close of previous year _______________________ Issued during the year _____________________________________ Cancelled during the year ________________________________ BAL A N C E A T CLOSE OF CURRENT Y E A R _________________________________________ 31 T A T 7 ') (D ecem ber 31, 1969) Wilson H. Elkins Chairman o f the Board and Federal R eserve A g en t Robert W . Lawson, Jr. D eputy Chairman o f the Board CLASS A Robert C. Baker Giles H. Miller, Jr. Douglas D. Monroe, Jr. Chairman o f the Board, Am erican Security and Trust Company Washington, D. C. (T erm expired D ecem ber 31, 1969) Succeeded b y : Hugh A . Curry President, The Kanawha Valley Bank Charleston, W est Virginia (T e rm expires D ecem ber 31, 1972) President, The Culpeper National Bank Culpeper, Virginia (T erm expires D ecem ber 31, 1970) President, Chesapeake National Bank Kilmarnock, Virginia (T erm expires D ecem ber 31, 1971) CLASS B H. Dail Holderness Charles D. Lyon Thaddeus Street President, Carolina Telephone and Telegraph Company Tarboro, N orth Carolina (T erm expires D ecem ber 31, 1970) Retired President, The Potomac Edison Company Hagerstown, Maryland (T erm expires D ecem ber 31, 1971) President, Carolina Shipping Company Charleston, South Carolina (T erm expired D ecem ber 31, 1969) Succeeded b y : Robert S. Small President and C hief E xecu tive O fficer, Dan R iver Mills, Inc. Greenville, South Carolina (T erm expires D ecem ber 31, 1972) CLASS C Wilson H. Elkins Robert W . Lawson, Jr. Stuart Shumate President, U niversity o f M aryland College Park, M aryland (T erm expires D ecem ber 31, 1971) Managing Partner, Charleston O ffice, Steptoe & Johnson Charleston, W e st Virginia (T erm expires D ecem ber 31, 1972) President, Richmond, Fredericksburg, and Potom ac Railroad Company Richmond, Virginia (T erm expires D ecem ber 3'1, 1970) MEMBER FEDERAL ADVISORY COUNCIL J. Harvie Wilkinson, Jr. 32 Chairman o f the Board, United Virginia B a n k /S ta te Planters Richmond, Virginia (T erm expired D ecem ber 31, 1969) Succeeded b y : Robert D. H. Harvey Chairman o f the Board and C hief E xecu tive O fficer, M aryland Natio7ial Bank Baltimore, M aryland (T e rm expires D ecem ber 31, 1970) Richmond Aubrey N. Heflin, President Welford S. Farmer, Senior Vice President and General Counsel Upton S. Martin, Senior Vice President James Parthemos, Senior Vice President and D irector o f Research Robert P. Black, F irst Vice P resident Arthur V. Myers, Jr., Vice President John L. Nosker, Vice President John F. Rand, Vice P resident Raymond E. Sanders, Jr., Vice P resident John G. Deitrick, Vice President Aubrey N. Snellings, Vice P resident J. Gordon Dickerson, Jr., Vice President William F. Upshaw, Vice President and William C. Glover, Vice President Jimmie R. Monhollon, Vice President Associate General Counsel H. Ernest Ford, Cashier J. Lander Allin, Jr., A ssista n t Vice President Chester D. Porter, Jr., Ch ief E xa m in er Clifford B. Beavers, A ssista n t Vice President Victor E. Pregeant, III, A ssista n t Vice President Lloyd W . Bostian, Jr., A ssistant Vice President and Secretary Wm. T. Cunningham, Jr., A ssistant Vice President Frank D. Stinnett, Jr., A ssista n t Vice President William C. Fitzgerald, A ssista n t General Counsel Andrew L. Tilton, A ssista n t Vice P resident John E. Friend, A ssistant Vice President William H. Wallace, A ssista n t Vice President William B. Harrison, III , A ssista n t Vice P resident Jack H. W yatt, A ssista n t Vice President Fred L. Bagwell, Exam ining O fficer Wenifred 0 . Pearce, A ssista n t Cashier W yatt F. Davis, Exam ining O fficer Joseph C. Ramage, A ssista n t Cashier George B. Evans, A ssista n t Cashier Wilbur C. Wilson, A ssista n t Cashier Joseph F. Viverette, General A uditor John C. Horigan, A ssista n t General A uditor G. Harold Snead, Senior A dviser Balt imora Branch Ch arlotte Branch H. Lee Boatwright, III, Senior Vice President Edmund F. Mac Donald, Senior Vice President A. A. Stewart, Jr., Vice President Stuart P. Fishburne, Vice President B. F. Armstrong, A ssistan t Vice President Boyd Z. Eubanks, A ssista n t Vice President E. Riggs Jones, Jr., A ssista nt Vice President Winfred W. Keller, A ssista n t Vice President Gerald L. Wilson, A ssista nt Vice President Fred C. Krueger, Jr., A ssista n t Vice President Charles P. Kahler, A ssistant Cashier 0 . Louis Martin, Jr., A ssista n t Cashier :'0 n leave of absence. BKA1M UM U l K t U l U K d (D ecem ber 31, 1969) Balt 1 imore Tilton H. Dobbin John H. Fetting, Jr. James M. Jarvis Arnold J. Kleff, Jr. Adrian L. McCardell James J. Robinson John P. Sippel President and Chairman o f E xecu tive Committee, M aryland National Bank Baltimore, M aryland (T erm expires Decem ber 31} 1971) President, A . H . F ettin g Company Baltimore, May'yland (T erm expires D ecem ber 31, 1970) Chairman o f the Board, Jarvis, Downing & Emcli, Inc. Clarksburg, W e st Virginia (T erm expires D ecem ber 31, 1971) Manager, Baltimore R efin ery, Am erican Smelting and R efining Company Baltimore, M aryland (T erm expires D ecem ber 31, 1972) Chairman o f the Board, F irst National Bank o f Maryland Baltimore, M aryland (T erm expires D ecem ber 31, 1970) E xecutive Vice President and Cashier, Bank o f R ipley Ripley, W e st Virginia (T erm expires D ecem ber 31, 1970) President, The Citizens National Bank Laurel, M aryland (T erm expired D ecem ber 31, 1969) Succeeded b y : James R. Chaffinch, Jr. E xecu tive Vice President, The Denton National Bank D enton, Maryland (T erm expires D ecem ber 31, 1972) Ch arlotte H. Phelps Brooks, Jr. C. C. Cameron J. W illis Cantey L. D. Coltrane, III John L. Fraley William B. McGuire James A. Morris 34 President and Trust O fficer, The Peoples National Bank Chester, South Carolina (T erm expires D ecem ber 31, 1970) Chairman o f the Board and President, F irst Union National Bank o f N orth Carolina Charlotte, N orth Carolina (T erm expires D ecem ber 31, 1970) President, The Citizens & Southern National Bank of South Carolina Columbia, South Carolina (T erm expires D ecem ber 31, 1972) President and Trust O fficer, The Concord National Bank Concord, N orth Carolina (T erm expires D ecem ber 31, 1971) E xecu tive Vice President, Carolina F reig h t Carriers Corporation Cherryville, N orth Carolina (T erm expires D ecem ber 31, 1971) President, Duke P ow er Company Charlotte, N orth Carolina (T erm expires D ecem ber 31, 1970) Commissioner o f H igher Education, The South Carolina Commission on H igher Education Columbia, South Carolina (T erm expired D ecem ber 31, 1969) Succeeded b y : E. Craig Wall, Sr. Chairman o f the Board, Canal Industries, Inc. Conway, South Carolina (T erm expires D ecem ber 31, 1972)