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1979 ANNUAL REPORT / FEDERAL R E SE R V E BA N K O F RICHM OND










FEDERAL RESERVE
BANK OF RICHMOND

Sixty-fifth Annual Report 1979

Contents
RECENT FIN AN CIAL IN N O V A T IO N S:
Causes, Consequences fo r the Payments System,
and Im plications fo r M onetary C o n t r o l ............................

5

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

6

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

6

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

8

Financial Innovation and the Payments System
Some Factors Promoting Innovation
A Review of Specific Developments

Changes in Bank Liabilities and the Public s Liquid Assets

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

16

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

18

Financial Innovation and Monetary Control
Conclusion

14

HIGHLIGHTS

20

SU M M ARY OF OPERATIONS

23

C O M PA R A TIV E FINANCIAL STATEMENTS

24

DIRECTORS

26

OFFICERS ........................................................................

28




ISSN 0164-0798

L IB R A R Y O F CONGRESS C A T A L O G CARD N U M B E R :

16-7264

Additional copies of this Annual Report may be obtained without charge from the
Bank and Public Relations Department, Federal Reserve Bank of Richmond,
P. O. Box 27622, Richmond, Virginia
23261.

February 14, 1980

T o O ur M em ber B a n k s:

W e a r e p le a s e d t o p r e s e n t t h e 1 9 7 9 A n n u a l R e p o r t o f t h e F e d e r a l R e s e r v e
B a n k o f R ic h m o n d .

T h e R e p o r t ’ s f e a t u r e a r t ic le e x a m in e s t h e c a u s e s a n d c o n s e ­

q u e n c e s o f r e c e n t f in a n c ia l in n o v a t io n s a n d t h e i r im p lic a t io n s f o r m o n e t a r y c o n t r o l.
The

R e p o r t a ls o

in c lu d e s

h ig h lig h t s

o f th e

y e a r, a

s u m m a ry

o f o p e r a t io n s ,

c o m p a r a t iv e f in a n c ia l s ta te m e n ts , a n d c u r r e n t lis t s o f d ir e c t o r s a n d o f f ic e r s o f o u r
R ic h m o n d , B a lt im o r e , C h a r lo t t e , C h a r le s t o n , C o lu m b ia , a n d C u lp e p e r O f f ic e s .

O n b e h a lf o f o u r d ir e c t o r s a n d s t a f f , w e w is h t o t h a n k y o u f o r t h e c o o p e r a t io n
a n d s u p p o r t y o u h a v e e x te n d e d t o u s t h r o u g h o u t t h e p a s t y e a r .




S in c e r e ly y o u r s ,

Chairman of the Board

President




RECENT FINANCIAL INNOVATIONS:
Causes, Consequences for the Payments System,
and Implications for Monetary Control
T h e p a s t t w o d e c a d e s h a v e b e e n c h a r a c t e r iz e d b y a
n u m b e r o f s ig n i f i c a n t in n o v a t io n s in t h e U . S . f i n a n ­
c ia l s y s te m , w h ic h t o d a y d if f e r s g r e a t ly f r o m t h e
s y s te m e x is t in g a t t h e b e g in n in g o f t h e 1 9 6 0 ’ s.
T o d a y ’ s f in a n c ia l in t e r m e d ia r ie s , i n c lu d in g c o m m e r ­
c ia l b a n k s , h a n d le a m u c h la r g e r v o lu m e o f b u s in e s s
a n d g e n e r a lly s e r v e b r o a d e r g e o g r a p h ic m a r k e t s
th a n t h e ir c o u n te rp a rts o f tw o d e c a d e s a g o . T h e y
a r e a ls o m o r e c o m p e t it iv e a n d m o r e in c lin e d t o o f f e r
a g r e a t e r v a r ie t y o f s e r v ic e s in a n e f f o r t t o m a in t a in
o r e x p a n d m a r k e t s h a re s . M o r e o v e r , s o m e i n t e r ­
m e d ia r ie s , s u c h a s c r e d i t u n io n s , n o w p la y a m o r e
im p o r t a n t r o le in t h e n a t io n ’ s f in a n c ia l s y s te m , a n d
e n t ir e ly n e w t y p e s o f in t e r m e d ia r ie s , s u c h a s m o n e y
m a r k e t f u n d s , h a v e e m e r g e d . G e n e r a lly s p e a k in g ,
b o t h t h e v a r ie t y o f in s t it u t io n s o f f e r in g f in a n c ia l
s e r v ic e s a n d t h e a r r a y o f s u c h s e r v ic e s h a v e in c r e a s e d
s ig n i f i c a n t ly , e s p e c ia lly in r e c e n t y e a r s .
T h e e x p a n d in g v a r ie t y o f s e r v ic e s o f f e r e d b y f i n a n ­
c ia l in t e r m e d ia r ie s h a s b e e n p a r a lle le d b y a n i n ­
c r e a s e d d iv e r s it y o f t h e l i a b ilit ie s o f th e s e in s t it u t io n s .
T w e n t y y e a r s a g o , f o r e x a m p le , t h e lia b ilit ie s s id e
o f a t y p i c a l c o m m e r c ia l b a n k ’ s b a la n c e s h e e t w a s
h e a v ily w e ig h t e d w i t h d e m a n d d e p o s its a n d r e g u la r
s a v in g s d e p o s its . T o d a y ’s t y p i c a l b a n k b a la n c e s h e e t
s h o w s a s iz a b le r e d u c t io n in t h e r e la t i v e im p o r t a n c e
o f s u c h d e p o s its a n d a s h a r p in c r e a s e in s o - c a lle d
“ p u r c h a s e d f u n d s , ” i.e ., n e g o t ia b le c e r t if ic a t e s o f
d e p o s it, n o n n e g o t ia b le c e r t if ic a t e s o f d e p o s it, r e p u r ­
c h a s e a g r e e m e n t s , F e d e r a l f u n d s p u r c h a s e d , a n d in
t h e c a s e o f v e r y la r g e b a n k s , p e r h a p s E u r o d o l la r
b o r r o w in g s a s w e ll. L ik e w is e , r e g u la r s a v in g s d e ­
p o s it s ( d e p o s it s h a r e s ) t y p i f i e d t h e l i a b ilit ie s o f
s a v in g s a n d lo a n a s s o c ia t io n s in t h e 1 9 5 0 ’ s b u t t o d a y
h a v e g iv e n w a y in la r g e m e a s u r e t o t im e c e r t if ic a t e s
o f d e p o s it. M u c h t h e s a m e c a n b e s a id f o r c r e d it
u n io n s a n d m u t u a l s a v in g s b a n k s .




T h e l i a b ilit ie s o f f in a n c ia l in t e r m e d ia r ie s r e p r e ­
s e n t in d e b te d n e s s t o t h e i r c u s to m e r s — t o h o u s e h o ld s ,
b u s in e s s e s , a n d g o v e r n m e n t a l u n it s f o r t h e m o s t p a r t .
C o lle c t iv e ly , c la im s o n th e s e in s t it u t io n s m a k e u p t h e
p r e d o m in a n t f r a c t i o n o f t h e p u b lic ’s h o ld in g s o f liq u i d
a s s e ts . O f t h e s e v e r a l t y p e s o f th e s e l iq u id a s s e ts ,
t h e p u b lic ’ s h o ld in g s o f d e m a n d d e p o s it c la im s a t
c o m m e r c ia l b a n k s h a v e c o m m a n d e d p a r t ic u la r a t t e n ­
t io n b e c a u s e t h e y h a v e t r a d i t i o n a l l y b e e n t h e p r in c ip a l
m e a n s o f m a k in g p a y m e n t . U n t i l r e c e n t ly , d e m a n d
d e p o s its p o s s e s s e d a n a d v a n t a g e in t h a t t h e y w e r e
im m e d ia t e ly a v a ila b le f o r s p e n d in g w h ile o t h e r liq u id
c la im s c o u ld b e s p e n t o n ly a f t e r b e in g c o n v e r t e d in t o
c o in , c u r r e n c y , o r d e m a n d d e p o s its . F o r t h is r e a s o n ,
d e m a n d d e p o s its a lo n g w i t h c o in a n d c u r r e n c y h a v e
b e e n t r a d i t i o n a l l y d e f in e d a s “ m o n e y ” w h ile o t h e r
l iq u i d c la im s a t f in a n c ia l in t e r m e d ia r ie s h a v e b e e n
c o n s id e r e d t o b e m o n e y s u b s t it u te s o r “ n e a r m o n e y . ”
T h e o u t s t a n d in g v o lu m e o f m o n e t a r y a s s e ts a t a
g iv e n t im e a n d it s r a t e o f g r o w t h o v e r t im e a r e i m ­
p o r t a n t d e t e r m in a n t s o f a g g r e g a t e s p e n d in g a n d i n ­
f la t i o n . T w o s t a t is t ic a l m e a s u r e s o f t h e m o n e t a r y
a g g r e g a te s , M i a n d M 2, h a v e p la y e d a n im p o r t a n t
r o le i n t h e im p le m e n t a t io n o f m o n e t a r y p o lic y
s in c e 1 9 7 0 . M i , t h e m e a s u r e o f m o n e y n a r r o w l y
d e f in e d , in c lu d e s c o in a n d c u r r e n c y in c ir c u la t io n
o u t s id e t h e b a n k in g s y s t e m a n d p r iv a t e d e m a n d d e ­
p o s it s a d ju s t e d . 1 A b r o a d e r m e a s u r e , M 2, in c lu d e s
w i t h M i t im e a n d s a v in g s d e p o s its a t c o m m e r c ia l
b a n k s e x c e p t f o r la r g e d e n o m in a t io n n e g o t ia b le c e r ­
t if ic a t e s o f d e p o s it.

1 The demand deposit component of Mi consists of (1)
demand deposits at commercial banks other than do­
mestic interbank and U. S. government demand deposits,
less cash items in process of collection and Federal Re­
serve float and (2) foreign demand balances at Federal
Reserve Banks.

5

J.

Financial Innovation and the Payments System

R e c e n t in n o v a t io n s h a v e h a d a d ir c c t im p a c t o n
t h e p a y m e n ts s y s te m , i.e ., o n t h e t y p e s o f a s s e ts a n d
i n s t it u t io n s in v o lv e d i n t h e c o n s u m m a t io n o f p a y ­
m e n t s b e t w e e n i n d i v i d u a l e c o n o m ic u n it s . T h e p a y ­
m e n ts s y s te m h a s h i s t o r i c a l l y c o m p r is e d t h e n a t io n ’s
1 4 ,5 0 0 c o m m e r c ia l b a n k s , a s y s t e m o f c o r r e s p o n d e n t
r e la t io n s b e t w e e n in d i v i d u a l b a n k s , lo c a l c le a r in g
h o u s e s , a n d t h e F e d e r a l R e s e r v e S y s te m . T h i s n e t ­
w o r k p r o v id e s t h e m a c h in e r y f o r t r a n s f e r r in g d e ­
m a n d d e p o s it c la im s b e t w e e n i n d i v i d u a l e c o n o m ic
u n it s . A s m e n t io n e d a b o v e , u n t i l r e c e n t ly p a y m e n ts
h a v e b e e n m a d e a lm o s t e x c lu s iv e ly w i t h d e m a n d d e ­
p o s it s o r c u r r e n c y a n d c o in .
A s a r e s u lt o f r e c e n t in n o v a t io n s , c la im s o n f i n a n ­
c ia l in s t it u t io n s o t h e r t h a n c o m m e r c ia l b a n k s a r e b e ­
in g u s e d t o m a k e p a y m e n ts . F o r s e v e r a l y e a r s i t h a s
b e e n p o s s ib le t o t r a n s f e r f u n d s f r o m s a v in g s a c c o u n ts
in t h r i f t s t o b a n k c h e c k in g a c c o u n t s b y t e le p h o n e , o r
t o u s e th e s e f u n d s t o m a k e p r e a r r a n g e d t h i r d - p a r t y
p a y m e n ts . M o r e r e c e n t ly in N e w E n g la n d a n d N e w
Y o r k N e g o t ia b le O r d e r o f W i t h d r a w a l ( N O W )
a c c o u n ts h a v e b e e n o f f e r e d b y t h r i f t i n s t it u t io n s
a s w e ll a s b y c o m m e r c ia l b a n k s . N O W a c c o u n ts
a r e a r e a d il y t r a n s f e r a b le m e a n s o f p a y m e n t. S h a r e
d r a f t s a t c r e d i t u n io n s h a v e a ls o b e c o m e a m e a n s
o f p a y m e n t. N O W
a c c o u n ts a n d s h a re d ra fts ,
h o w e v e r , d i f f e r f r o m d e m a n d d e p o s its a t c o m m e r ­
c ia l b a n k s in t h a t t h e y b e a r in t e r e s t .
H e n ce , fo r
t h e f i r s t t im e s in c e 1 9 3 3 , w h e n in t e r e s t o n d e m a n d

d e p o s its w a s p r o h ib it e d b y la w , w h a t- a m o u n ts t o
in t e r e s t - b e a r in g d e m a n d d e p o s its c o m p r is e s p a r t o f
t h e n a t io n ’ s p a y m e n ts m e d iu m .
M o r e o v e r , s in c e
N o v e m b e r 1, 1 9 7 8 , c o m m e r c ia l b a n k s h a v e b e e n
a llo w e d t o c o v e r t h e i r c u s t o m e r s ’ o v e r d r a f t s b y
a u t o m a t ic a lly t r a n s f e r r in g f u n d s f r o m s a v in g s t o
c h e c k in g a c c o u n ts . T h i s t o o a llo w s t h e u s e o f
in t e r e s t - b e a r in g d e p o s its f o r m a k in g p a y m e n t s . 2
T h e e m e r g e n c e o f n e w t y p e s o f a s s e ts t h a t m e d ia t e
t r a n s a c t io n s — t h a t is , s e r v e a s m o n e y — p o s e s p e c ia l
m o n e t a r y c o n t r o l p r o b le m s f o r t h e F e d e r a l R e s e r v e
S y s te m . A b r o a d e n e d s p e c t r u m o f m o n e y a n d n e a r
m o n e y a s s e ts c o m p lic a t e s t h e p r o b le m o f d e t e r m in ­
in g a n a p p r o p r ia t e w o r k i n g s t a t is t ic a l d e f in it io n o f
m o n e y . M o r e o v e r , g r o w t h o f m o n e t a r y a s s e ts is s u e d
b y i n s t it u t io n s b e y o n d t h e c o n t r o l o f t h e c e n t r a l b a n k
c a n s ig n i f i c a n t ly w e a k e n t h e F e d e r a l R e s e r v e ’ s a b i l i t y
t o c o n t r o l t h e m o n e t a r y a g g r e g a te s . T h e s e c tio n s
t h a t f o l l o w c o n t a in d e t a ile d d is c u s s io n s o f m a jo r
f a c t o r s p r o m o t in g in n o v a t io n , t h e in n o v a t io n s t h e m ­
s e lv e s , a n d t h e i r im p lic a t io n s f o r m o n e t a r y c o n t r o l.
2 The U. S. Circuit Court for the District of Columbia
ruled on April 20, 1979 that automatic transfer services,
share drafts, and savings and loan association remote
service units are not authorized under current law. How­
ever, the Court delayed the effect of its order until Janu­
ary 1, 1980 in order to give Congress time to consider
legislation legalizing such services.
Legislation passed
in December 1979 allows financial institutions to con­
tinue offering these services until April 1, 1980.

II. Some Factors Promoting Innovation
T h e r a p id p a c e o f f in a n c ia l in n o v a t io n o f r e c e n t
y e a r s is d u e la r g e l y t o t h r e e m a jo r f a c t o r s . T h e f i r s t
o f th e s e is t h e s e r io u s i n f la t io n t h e e c o n o m y h a s
s u f f e r e d s in c e 1 9 6 5 a n d e s p e c ia lly s in c e 1 9 7 3 . T h e
s e c o n d is t h e r a p id d e v e lo p m e n t o f c o m p u t e r a n d
c o m m u n ic a t io n s t e c h n o lo g y . T h e t h i r d is a c h a n g e
in t h e r e g u la t o r y e n v ir o n m e n t d a t in g f r o m t h e e a r ly
1 9 6 0 ’s.
I n f l a t i o n h a s a c c e le r a te d t h e p a c e o f f in a n c ia l in n o ­
v a t io n t h r o u g h it s im p a c t o n in t e r e s t r a te s . I n f l a t i o n
is a n im p o r t a n t d e t e r m in a n t o f t h e le v e l o f in t e r e s t
r a te s b e c a u s e t h e le v e l o f in t e r e s t r a te s r e f le c t s a n t ic i­
p a t io n s o f f u t u r e in f l a t i o n a n d a n t ic ip a t io n s r o u g h ly
f o l lo w r e c e n t e x p e r ie n c e w i t h in f la t io n . W h e n i n f l a ­
t io n h a s b e e n h ig h a n t ic ip a t io n s o f in f la t io n a r e a ls o

6




h i g h ; a n d w h e n in f l a t i o n h a s b e e n lo w s o a r e i n f l a ­
t io n a r y a n t ic ip a t io n s . I n f l a t i o n h a s c o n t in u a lly r is e n
i n r e c e n t y e a r s , s o in f l a t i o n a r y a n t ic ip a t io n s h a v e
r is e n a s w e ll.
I n t h is e n v ir o n m e n t le n d e r s h a v e
s o u g h t h ig h e r in t e r e s t r a te s a s c o m p e n s a t io n f o r t h e
d e p r e c ia t in g p u r c h a s in g p o w e r o f t h e i r s a v in g s . B o r ­
r o w e r s c o m p e t in g f o r f u n d s h a v e b e e n w i l l i n g t o p a y
h ig h e r in t e r e s t r a te s b e c a u s e t h e y c a n e x p e c t c o r r e ­
s p o n d in g in c r e a s e s in in c o m e f r o m in v e s t m e n t s f i ­
n a n c e d t h r o u g h b o r r o w in g s .
C o n s e q u e n t ly , r is i n g
r a t e s o f i n f la t io n h a v e le d t o h ig h e r in t e r e s t r a te s .
H i g h in t e r e s t r a te s in c r e a s e t h e o p p o r t u n it y c o s t
o f h o ld in g n o n in t e r e s t - b e a r in g a s s e ts a n d e n c o u r a g e
t h e e c o n o m iz in g o f s u c h a s s e ts . A n e x a m p le o f h o w
t h is le a d s t o in n o v a t io n is s e e n in t h e c a s e o f c o m ­

m e r c ia l b a n k s , w h ic h a r e r e q u ir e d b y la w t o h o ld
r e s e r v e s in t h e f o r m o f n o n in t e r e s t - b e a r in g a s s e ts .3
T h e in t e r e s t f o r e g o n e o n th e s e r e s e r v e s , a n d h e n c e
th e c o s t o f h o ld in g t h e m , r is e s with the level o f
m a ik e t in t e r e s t rates. T n a period o f h ig h r a te s ,
b a n k s t r y h a r d e r to re d u c e th e a m o u n t o f re s e rv e s
r e q u ir e d b y la w . B a n k s c a n d o t h is b y e n c o u r a g in g
s h if t s in lia b ilit ie s f r o m c a te g o r ie s li k e d e m a n d
d e p o s its , w h ic h h a v e a r e la t i v e ly h ig h r e s e r v e r e q u ir e ­
m e n t , t o c a te g o r ie s f o r w h ic h lo w e r , o r e v e n n o ,
r e s e r v e s a r e r e q u ir e d . F o r e x a m p le , t h e y m ig h t o f f e r
t o e n t e r r e p u r c h a s e a g r e e m e n t s w i t h c u s to m e r s h o ld ­
in g d e m a n d d e p o s its . T h i s in v o lv e s s e llin g t h e c u s ­
t o m e r g o v e r n m e n t s e c u r itie s u n d e r a g r e e m e n t t o b u y
t h e s e c u r itie s b a c k a t a s o m e w h a t h ig h e r p r ic e ( d e t e r ­
m in e d b y p r e v a ili n g m a r k e t in t e r e s t r a t e s o n s u c h
c o n t r a c t s ) a f t e r a s t ip u la t e d p e r io d , u s u a lly o n e t o
s e v e n d a y s . S u c h r e p u r c h a s e a g r e e m e n t s ( R P ’s ) a r e
lia b ilit ie s o f t h e b a n k t o it s c u s to m e r s , a s a r e d e m a n d
d e p o s its . T h e d if f e r e n c e is t h a t , f o r a la r g e b a n k , t h e
r e s e r v e r e q u ir e m e n t a g a in s t R P ’ s is s ig n i f i c a n t ly
lo w e r t h a n t h a t a g a in s t d e m a n d d e p o s its . 4 C o n s e ­
q u e n t ly , t h e b a n k i n e ff e c t p a y s in t e r e s t t o t h e c u s ­
t o m e r a n d s im u lt a n e o u s ly r e d u c e s it s r e q u ir e d r e ­
s e rv e s .
C o m m e r c ia l b a n k s c a n a c h ie v e th e s e r e s u lt s in a
v a r ie t y o f o t h e r w a y s a s w e ll. T h e i r e f f o r t s t o d o s o
h a v e r e s u lt e d i n a s ig n i f i c a n t d iv e r s if ic a t io n o f b a n k
lia b ilit ie s , h e n c e in t h e c la im s o n b a n k s h e ld b y b a n k
c u s to m e r s . A s m e n t io n e d a b o v e , t h e lia b ilit ie s s id e
o f b a n k b a la n c e s h e e ts n o w in c lu d e , in m u c h la r g e r
p r o p o r t io n t h a n in t h e 1 9 6 0 ’ s, R P ’ s, F e d e r a l f u n d s
p u r c h a s e s , n e g o t ia b le a n d n o n n e g o t ia b le C D ’ s, c o n ­
s u m e r t y p e C D ’ s, a n d i n t h e c a s e o f la r g e b a n k s ,
E u r o d o l la r b o r r o w in g s a n d o t h e r lia b ilit ie s t o f o r e ig n
b r a n c h e s . T h e s e l i a b ilit ie s a ll in v o l v e lo w e r le g a l
r e s e r v e r e q u ir e m e n t s t h a n d e m a n d d e p o s its . T o t h e
e x te n t th a t b a n k s c a n fin d w a y s to c o n v e rt d e m a n d

3 Reserve balances of member banks held with the Fed­
eral Reserve are noninterest bearing. Nonmember banks
hold reserves as specified by the individual states. A
number of states allow various types of earning assets to
satisfy their reserve requirements.
4 The marginal reserve requirement on net demand de­
posit balances over $400 million is 16^4 percent. Until
the statement week of October 11, 1979 reserve require­
ments against R P’s were zero. Since then, banks have
been required to hold an 8 percent reserve against R P’s
and certain other categories of managed liabilities above a
base amount. The base is either $100 million or the
average amount of managed liabilities held by a member
bank as of the two statement weeks ending September 26,
1979, whichever is larger. Member bank reserve require­
ments are listed in the Federal Reserve Bulletin.




d e p o s it lia b ilit ie s i n t o th e s e o t h e r f o r m s , r e q u ir e d
r e s e r v e s a r e r e d u c e d , a l lo w in g a g iv e n r e s e r v e t o
s u p p o r t a h ig h e r v o lu m e c f b o t h e a r n in g a s s e ts a n d
lia b ilit ie s .
H i g h in t e r e s t r a t e s p r o v i d e in c e n t iv e s f o r i n d i v i d ­
u a ls a n d b u s in e s s e s t o s h if t o u t o f d e m a n d d e p o s its
a n d in t o th e s e n e w t y p e s o f b a n k lia b ilit ie s . H e n c e ,
c o m m e r c ia l b a n k s a n d o t h e r f in a n c ia l in s t it u t io n s
f i n d a r e a d y , in d e e d e a g e r , m a r k e t f o r n e w in t e r e s t b e a r in g li q u i d s u b s t it u t e s f o r d e m a n d d e p o s its t h a t
t h e i r in g e n u it y c a n d e v is e .
A s a m a t t e r o f fa c t ,
s h a r p - p e n c ile d c o r p o r a t e t r e a s u r e r s h a v e b e e n k n o w n
t o in s is t t h a t t h e i r b a n k e r s s t a n d r e a d y t o e n t e r o v e r ­
n ig h t r e p u r c h a s e a g r e e m e n t s w i t h t h e m s o t h a t t h e y
c a n e a r n in t e r e s t o n b a la n c e s t h a t c a n b e u s e d r a t h e r
p r o m p t l y f o r m a k in g p a y m e n ts .
A r r a n g e m e n t s a llo w in g b a n k s t o r e d u c e r e q u ir e d
r e s e r v e s a n d t h e p u b lic t o r e d u c e it s h o ld in g s o f
d e m a n d d e p o s its a r e m o t iv a t e d s im p ly b y a d e s ir e to
m in im i z e in d i v id u a l c o s ts o f d o in g b u s in e s s . U n ­
f o r t u n a t e ly , h o w e v e r , t h e a g g r e g a t e e ff e c t o f th e s e
a r r a n g e m e n t s is t h e c r e a t io n a n d r a p id g r o w t h o f
h ig h ly l i q u i d a s s e ts u s e d b y t h e p u b lic in p la c e o f
d e m a n d d e p o s its . A s e x p la in e d in S e c t io n V , t h is
c o m p lic a t e s m o n e t a r y c o n t r o l.
T h e r a p id d e v e lo p m e n t o f c o m p u t e r a n d c o m m u n i­
c a tio n s t e c h n o lo g y h a s g iv e n i n d i v id u a l in s t it u t io n s
t h e c a p a c it y t o p r o c e s s m a s s iv e a m o u n ts o f d a ta a n d
t o m a k e t r a n s f e r s r a p i d l y a n d e f f ic i e n t ly . I n m a n y
in s ta n c e s , s o p h is t ic a te d n e w e q u ip m e n t h a s r e s u lte d
in s iz a b le a m o u n ts o f e x c e s s c a p a c it y , t h e r e b y c r e a t ­
in g in c e n t iv e s f o r e x p a n d in g e x is t in g s e r v ic e s a n d
o f f e r in g n e w k in d s o f s e r v ic e s . I n s h o r t , t h e r e v o lu ­
t io n in c o m p u t e r a n d c o m m u n ic a t io n s t e c h n o lo g y h a s
p la y e d a n im p o r t a n t r o le i n r e c e n t f in a n c ia l in n o ­
v a t io n .
B e t w e e n t h e e a r ly 1 9 3 0 ’s a n d t h e 1 9 6 0 ’s, b a n k
r e g u la t o r y p h ilo s o p h y w a s d o m in a t e d b y a p r e o c c u ­
p a t io n w i t h t h e s o u n d n e s s o f i n d i v i d u a l in s t it u t io n s .
C o m p e t it io n in b a n k in g w a s v ie w e d a s a d o u b le e d g e d s w o r d , in c o r p o r a t in g n o t a b le d is a d v a n ta g e s a s
w e ll a s s o m e g e n e r a lly a c c e p te d a d v a n ta g e s in im ­
p r o v i n g t h e q u a lit y o f b a n k in g s e r v ic e s t o t h e p u b lic .
I n d e e d , s o m e b a n k r e g u la t io n s , s u c h a s t h e p r o h ib i­
t io n o f t h e p a y m e n t o f in t e r e s t o n d e m a n d d e p o s its
a n d t h e l i m i t a t i o n o n in t e r e s t p a y a b le o n s a v in g s
d e p o s its , w e r e d e s ig n e d e x p l i c i t l y t o d is c o u r a g e c o m ­
p e t it io n .
I n t h e e a r ly a n d m id d le 1 9 6 0 ’ s m a j o r c h a n g e s w e r e
m a d e in F e d e r a l a n d s t a t e b a n k in g la w s a n d r e g u ­

7

la t io n s , m o s t t e n d in g t o e n c o u r a g e c o m p e t it io n n o t
o n ly a m o n g b a n k s b u t a ls o b e t w e e n c o m m e r c ia l b a n k s
a n d o t h e r f in a n c ia l in s t it u t io n s . W i t h t h e in t r o d u c t i o n
o f t h e n e g o t ia b le c e r t if ic a t e o f d e p o s it in 1 9 0 1 , la r g e
c o m m e r c ia l b a n k s f o u n d a w a y t o c o m p e te f o r m o n e y
m a r k e t f u n d s . S h o r t ly a f t e r w a r d s , b o t h la r g e a n d
s m a ll b a n k s , w h ic h u p t o t h e 1 9 6 0 ’ s h a d s h o w n r e la ­
t iv e ly l i t t l e in t e r e s t in c o n s u m e r t y p e s a v in g s d e p o s its ,
b e g a n m o v in g v ig o r o u s ly in t o t h is m a r k e t . T h e s e
m o v e s u s h e r e d in a n e r a o f e v e r s h a r p e n in g c o m p e t i­
t io n w i t h i n t h e c o m m e r c ia l b a n k in g c o m m u n it y a n d
b e tw e e n c o m m e r c ia l b a n k s a n d o t h e r f in a n c ia l i n t e r ­
m e d ia r ie s . S u b s e q u e n t c h a n g e s in b a n k h o ld in g c o m ­
p a n y la w , lib e r a liz a t io n o f r e g u la t io n s f o r t h r i f t i n ­
s t it u t io n s , a n d a m o r e c o m p e t it iv e i n t e r n a t i o n a l b a n k ­
in g c lim a t e r e in f o r c e d t h is m o v e t o m o r e in t e n s iv e
c o m p e t it io n .
I n a n y c a s e , t h e r e h a s b e e n in t h e
p e r io d a f t e r 1 9 6 1 a m o r e o r le s s s te a d y r e la x a t io n o f
r e g u la t o r y c o n s t r a in t s a n d a s ig n i f i c a n t in c r e a s e in
c o m p e t it io n a m o n g a ll t y p e s o f f in a n c ia l in s t i t u t i o n s . 5

5 An exception to this steady relaxation of regulatory
constraints is the Interest Adjustment Act of 1966, which
extended coverage of deposit rate ceilings to the thrift
industry and established a differential between maximum
rates that banks and thrifts could pay on deposits. This
action was a direct result of the heightened competition
for consumer deposits occurring in the early- and mid1960’s, which had resulted in a decline in thrift institution
deposit growth relative to bank deposit growth.

T h e s t e a d y r e la x a t io n o f r e g u la t o r y c o n s t r a in t s ,
h o w e v e r , h a s n o t a lw a y s p r e c e d e d o n t h e i n i t i a t i v e o f
t h e r e g u la t o r s t h e m s e lv e s . T h e N O W a c c o u n t c a s e
p r o v id e s a s im p le i l l u s t r a t i o n o f t h is . T h e s e c u la r
r is e in in t e r e s t r a t e s in t h e la t e 1 9 6 0 ’ s w a s e s p e c ia lly
t r o u b le s o m e f o r m u t u a l s a v in g s b a n k s .
A s le g a l
c e ilin g s o n t h e in t e r e s t t h e y c o u ld p a y b e c a m e i n ­
c r e a s in g ly r e s t r ic t iv e , t h e i r a b i l i t y t o c o m p e t e f o r
f u n d s d e t e r io r a t e d a n d t h e i r d e p o s it g r o w t h s lo w e d .
F e d e r a l la w p r o h ib it e d p a y m e n t o f in t e r e s t o n c h e c k ­
in g a c c o u n ts , b u t t h e p r o h i b i t i o n d id n o t e x t e n d t o
m u t u a l s a v in g s b a n k s t h a t w e r e n o t in s u r e d b y t h e
F D I C . I n 1 9 7 0 a s t a t e - in s u r e d M a s s a c h u s e t t s m u ­
t u a l s a v in g s b a n k , lo o k i n g f o r a w a y t o a t t r a c t d e ­
p o s it s , p e t it io n e d t h e s t a t e c o m m is s io n e r o f b a n k in g
f o r a u t h o r i t y t o o f f e r N O W a c c o u n ts . T h e p e t it io n
w a s d e n ie d b u t , o n a p p e a l, t h e s ta te s u p r e m e c o u r t
o v e r t u r n e d t h e d e n ia l o n g r o u n d s t h a t s ta te la w p r o ­
v id e d n o r e s t r ic t io n s o n t h e f o r m in w h ic h d e p o s its
c o u ld b e w it h d r a w n . W i t h t h e p u b lic b e c o m in g i n ­
c r e a s in g ly a w a r e o f lo s s e s s u ff e r e d b y e a r n in g n o
in t e r e s t o n c h e c k in g b a la n c e s , F e d e r a l la w a u t h o r iz e d
t h e is s u e o f N O W a c c o u n ts b y c o m m e r c ia l b a n k s a n d
t h r i f t in s t it u t io n s , f i r s t in M a s s a c h u s e t t s a n d N e w
H a m p s h ir e , t h e n in a ll N e w E n g la n d s ta te s , a n d
f i n a l l y in N e w Y o r k a n d N e w J e r s e y . T o p r e s e r v e
c o m p e t it iv e e q u it y n a t io n a lly , c o m m e r c ia l b a n k s h a v e
b e e n a llo w e d t o o f f e r a u t o m a t ic t r a n s f e r s e r v ic e s
b e g in n in g i n N o v e m b e r 1 9 7 8 .

III. A Review of Specific Developments
T a b le I is a r o u g h ly c h r o n o lo g ic a l l i s t i n g o f in n o ­
v a t io n s t h a t h a v e p e r m it t e d t h e p u b lic t o r e d u c e it s
r e lia n c e o n d e m a n d d e p o s its . T h e in f lu e n c e o f e a c h
o f th e s e d e v e lo p m e n ts o n t h e m a n a g e m e n t o f p a y ­
m e n t s b a la n c e s b y b u s in e s s e s a n d h o u s e h o ld s is
d e s c r ib e d b e lo w .
L ik e o th e r e c o ­
n o m ic u n it s , b u s in e s s e s h a v e a n in c e n t iv e t o m in im i z e
c a s h h e ld f o r p a y m e n ts p u r p o s e s . D o in g s o is a
c o m p le x t a s k , h o w e v e r , e s p e c ia lly f o r la r g e c o r p o r a ­
t io n s w h o s e o p e r a t io n s a r e w id e ly d iv e r s if ie d g e o ­
g r a p h ic a lly a n d b y p r o d u c t lin e . A n u m b e r o f s p e ­
c ia liz e d c a s h m a n a g e m e n t te c h n iq u e s h a v e b e e n d e ­
v e lo p e d t o im p r o v e t h e e f f ic ie n c y w i t h w h ic h m o n e y
p o s it io n s a r e m a n a g e d . S o m e o f th e s e te c h n iq u e s ,
e .g ., c a s h f l o w f o r e c a s t in g a n d in t e r n a l a c c o u n t in g
C orporate C ash M a n a g em en t

8




c o n t r o l s y s te m s , a r e a v a ila b le in - h o u s e o r t h r o u g h
n o n b a n k v e n d o r s . B e c a u s e o f t h e i r c e n t r a l r o le in
t h e p a y m e n ts p r o c e s s , h o w e v e r , c o m m e r c ia l b a n k s
a r e t h e m o s t i m p o r t a n t s u p p lie r s o f c o r p o r a t e c a s h
m a n a g e m e n t s e r v ic e s . B a n k s p o n s o r e d c a s h m a n a g e ­
m e n t s y s te m s a r e d e s ig n e d t o a c c e le r a te c o lle c t io n s
in t o a la r g e f i r m ’s r e g io n a l c h e c k in g a c c o u n t s a n d
t h e n t o f u r t h e r c o n c e n t r a t e d e m a n d d e p o s its in t o o n e
a c c o u n t u s e d t o p a y b ills a n d f u n d s h o r t - t e r m in v e s t ­
m e n ts . T h e k e y e le m e n ts i n s u c h a s y s te m in c lu d e
c a s h c o n c e n t r a t io n , d is b u r s e m e n t , a n d in v e s t m e n t
m a n a g e m e n t.
T h e f i r s t s te p in c a s h c o n c e n t r a t io n is d e v e lo p m e n t
o f a c o lle c t io n s y s te m f o r f u n d s b a s e d o n a g r o u p o f
lo c a l a n d r e g io n a l b a n k in g o r g a n iz a t io n s s e le c te d f o r
t h e ir p r o x i m i t y e it h e r t o t h e f i r m ’s f ie ld o p e r a t io n s
o r t o it s c u s to m e r s . C u s t o m e r s a r e in s t r u c t e d t o

Table I

SUMMARY OF REGULATORY, LEGISLATIVE, AND TECHNICAL DEVELOPMENTS
ENABLING THE PUBLIC TO REDUCE STS RELIANCE O N

NONINTEREST-BEARING DEMAND DEPOSITS
D e v e lo p m e n t

D a te o r Period

D escrip tion

(1)

C o rp o ra te cash m a n a g e m e n t
services

p o s t-W o rld W a r II

C o rp o ra te ca sh m a n a g e m e n t services, fo r e x a m p le , lo ckb oxe s, ca sh concen tra tion a ccounts, a n d in fo rm a tio n -re trie va l system s, a re tech­
n ical in n o v a tio n s p erm ittin g m ore efficient m a n a g e m e n t o f ca sh
b a la n ce s.
Their in trod u ction b y com m ercial b a n k s g o e s b a ck m a n y
ye a rs, a lt h o u g h such services cam e to b e u se d m uch m ore w id e ly a fter
W o rld W a r II.

(2)

N e g o tia b le certificates of
d e p o sit (C D 's)

1961

N e g o tia b le C D 's a re m a rk e ta b le receipts fo r f u n d s d e p o site d in a
b a n k fo r a sp e cifie d p e rio d a t a spe cifie d rate o f interest.
This
instrum en t w a s o rig in a te d in 1961 b y a la r g e m o n e y center b a nk.

(3)

S a v in g s accou nts fo r state
a n d local go ve rn m e n ts
a n d b u sin e sse s

1 9 6 0 's, 1 1 / 7 4 , 1 1 / 7 5

F e d e ra lly ch arte re d s a v in g s a n d lo a n a sso c ia tio n s h a ve been a u t h o ­
rized to o ffe r local g o v e rn m e n ts a n d b u sin e sse s s a v in g s accou nts since
the 1 9 6 0 's.
C o m m e rc ia l b a n k s w e re a u th o riz e d to accept s a v in g s
d e p o sits fro m local go v e rn m e n ts sta rtin g N o v e m b e r 1974 a n d fro m
b u sin e sse s (u p to $ 1 5 0 ,0 0 0 ) sta rtin g N o v e m b e r 1975.

(4)

T ele p h o n e tra n sfe rs from
s a v in g s accounts

1 9 6 0 's, 4 / 7 5

T e lep ho ne tra n sfe rs a llo w s a v in g s a ccou nt custom ers to tra n sfe r
fu n d s either to ch ecking a ccou nts o r to third p a rtie s b y phone. Federal
s a v in g s a n d lo a n a sso c ia tio n s h a v e h a d this a u th o rity since the 1 9 6 0 's,
w h e re a s b a n k s w e re g ra n te d it in A p ril 1975.

(5)

R e p u rc h a se a gre e m e n ts (R P's)

19 6 9

R e p u rc h a se a g re e m e n ts a re p rim a rily short-term contracts fo r the
p u rc h a se o f im m e d ia te ly a v a ila b le fu n d s co lla te ra lized b y securities.
R P 's g r e w ra p id ly b e g in n in g in 1 9 6 9 a fte r R e g u la tio n D w a s a m e n d e d
to ex p licitly e x e m p t fro m reserve req u ire m e nts R P 's b a cked b y the
sate o f U. S. G o v e rn m e n t o r Fed eral a g e n c y securities.

(6)

P re a u th o rize d th ird -p a rty
tra n sfe rs

9/70, 4/75, 9/75

P re a u th o rize d tra n sfe rs a re p a y m e n ts m a d e fro m s a v in g s accou nts fo r
recurring tra n sa c tion s. S a v in g s a n d lo a n a sso c ia tio n s w e re perm itted
to m a k e p re a u th o riz e d n o n n e g o tia b le tra n sfe rs fro m s a v in g s accounts
to third p a rtie s fo r h o u se h o ld -re la te d e x p e n d itu re s in Sep tem b er 1970
a n d fo r a n y p u rp o se b e g in n in g in A p ril 1975.
C om m e rcia l b a n k s
w e re p erm itted to m a k e p re a u th o riz e d n o n n e g o tia b le tra n sfe rs from
s a v in g s accou nts to third p a rtie s fo r a n y p u rp o se in Se p te m b e r 1975.

(7)

N e g o tia b le O rd e r of
W it h d r a w a l (N O W )
accou nts

5/72, 9/72, 1/74
3/76, 10/78, 12/79

N O W a ccou nts a re s a v in g s accou nts fro m w h ic h p a ym e n ts ca n be
m a d e b y dra ft. Sta te-cha rtered m utua l s a v in g s b a n k s b e g a n o ffe rin g
N O W a ccou nts in M a ssa c h u se tts a fte r a M a y 19 7 2 state court ru lin g
a u th o riz in g such d ep osits.
N O W 's w e re o ffe re d b y state-chartered
m utua l s a v in g s b a n k s in N e w H a m p sh ire in S e p te m b e r 1972 w ith the
a p p ro v a l o f the state b a n k com m ission er.
B e g in n in g J a n u a r y 19 7 4
C o n g r e s s a u th o riz e d all d e p o sito ry in stitutions in the tw o a b o v e
m en tio ne d states to o ffe r N O W 's .
B e g in n in g M a r c h 1976, C o n g r e s s
a u th o riz e d N O W 's at a ll d e p o sito ry in stitutions in Connecticut, M a in e ,
R ho d e Isla n d , a n d V e rm o n t, a u th o rity that w a s ex te n d e d to N e w Y o rk
in N o v e m b e r 1978 a n d N e w Je rse y in D ece m be r 1979.

(8)

S a v in g s a n d lo an rem ote
service units (R S U 's)

1/74

R S U 's a re m a ch in e s that a llo w a custom er to m a k e d e p o sits to, a n d
w ith d ra w a ls from , his s a v in g s a ccou nt a t stores a n d oth er places
a w a y fro m the institution m a in t a in in g the account.
The Federal
H om e L oa n B a n k B o a rd a u th o riz e d R S U 's in J a n u a r y 1974, A lt h o u g h
ruled ille g a l in A p ril 1979, C o n g r e s s su b se q u e n tly p a sse d le gisla tio n
le g a liz in g the service until A p ril 1, 1980.

(9)

M o n e y m ark e t fu n d s (M M F 's )

e a rly 1 9 7 4

M o n e y m a rk e t fu n d s a re m u tu a l fu n d s sp e c ia liz in g in short-term
in vestm en ts fro m w h ich sh a re s ca n be redeem ed b y checks d ra w n on
d e sig n a te d com m ercial b a n k s, o r b y w ire tran sfer, telephone, o r m ail.
U se o f M M F 's b eca m e w id e sp r e a d b e g in n in g in e a rly 1974.

C re d it u nio n sh a re d ra fts

10/74, 3 / 7 8

C re d it u n io n sh a re d ra fts a re p a y m e n ts m a d e directly fro m sh a re
accounts.
A n e x p e rim e n ta l s h a re d ra ft p ro g r a m w a s a p p ro v e d fo r
Federal credit u n io n s in O c to b e r 1 9 7 4 a n d m a d e p e rm a n e n t in M a r c h
1978.
A lt h o u g h ruled ille g a l in A p ril 1979, C o n g r e s s su b se q u e n tly
p a sse d le g isla tio n le g a liz in g the service until A p ril 1, 1980.

11/78

C o m m e rc ia l b a n k s w e re a llo w e d to o ffe r custom ers a u to m a tic s a v in g s
to ch ecking tra n sfe rs sta rtin g N o v e m b e r 1978. This led to the w id e ­
sp re a d o ffe rin g o f a u to m a tic tra n sfe r services (ATS), w h ic h a re
esse n tia lly ze ro -b a la n c e ch ecking a ccou nts fe d fro m s a v in g s accounts.
A lt h o u g h ruled ille g a l in A p ril 1979, C o n g r e s s su b se q u e n tly p a sse d
le gisla tio n le g a liz in g the service until A p ril 1, 1980.

(10)

(11)

'P re a u th o rize d s a v in g s to
ch e c kin g tran sfers

Source:

A dapted from [ ! ] •




m a il t h e i r p a y m e n ts t o a lo c k b o x u n d e r t h e c o n t r o l
o f a lo c a l b a n k , w h ic h c o lle c ts r e m it t a n c e s a n d c r e d it s
t h e f i r m ’s c h e c k in g a c c o u n t . 6 I n f o r m a t i o n o n t h e
a m o u n t o f c o lle c te d b a la n c e s in th e s e lo c a l d e p o s i­
t o r ie s is g a t h e r e d b y te le p h o n e , a n d t h e n a d e p o s it o r y
t r a n s f e r c h e c k ( D T C ) is w r i t t e n p a y a b le t o a n a c ­
c o u n t in a r e g io n a l “ c o n c e n t r a t io n ” b a n k a n d d r a w n
o n t h e v a r io u s lo c a l b a n k s . T h e D T C , w h ic h is a
n o n n e g o t ia b le c h e c k t h a t r e q u ir e s n o s ig n a t u r e , is
c o m m o n ly u s e d t o t r a n s f e r f u n d s b e t w e e n a c o r ­
p o r a t io n ’s a c c o u n ts h e ld i n d if f e r e n t b a n k s . S in c e
t h e D T C c a n b e d e p o s ite d in t h e r e g io n a l c o n c e n t r a ­
t io n b a n k im m e d ia t e ly a f t e r a c c o u n t b a la n c e s a r e
a s c e r t a in e d b y p h o n e , o v e r n ig h t c r e d i t is a v a ila b le a s
lo n g a s t h e r e g io n a l b a n k a n d lo c a l d e p o s ito r ie s a r e
a ll lo c a t e d in t h e s a m e F e d e r a l R e s e r v e r e g io n a l
c h e c k p r o c e s s in g a re a . T h e r e g io n a l b a n k c a n t h e n
w ir e t h e c o lle c te d f u n d s t o t h e c o r p o r a t io n ’ s m a s t e r
c h e c k in g a c c o u n t h e ld a t a b a n k in t h e h o m e o f f ic e
c it y .
D is b u r s e m e n t o f c o r p o r a t e f u n d s c a n b e c e n t r a l­
iz e d , a ll c h e c k s b e in g w r i t t e n f r o m t h e m a s t e r a c ­
c o u n t , o r d e c e n t r a liz e d , w i t h s e p a r a te d iv is io n s o f t h e
c o m p a n y m a k in g p a y m e n ts in t h e i r r e s p e c t iv e lo c a li­
t ie s . C e n t r a liz e d c a s h c o n t r o l c a n b e m a in t a in e d e v e n
in a d e c e n t r a liz e d c h e c k - w r it in g e n v ir o n m e n t u s in g
z e r o - b a la n c e a c c o u n ts . U n d e r t h i s s y s te m , a c o m ­
p a n y ’ s d is b u r s in g a g e n ts w r i t e c h e c k s o n d e s ig n a t e d
d is b u r s in g a c c o u n ts m a in t a in e d a t r e g io n a l b a n k s a n d
h a v in g z e r o b a la n c e s . D e b i t b a la n c e s a c c u m u la t e i n
th e s e z e r o - b a la n c e d is b u r s in g a c c o u n ts a s c h e c k s a r e
w r itt e n a n d a re o ffs e t b y c h a rg e s m a d e o n th e c o r ­
p o r a t io n ’ s m a s t e r a c c o u n t.
In te g r a l to th e c o n c e p t o f c o rp o ra te c a s h m a n a g e ­
m e n t is a p r o m p t r e p o r t in g s y s te m t h a t m o n it o r s ,
a n d p e r h a p s e v e n f o r e c a s t s , c a s h f lo w . I n f o r m a t io n
c o n t a in e d i n a r e p o r t in g s y s t e m w o u l d c o n s is t o f d e ­
t a ile d t r a n s a c t io n s d a ta , in c lu d in g t r a n s f e r a c t i v it y
b e t w e e n a c c o u n ts a n d d a il y b a n k b a la n c e s .
The
u lt im a t e o b je c t iv e o f s u c h a r e p o r t in g s y s te m is t o
p r o v i d e in f o r m a t io n o n t h e a m o u n t o f m o n e y a v a il­
a b le f o r s h o r t - t e r m in v e s t m e n t .
N eg o tia b le C D ’s A s c o r p o r a t i o n s b e c a m e m o r e
a d e p t a t c a s h m a n a g e m e n t d u r i n g t h e 1 9 5 0 ’s, t h e i r
in v e s t a b le b a n k b a la n c e s in c r e a s e d s ig n i f i c a n t ly .
R a t h e r t h a n h o ld in g id le d e m a n d d e p o s its , s h o r t ­
t e r m in v e s t m e n t s o f f e r in g h ig h l i q u i d i t y a n d lo w r i s k
w e r e s o u g h t . S in c e f e w b a n k s o f f e r e d c o r p o r a t io n s
6 A simple rule of thumb is to choose local lockboxes so
that mail from company operations in an area can be
delivered overnight.

10




in t e r e s t - b e a r in g d e p o s its a s a lt e r n a t iv e s t o c h e c k in g
b a la n c e s , b u s in e s s e s t u r n e d t o o t h e r in v e s t m e n t
s o u r c e s , p a r t i c u l a r l y c o m m e r c ia l p a p e r , T r e a s u r y
b ills , a n d r e p u r c h a s e a g r e e m e n t s w i t h s e c u r it ie s
d e a le r s . C o n s e q u e n t ly , t h e r e w a s a s h a r p d e c lin e in
t h e im p o r t a n c e o f c o r p o r a t e d e p o s its o n t h e b a n k in g
s y s t e m ’ s b a la n c e s h e e t. L a r g e m o n e y c e n t e r b a n k s
e s p e c ia lly f e l t t h is lo s s o f f u n d s s in c e t h e y r e lie d o n
c o r p o r a t e d e m a n d d e p o s its t o a g r e a t e r e x t e n t t h a n
o t h e r , s m a lle r b a n k s . T h is s it u a t io n p r o m p t e d F i r s t
N a t io n a l C i t y B a n k o f N e w Y o r k t o in t r o d u c e in
F e b r u a r y 1 9 6 1 t h e la r g e n e g o t ia b le c e r t if ic a t e o f
d e p o s it ( n e g o t ia b le C D ) , a n e w l i a b i l i t y s p e c if ic a lly
d e s ig n e d t o a t t r a c t c o r p o r a t e f u n d s .
R e g u la t io n s l i m i t n e g o t ia b le C D ’ s t o a m in im u m
m a tu r ity o f 3 0 d a y s .
A l t h o u g h r e la t i v e ly s h o r t ,
t h is m a t u r i t y is s t i l l u n a t t r a c t iv e t o b u s in e s s e s s e e k ­
in g a n in v e s t m e n t o u t le t t h a t a llo w s q u ic k c o n v e r s io n
b a c k t o d e m a n d d e p o s its . W h e n f i r s t in t r o d u c e d in
1 9 6 1 , t h e r e f o r e , i t w a s a ls o a n n o u n c e d t h a t a m a jo r
g o v e r n m e n t s e c u r itie s d e a le r h a d a g r e e d t o m a k e a
s e c o n d a r y m a r k e t in n e g o t ia b le C D ’ s. T h is s e c o n d a r y
m a r k e t m a k e s n e g o t ia b le C D ’s a n a t t r a c t iv e s u b s t i­
t u t e f o r d e m a n d d e p o s its . C o r p o r a t io n s h o ld in g C D ’ s
c a n s e ll th e s e in t h e s e c o n d a r y m a r k e t a t a n y t im e t o
r a is e c a s h , w h ile f i r m s d e s ir in g in v e s t m e n t s w i t h m a ­
t u r i t i e s s h o r t e r t h a n 3 0 d a y s c a n a c q u ir e C D ’ s w i t h
r e m a in in g t e r m s t o m a t u r i t y t h a t f i t t h e i r l i q u i d i t y
n e e d s . T h e m a r k e t a b ilit y o f p r im e C D ’ s is s u e d b y
la r g e w e ll k n o w n b a n k s is g e n e r a lly g r e a t e r t h a n t h a t
f o r t h o s e is s u e d b y le s s e r k n o w n r e g io n a l in s t it u t io n s .
F o r t h i s r e a s o n , in v e s t m e n t in m o n e y c e n t e r b a n k
C D ’ s is f a v o r e d b y c o r p o r a t io n s .
N e g o t ia b le C D ’ s p o s s e s s s o m e c h a r a c t e r is t ic s t h a t
l i m i t t h e i r a t t r a c t iv e n e s s t o c o r p o r a t e m o n e y m a n ­
a g e r s . I n p a r t ic u la r , C D ’ s a r e n o t n e a r ly a s h o m o ­
g e n e o u s ( i n t e r m s o f r a te s , d e n o m in a t io n s , a n d o t h e r
c o n t r a c t u a l f e a t u r e s ) a s a r e , s a y , T r e a s u r y b ills .
A ls o , d e a le r s m a in ly t r a d e p r im e C D ’s in d e n o m in a ­
t io n s o f $ 1 m i l l i o n a n d w i l l r a r e ly s p lit o r c o n s o lid a t e
c e r t if ic a t e s t o f a c i lit a t e a s e c o n d a r y m a r k e t t r a n s ­
a c t io n . F o r th e s e re a s o n s , n e g o t ia b le C D ’ s m a y n o t
a lw a y s e x a c t ly f i t t h e s h o r t - t e r m in v e s t m e n t n e e d s o f
c o r p o r a t io n s . T h e s e lim it a t io n s n o t w it h s t a n d i n g , n e ­
g o t ia b le C D ’ s h a v e b e c o m e a m a j o r s o u r c e o f b a n k
fu n d s .
R e p u rc h a s e a g re e m e n ts
( R P ’s ) r e p r e s e n t a p a r t i c u l a r l y u s e f u l i n s t r u m e n t f o r
c a s h m a n a g e m e n t t h a t h a s b e c o m e w id e ly u s e d o n ly
i n t h e la s t f e w y e a r s . R P ’s a r e in c o m e - g e n e r a t in g
a s s e ts h a v in g a v e r y lo w c r e d i t r i s k t h a t a r e a v a il­
R epu rch ase A g r e e m e n ts

a b le in m a t u r it i e s a s s h o r t a s o n e d a y . C o m m e r c ia l
b a n k s b e c a m e a c tiv e s u p p lie r s o f R P ’s a f t e r 1 9 6 9 a n d
n o w o ffe r th e m as p a r t o f th e c a s h m a n a g e m e n t
s y s te m s m a r k e t e d t o c o r p o r a t io n s .
B u s in e s s e s h a v in g c a s h c o n c e n t r a t io n s y s te m s a r e
a b le t o d e t e r m in e t h e a m o u n t o f in v e s t a b le b a la n c e s
a v a ila b le in t h e i r c h e c k in g a c c o u n t s e a c h m o r n in g .
I f f u n d s a r e a v a ila b le t o in v e s t f o r o n ly a v e r y s h o r t
p e r io d , t h e y c a n b e p la c e d in t h e o v e r n ig h t o r o n e d a y R P m a r k e t.
T o f a c i lit a t e p la c e m e n t o f id le
c h e c k in g b a la n c e s i n t h e R P m a r k e t , a n in v e s t m e n t
t e c h n iq u e k n o w n a s t h e c o n t in u i n g c o n t r a c t h a s b e e n
d e v e lo p e d . U n d e r t h i s t y p e o f a r r a n g e m e n t , a c o r ­
p o r a t io n a g r e e s t o p r o v i d e it s b a n k w i t h a s p e c if ic
v o lu m e o f f u n d s t o b e a u t o m a t ic a lly r e in v e s t e d e a c h
d a y f o r a s p e c if ie d p e r io d . C o n t in u in g c o n t r a c t s i n
R P ’ s r e d u c e t r a n s a c t io n s c o s ts s in c e f u n d s a r e e x ­
c h a n g e d o n ly a t t h e b e g in n in g a n d e n d o f t h e c o n ­
t r a c t p e r io d . L i q u i d i t y is p r e s e r v e d , h o w e v e r , s in c e
e it h e r t h e c o r p o r a t io n o r t h e b a n k c a n c a n c e l t h e
c o n t r a c t b e f o r e m a t u r i t y . S i m i l a r t o t h e c o n t in u i n g
c o n t r a c t is t h e p r e a u t h o r iz e d t r a n s f e r a r r a n g e m e n t .
U n d e r t h e la t t e r a r r a n g e m e n t , b a n k s a u t o m a t ic a lly
in v e s t a c o r p o r a t io n ’ s m a s t e r c h e c k in g a c c o u n t f u n d s
a b o v e a s p e c if ie d m in im u m in R P ’s.
T h e R P m a r k e t h a s g r o w n d r a m a t ic a lly i n r e c e n t
y e a r s , e s p e c ia lly t h e m a r k e t f o r v e r y s h o r t - t e r m R P ’ s.
A s p e c ia l s u r v e y o f 4 6 m o n e y c e n t e r b a n k s c o n d u c t e d
in D e c e m b e r 1 9 7 7 s h o w e d R P ’ s o u t s t a n d in g t o n o n f in a n c ia l b u s in e s s e s o f $ 1 0 .5 b i l l i o n — 3 1 p e r c e n t
u n d e r o n e - d a y c o n t r a c t , 11 p e r c e n t u n d e r c o n t in u i n g
c o n tra c t, 2 2 p e rc e n t u n d e r tw o - to s e v e n -d a y c o n ­
t r a c t , a n d 2 8 p e r c e n t u n d e r e ig h t - t o t h i r t y - d a y c o n ­
t r a c t . A n o t h e r $ 3 . 8 b i l l i o n w a s o u t s t a n d in g t o s ta te
a n d lo c a l g o v e r n m e n t s , w h ic h , lik e c o r p o r a t io n s , a r e
a c tiv e c a s h m a n a g e r s . T h e m a j o r i t y o f s ta te a n d
lo c a l g o v e r n m e n t R P ’ s a r e e it h e r o n e - d a y o r c o n ­
t i n u i n g c o n t r a c t s . B a n k s in d ic a t e t h a t a c t i v i t y in t h e
R P m a r k e t h a s in c r e a s e d g r e a t ly s in c e 1 9 7 7 .
S a v in g s A c c o u n ts F o r B u sin ess
S in c e a f a i r l y
la r g e m i n im u m in v e s t m e n t is n e c e s s a r y i n n e g o t ia b le
C D ’ s a n d R P ’ s, th e s e in s t r u m e n t s a r e n o t g e n e r a lly
s u it e d t o t h e r e q u ir e m e n t s o f s m a lle r b u s in e s s e s . A n
a m e n d m e n t t o R e g u la t io n Q , e f f e c t iv e N o v e m b e r 1 0 ,
1 9 7 5 , h a s p e r m it t e d b u s in e s s e s t o h o ld s a v in g s a c ­
c o u n t s a t c o m m e r c ia l b a n k s , s u b je c t t o a c e ilin g l i m i t
o f $ 1 5 0 ,0 0 0 . T h i s c h a n g e w a s m a d e t o p r o v i d e a n
in v e s t m e n t o u t le t t o s m a ll b u s in e s s e s h o ld in g t e m ­
p o r a r i l y id le f u n d s .
S u c h b a la n c e s r e a c h e d $ 1 0 .5
b illio n b y J u n e 1 9 7 9 .




S a v in g s a n d lo a n a s s o c ia t io n s h a v e b e e n a b le t o
o f f e r s a v in g s a c c o u n t s t o b u s in e s s e s f o r m a n y y e a r s .
A l t h o u g h d a t a o n t h e s iz e o f s u c h balances are n n t
a v a ila b le , indications a r e t h a t t h e y d o n o t m a k e u p a
1 n t* r r a

nU n
a
U iia iv ,

u i

nn
o c iv m g o

J
a x iu

1 — — -iV J c L ll

1 ! _ t- *1 ' j ' .
lld U lilllC b .

T elep h o n e and P reau th orized T h ird -P a r ty T r a n s­
fers F r o m S a v in g s A c c o u n ts U s e o f b a n k s a v in g s
a c c o u n t s b y in d i v id u a ls h a s h a d t h e d is a d v a n t a g e in
t h e p a s t o f n e c e s s it a t in g p e r s o n a l t r i p s t o t h e b a n k
in o r d e r t o t r a n s f e r f u n d s t o a n d f r o m c h e c k in g a c ­
c o u n t s . T h is in c o n v e n ie n c e w a s a t le a s t p a r t l y r e ­
d u c e d b y 1 9 7 5 c h a n g e s i n R e g u la t io n Q , a llo w in g
b a n k s t o t r a n s f e r f u n d s f r o m s a v in g s a c c o u n ts
d i r e c t l y t o c h e c k in g o r t o t h i r d p a r t ie s o n t h e t e le ­
p h o n e - o r ig in a t e d o r d e r o f a c u s to m e r , a n d a ls o t o
p a y r e c u r r in g b ills d ir e c t l y f r o m s a v in g s a c c o u n ts o n
a p r e a u t h o r iz e d b a s is . T e le p h o n e t r a n s f e r s t o t h i r d
p a r t ie s h a v e b e e n a u t h o r iz e d a t s a v in g s a n d lo a n
a s s o c ia t io n s s in c e t h e 1 9 6 0 ’ s, w h ile p r e a u t h o r iz e d
th ir d - p a r ty tra n s fe rs fo r g e n e ra l p u rp o s e s h a v e b e e n
a llo w e d s in c e 1 9 7 5 .
T h e e ff e c t o f th e s e r e g u la t o r y c h a n g e s h a s p r o b a b ly
b e e n t o in c r e a s e t h e s u b s t it u t a b ilit y b e tw e e n c h e c k in g
a n d s a v in g s a c c o u n ts . T h e r e is n o w a y t o m e a s u r e
d i r e c t l y t h e im p a c t o f t e le p h o n e a n d p r e a u t h o r iz e d
t r a n s f e r s e r v ic e s o n c a s h m a n a g e m e n t p o lic ie s o f
h o u s e h o ld s o r b u s in e s s e s . S a v in g s d e p o s it t u r n o v e r
d a t a d o s h o w s ig n s o f in c r e a s in g s in c e 1 9 7 7 , t h e f i r s t
y e a r t h e y w e r e c o lle c t e d ; a n d i t m a y b e t h a t t e le ­
p h o n e a n d p r e a u t h o r iz e d t r a n s f e r s e r v ic e s h a v e e n ­
c o u r a g e d g r e a t e r u s e o f s a v in g s a c c o u n ts a s p a y m e n ts
b a la n c e s .
T h e r e a r e t w o f e a t u r e s o f s a v in g s a c c o u n ts t h a t
m a y d is c o u r a g e t h e i r u s e a s d e m a n d d e p o s it s u b s t i­
t u t e s . F i r s t , in t h e c a s e o f d ir e c t b i l l p a y in g f r o m
s a v in g s , t h e c u s t o m e r d o e s n o t h a v e a c a n c e lle d c h e c k
a s a r e c o r d o f p a y m e n ts . T h i s is s ig n if ic a n t b e c a u s e
s t u d ie s o f c o n s u m e r a t t it u d e s t o w a r d e le c t r o n ic f u n d
t r a n s f e r ( E F T ) s e r v ic e s h a v e f o u n d a d e e p - s e a te d
r e lu c t a n c e t o g iv e u p t h e r e c o r d - k e e p in g s e r v ic e s t h a t
c a n c e lle d c h e c k s p r o v id e . S e c o n d , b a n k s a n d t h r i f t
in s t it u t io n s t y p i c a ll y le v y c h a r g e s o n s a v in g s a c c o u n t
w it h d r a w a ls a b o v e s o m e m o n t h ly o r q u a r t e r ly m i n i ­
m u m . T h e s e c h a r g e s c a n b e f a i r l y s u b s t a n t ia l, r u n ­
n in g s o m e tim e s 2 5 t o 5 0 c e n ts p e r t r a n s f e r , t h e r e b y
r a is in g a c o s t b a r r ie r t o h e a v y u s e o f s a v in g s t r a n s ­
fe rs .
N O W A cc o u n ts and Share D r a fts
N O W ’s a r e
n e g o t ia b le d r a f t s w r i t t e n o n s a v in g s a c c o u n ts a t
b a n k s , m u t u a l s a v in g s b a n k s , a n d s a v in g s a n d lo a n

11

a s s o c ia tio n s . T h e i r u s e is c u r r e n t l y c o n f in e d t o N e w
E n g la n d , N e w Y o r k , a n d N e w J e r s e y . S h a r e d r a f t s
a r e w r i t t e n o n a c c o u n t s a t c r e d i t u n io n s a n d c a n b e
e it h e r n e g o t ia b le o r n o n n e g o t ia b le . T h e r e a r e c u r ­
r e n t l y n o g e o g r a p h ic r e s t r ic t io n s o n t h e u s e o f s h a r e
d r a f t s . T h e u s e o f b o t h N O W ’s a n d s h a r e d r a f t s is
l im it e d b y la w t o in d i v id u a ls o n ly . W h i l e b o t h a r e in
p r a c t ic e h o n o r e d a s d e m a n d d r a f t s , t h e y a r e le g a lly
t im e d r a f t s o n w h ic h f in a n c ia l in s t it u t io n s h a v e t h e
r i g h t t o d e la y p a y m e n t f o r u p t o 3 0 d a y s . N O W ’s
o f f e r e d b y t h r i f t in s t it u t io n s a n d s h a r e d r a f t s a r e
“ p a y a b le t h r o u g h ” in s t r u m e n t s , i.e ., t h e y a r e c le a r e d
t h r o u g h n o r m a l c h e c k - c le a r in g c h a n n e ls a n d a r e p a id
b y a c o m m e r c ia l b a n k w i t h w h ic h t h e is s u in g t h r i f t
in s t i t u t i o n m a in t a in s a c o r r e s p o n d e n t r e la t io n s h ip .
F e d e r a l la w l i m i t s in t e r e s t p a y m e n ts o n N O W a c ­
c o u n t s t o a m a x im u m o f 5 p e r c e n t, a lt h o u g h c r e d i t
u n io n s a r e p e r m it t e d t o p a y t h e r e g u la r s h a r e a c c o u n t
r a t e o n b a la n c e s s u b je c t t o d r a f t , c u r r e n t l y 7 p e r c e n t.
N O W a c c o u n t s h a v e b e e n a n i m p o r t a n t c a t a ly t ic
f o r c e c a u s in g c h a n g e s in p u b lic a t t it u d e s t o w a r d c a s h
m a n a g e m e n t.
T h is f in a n c ia l in n o v a t io n , h o w e v e r ,
h a s b y n o m e a n s c o m p le t e ly a lt e r e d t h e p u b lic ’s
m o n e y m a n a g e m e n t h a b it s . W h e n i t p a s s e d le g is la ­
t io n in 1 9 7 4 a llo w in g N O W ’ s t h r o u g h o u t N e w E n g ­
la n d , C o n g r e s s in a s e n s e c r e a te d a t e s t o f in t e r e s t b e a r in g p a y m e n t a c c o u n ts . T h e r e s u lt s o f t h is t e s t
s h o w t h a t t h e p u b lic is r e c e p t iv e t o in t e r e s t - b e a r in g
p a y m e n ts b a la n c e s ; a n d a ls o t h a t p r i c i n g p o lic ie s a s
w e ll a s t h e d e g r e e o f c o m p e t it io n b e t w e e n f in a n c ia l
in s t it u t io n s in f lu e n c e t h e s p r e a d o f t h e n e w s e r v ic e .
F o r e x a m p le , in M a s s a c h u s e t t s a n d N e w H a m p s h ir e ,
t h e f i r s t t w o s ta te s w h e r e N O W ’s w e r e in t r o d u c e d ,
c o m p e t it io n b e t w e e n b a n k s a n d t h r i f t in s t it u t io n s w a s
k e e n a n d c o n s e q u e n t ly lo w - c o s t p r i c i n g o f N O W
a c c o u n ts w a s c o m m o n . A s a r e s u lt , u s e o f N O W
a c c o u n ts in c r e a s e d r a p id l y , w i t h t h e n u m b e r o f a c ­
c o u n t s p e r 1 0 0 h o u s e h o ld s r e a c h in g a b o u t 7 0 b y
J a n u a r y 1 9 7 8 . I n t h e o t h e r f o u r N e w E n g la n d s ta te s ,
w h e r e N O W ’ s w e r e in t r o d u c e d s o m e w h a t la t e r ,
t h r i f t i n s t it u t io n s a r e g e n e r a lly le s s o f a f o r c e t h a n in
M a s s a c h u s e t t s a n d N e w H a m p s h ir e . T h e n u m b e r
o f a c c o u n ts p e r 1 0 0 h o u s e h o ld s in th e s e o t h e r f o u r
s ta te s w a s m u c h lo w e r , in t h e 1 0 t o 2 0 r a n g e , b y
J a n u a r y 1 9 7 8 [ 4 ] . T h e r e f o r e , lo c a l m a r k e t c h a r a c ­
t e r is t ic s a p p e a r im p o r t a n t in d e t e r m in in g t h e e x t e n t
t o w h ic h N O W ’s a r e s u b s t it u t e d f o r m o r e t r a d i t i o n a l
f o r m s o f p a y m e n t.
T o t a l b a la n c e s in N O W a c c o u n ts a s o f J u n e 1 9 7 9
in s ix N e w E n g la n d s ta te s a n d N e w Y o r k w e r e $ 5 .6
b illio n . A c c o u n t d a t a o n s h a r e d r a f t b a la n c e s u n f o r ­
t u n a t e ly a r e n o t a v a ila b le , b u t t h e N a t io n a l C r e d it

12




U n i o n A d m i n i s t r a t i o n in d ic a t e s t h a t p e r h a p s a l i t t l e
le s s t h a n $ 1 . 0 b i l l i o n o f s u c h b a la n c e s e x is t e d a s o f
m id - 1 9 7 9 .
and L o a n R em ote Service U n its
A
r e m o t e s e r v ic e u n i t ( R S U ) is d e f in e d b y t h e F e d e r a l
H o m e L o a n B a n k B o a r d a s a n in f o r m a t io n - p r o c e s s ­
in g d e v ic e , a n d a n R S U a c c o u n t is a s a v in g s a c c o u n t
a c c e s s ib le t h r o u g h s u c h a d e v ic e . R S U ’ s c a n b e l o ­
c a te d d i r e c t l y o n s ite s w h e r e f r e q u e n t p a y m e n ts o c c u r ,
e .g ., t h e s u p e r m a r k e t .
S in c e R S U ’ s a r e n o t c o n ­
s id e r e d b r a n c h e s , t h e r e a r e f e w a d m i n is t r a t iv e b a r ­
r ie r s t o t h e i r e s t a b lis h m e n t b y s a v in g s a n d lo a n s .
S a vin gs

M a rk et F u n d s
M o n e y m a rk e t fu n d s
( M M F ’ s ) w e r e f i r s t o f f e r e d t o t h e p u b lic in 1 9 7 2 ;
b u t t h e i r im p o r t a n c e , a s m e a s u r e d b y g r o w t h in
n u m b e r o f s h a r e h o ld e r s a n d b a la n c e s in s h a r e h o ld e r
a c c o u n ts , in c r e a s e d r a p i d l y o n ly a f t e r 1 9 7 4 , a n d
e s p e c ia lly a f t e r 1 9 7 7 . I t is e s tim a t e d t h a t in d i v id u a ls
h e ld 5 5 t o 6 5 p e r c e n t a n d b u s in e s s e s a b o u t 1 0 p e r c e n t
o f t h e $ 2 4 . 6 b i l l i o n in M M F ’s a s o f J u n e 1 9 7 9 [ 3 ] .
M M F ’s o f f e r in d i v id u a ls a n d b u s in e s s e s h a v in g r e la ­
t i v e l y s m a ll a m o u n ts o f f u n d s a c c e s s t o o p e n m a r k e t
in v e s t m e n t s t h a t in t h e p a s t w e r e a v a ila b le o n ly t o
la r g e c o r p o r a t io n s .
I t is r e a s o n a b le t o t h i n k o f M M F ’ s a s b e in g a t
le a s t p a r t ia l s u b s t it u te s f o r d e m a n d d e p o s its . L i k e
s a v in g s a c c o u n ts , t h e y o f f e r h ig h l i q u i d i t y , s in c e f u n d
s h a r e s c a n b e p u r c h a s e d o r s o ld o n a n y b u s in e s s d a y
w i t h o u t a s a le s c h a r g e .
M o re o v e r, s o m e M M F ’s
o f f e r a c h e c k in g o p t io n t h a t e n a b le s s h a r e h o ld e r s t o
w r i t e c h e c k s in m in im u m a m o u n ts o f $ 5 0 0 . M M F ’ s,
h o w e v e r, a p p e a r to h a v e m o re in c o m m o n w it h
s a v in g s t h a n w i t h d e m a n d d e p o s it a c c o u n ts . E v i ­
d e n c e o f t h i s is t h e s i m i l a r i t y o f t u r n o v e r r a t e s i n
M M F a c c o u n ts a n d b a n k s a v in g s a c c o u n ts , b o t h o f
w h ic h a r e v e r y lo w c o m p a r e d t o t u r n o v e r r a t e s f o r
c h e c k in g d e p o s its .
M oney

A u t o m a t ic tr a n s fe r
s e r v ic e s ( A T S ) a llo w d e p o s ito r s t o a r r a n g e w i t h
t h e i r b a n k s t h e a u t o m a t ic t r a n s f e r o f f u n d s f r o m a n
in t e r e s t - b e a r in g s a v in g s a c c o u n t t o a c h e c k in g a c ­
c o u n t a n d a r e t h e f u n c t io n a l e q u iv a le n t o f N O W
a c c o u n ts a n d s h a r e d r a f t s . A T S is a d ir e c t s u b s t it u t e
f o r t r a d i t i o n a l c h e c k in g b a la n c e s a n d h a s b e e n a u ­
t h o r iz e d o n a n a t io n w id e b a s is f o r a ll c o m m e r c ia l
banks.
A u t o m a t ic t r a n s f e r s e r v ic e s h a v e b e e n p r ic e d m o r e
c o n s e r v a t iv e ly b y b a n k s t h a n w e r e N O W a c c o u n t s
a s o r i g i n a l l y o f f e r e d in N e w E n g la n d . I t s h o u ld a ls o
A u to m a tic T ra n sfer Services

b e n o t e d t h a t b a n k s , b u t n o t t h r i f t in s t it u t io n s , h a v e
b e e n a u t h o r iz e d t o o f f e r A T S . T h e s e t w o f a c t o r s
h a v e b e e n im p o r t a n t in d e t e r m in in g t h e g r o w t h o f
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in t r o d u c e d b u t w h ic h h a v e s u b s e q u e n t ly g r o w n m u c h
m o r e s lo w ly . F o r e x a m p le , A T S b a la n c e s in c r e a s e d
f r o m z e r o in N o v e m b e r 19 7 8 t o $ 6 b i l l i o n i n A p r i l
1 9 7 9 b u t t h e n r o s e b y o n ly a n o t h e r $ 6 0 0 m i l l i o n
t h r o u g h J u n e 1 9 7 9 . R o u g h e s tim a t e s p la c e t h e p r o ­
p o r t i o n o f f u n d s i n A T S b a la n c e s c o m in g f r o m d e ­
m a n d d e p o s its a t 5 0 p e r c e n t, o r a b o u t $ 3 .3 b i l l i o n
t h r o u g h J u l y 1 9 7 9 . T h is f ig u r e is v e r y s m a ll c o m ­
p a r e d t o t h e o v e r $ 9 0 b i l l i o n in d i v id u a ls a c t u a lly h o ld
i n c h e c k in g a c c o u n ts a n d s h o w s t h a t A T S h a s h a d
o n ly a m a r g in a l i n i t i a l im p a c t o n t r a d i t i o n a l p a y m e n ts
a rra n g e m e n ts .
A S u m m a ry O v e rv ie w
A l t h o u g h t h e d e v e lo p ­
m e n t s r e v ie w e d a b o v e t a k e v a r io u s f o r m s , t h e r e a r e
s o m e g e n e r a l p a t t e r n s u n d e r ly in g t h e c h a n g e s i n t h e
p a y m e n t s s y s te m d u r in g t h e p a s t s e v e r a l d e c a d e s .
A s n o t e d in S e c t io n I I , m a n y c h a n g e s i n t h e p a y ­
m e n t s s y s te m h a v e r e s u lte d f r o m a c o m b in a t io n o f
r e g u la t o r y a n d le g a l a c tio n s , b u t i t a p p e a r s t h a t
p r iv a t e in i t i a t i v e h a s b e e n t h e p r i m a r y f o r c e le a d in g
t o f in a n c ia l in n o v a t io n . A n u m b e r o f th e s e in n o v a ­
t io n s , in c lu d in g c o r p o r a t e c a s h m a n a g e m e n t s e r v ic e s ,
n e g o t ia b le C D ’ s, r e p u r c h a s e a g r e e m e n t s , N O W a c ­
c o u n t s , a n d m o n e y m a r k e t f u n d s , c a m e in t o e x is t e n c e
w i t h o u t a n y p r e r e q u is it e c h a n g e s in b a n k in g r e g u ­
la t io n s o r la w . S u b s e q u e n t r e g u la t o r y o r le g a l a c t io n
h a s b e e n im p o r t a n t i n e n c o u r a g in g t h e d e v e lo p m e n t
o f s o m e o f t h e n e w l y in t r o d u c e d s e r v ic e s , b u t i t is
n o t c le a r t h a t s u c h o f f ic i a l a c t io n w o u l d h a v e o c ­
c u r r e d w i t h o u t t h e im p e tu s p r o v i d e d b y p r iv a t e
in i t i a t i v e .
C o m p e t it io n in t h e f in a n c ia l m a r k e t s e x p la in s a
la r g e p a r t o f t h e p r iv a t e i n i t i a t i v e i n t h e p a y m e n ts
s y s te m . G iv e n a c o m p e t it iv e e n v ir o n m e n t f o r f i n a n ­
c ia l s e r v ic e s , f in a n c ia l in n o v a t io n s t h a t a r e d e m a n d
d e p o s it s u b s t it u t e s a n d p a y in t e r e s t , o r t h a t p a y
in t e r e s t a n d c a n b e q u ic k l y c o n v e r t e d t o c a s h , o f f e r
o p p o r t u n it ie s t o a g g r e s s iv e b a n k s a n d t h r i f t s s e e k in g
t o in c r e a s e t h e i r s h a r e s o f t h e d e p o s it m a r k e t .
T h e e a r lie s t in n o v a t io n s p r i m a r i l y b e n e f it e d b u s i­
n e s s e s , s in c e b u s in e s s e s g e n e r a lly o p e r a t e o n a la r g e r
s c a le t h a n d o in d i v id u a ls a n d c o n s e q u e n t ly m a in t a in
la r g e r a v e r a g e t r a n s a c t io n s b a la n c e s w i t h a s i g n i f i ­
c a n t ly g r e a t e r p o t e n t ia l g a in f r o m e f f ic i e n t m a n a g e ­
m e n t . A ls o , i n t h e p e r io d f o l l o w i n g W o r l d W a r I I ,
b u s in e s s e s o p e r a t e d w i t h m u c h h ig h e r r a t io s o f t r a n s ­
a c t io n s b a la n c e s t o t o t a l f in a n c ia l a s s e ts t h a n d id




in d i v id u a ls . I n 1 9 5 0 , f o r e x a m p le , t h e r a t io o f c u r ­
r e n c y p lu s d e m a n d d e p o s its t o t o t a l f in a n c ia l a s s e ts
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r e la t i v e ly la r g e s h a r e o f f in a n c ia l a s s e ts t ie d u p in
n o n in t e r e s t - e a r n in g f o r m , b u s in e s s e s h a d t h e g r e a t e r
in c e n t iv e t o f i n d w a y s o f i m p r o v in g c a s h m a n a g e ­
m e n t p r o c e d u r e s . T h r e a t e n e d w i t h t h e lo s s o f c o r ­
p o r a t e d e p o s its t o o p e n m a r k e t d e b t in s t r u m e n t s , t h e
b a n k in g in d u s t r y r e s p o n d e d t o th e s e im p r o v e d c a s h
m a n a g e m e n t p r a c t ic e s b y p r o v i d in g s h o r t - t e r m i n ­
v e s t m e n t o p p o r t u n it ie s . T h u s , t h e I 9 6 0 ’ s w it n e s s e d
t h e in t r o d u c t i o n o f t w o n e w b a n k lia b ilit ie s t h a t p r o ­
v id e b u s in e s s e s a p o s it iv e in t e r e s t r e t u r n a s w e ll a s
h ig h l i q u i d i t y , n a m e ly n e g o t ia b le C D ’s a n d R P ’s.
I f t h e I 9 6 0 ’ s w a s t h e d e c a d e o f b u s in e s s in s o f a r a s
c a s h m a n a g e m e n t is c o n c e r n e d , t h e n t h e I 9 7 0 ’s m a y
h a v e b e e n th e d e c a d e o f th e c o n s u m e r. A n u m b e r o f
s e r v ic e s d e s ig n e d t o f a c i lit a t e e f f ic ie n t m a n a g e m e n t o f
l i q u i d b a la n c e s b y h o u s e h o ld s w e r e in t r o d u c e d a t
b a n k s a n d t h r i f t i n s t it u t io n s i n t h e I 9 7 0 ’ s. F i r s t in
t h is g r o u p w e r e te le p h o n e a n d p r e a u t h o r iz e d t h i r d p a r t y t r a n s f e r s e r v ic e s f r o m s a v in g s a c c o u n ts . T h e s e
w e r e f o l lo w e d b y N O W a c c o u n ts , s h a r e d r a f t s , A T S ,
a n d m o n e y m a r k e t f u n d s . W i t h t h e e x c e p t io n o f
m o n e y m a r k e t f u n d s , a ll o f th e s e s e r v ic e s r e ly o n t h e
u s e o f in t e r e s t - b e a r in g s a v in g s a c c o u n ts f o r d ir e c t
t h i r d - p a r t y p a y m e n ts .
O n t h e w h o le , t h e in n o v a t io n s w h ic h h a v e b e e n
d e s c r ib e d h e r e , t a k e n b o t h i n d i v i d u a l l y a n d c o lle c ­
t i v e ly , a r e n e e d le s s ly c o m p le x . F o r in s t a n c e , R P ’ s
u s e d b y b u s in e s s e s a n d A T S a c c o u n ts u s e d b y c o n ­
s u m e r s e n t a il c o n s t a n t s w it c h in g o f f u n d s b e tw e e n
i n t e r e s t - b e a r in g a c c o u n t s a n d n o n in t e r e s t - b e a r in g d e ­
m a n d d e p o s it a c c o u n t s . T h e s e t w o s e r v ic e s f a c i lit a t e
t h e c ir c u m v e n t io n o f t h e p r o h i b i t i o n o f in t e r e s t o n
d e m a n d d e p o s its , b u t t h e y r e q u ir e a g r e a t e r in v e s t ­
m e n t i n m a n a g e m e n t t im e a n d d a t a p r o c e s s in g t h a n
d o c h e c k in g a c c o u n t s . T h e in g e n u it y o f t h e f in a n c ia l
m a r k e t s i n d e v e lo p in g a lt e r n a t iv e s t o d e m a n d d e p o s its
h a s r e s u lt e d in a b e w i ld e r in g a r r a y o f n e w m o n e t a r y
a s s e ts .
T h e p r o v i s io n o f m o n e t a r y a s s e ts b y t h e
f in a n c ia l s y s t e m c o u ld b e g r e a t ly s im p lif ie d i f t h e la w
a llo w e d in t e r e s t t o b e p a id o n d e m a n d d e p o s its . 8

7 These estimates are derived from Flow of Funds data.
See Chart l on page 14.
8 The court action declaring A T S illegal has forced
Congress to address the question of how far payments
system changes should go. As a result, legislation that
permits N O W accounts nationwide is actively being
considered.

13

IV . Changes in Bank Liabilities and the Public’s Liquid Assets
To what degree has payments system innovation
affected the balance sheets of the banking system and
the nonbank public? The paragraphs below present
some statistical evidence indicating the extent of
change in the nonbank public’s total holdings of
financial assets and in the composition of bank lia­
bilities.
Changes in the Public’s Financial Assets There
has been a significant reduction in the relative im­
portance of traditional money balances in the public’s
holdings of liquid assets. The ratio of demand de­
posits plus currency and coin to this total plus time
deposits and credit market instruments is shown for
the household and the nonfinancial business sectors
in Chart 1. The chart indicates a more or less steady
decline in the relative importance of traditional
money balances for both sectors since 1950. For the
nonfinancial business sector the decline has been
especially sharp since 1970, with traditional money

balances falling from 56 percent of the total in that
year to 39 percent in 1978.
For the household sector (including personal
trusts and nonprofit organizations) the decline has
been considerably less sharp. As a matter of fact,
the fraction of the total in traditional money declined
more sharply between 1950 and 1965 than in the
period since the latter year and remained fairly
stable until 1974. Since that time, however, a notice­
able downtrend appears to have developed. For
households, the fraction of financial assets held in
traditional money form fell from 25 percent in 1950
to 15 percent in 1965 and 12 percent in 1978. For
the period since 1970, it appears that financial inno­
vations have had a greater effect on the composition
of the liquid holdings of businesses than on those of
households.
Changes in Bank Liabilities The liabilities struc­
ture of the commercial banking system has been

C hart 1
D E M A N D D E P O S I T S & C U R R E N C Y A S A P E R C E N T O F T O T A L D EP OS I TS ,
CURRENCY, & CREDIT M A R K E T INSTRUMENTS

Percent

Percent

100

100
HOUSEHOLDS, PERSONAL TRUSTS,
& N O N P R O F IT O R G A N IZ A T IO N S

70

50

40

30

20

10

1950

Source:
14




1955

1960

1965

Flow of Funds.

1970

1975

1980

1950

1955

1960

1965

1970

1975

1980

C h a rt 2

SELECTED SOURCES OF FUNDS AS A PERCENT OF THE C O M M ER CI A L
BAN KI NG SYSTEM'S NET TOTAL LI ABILITIES *
P e rc en t

1961
■X-

1963

1965

1967

1969

1971

1973

1975

1977

N e t to ta l l i a b i li t i e s are d e f i n e d as t o t a l li a b i li ti e s m i n u s in t e r b a n k dep osi ts .

So u rc e :

F D I C , Assets and Liabilities.

significantly altered as a result of the public’s efforts
to economize on noninterest-earning cash balances.
The major change has been a decline in the relative
importance of demand deposits compared with net
total bank liabilities.9 For example, private demand
deposits declined from 63 percent of net total liabili­
ties in 1960 to just over 31 percent in 1978. This
large drop in the ratio of private demand deposits to
net total liabilities, which is shown in Chart 2, reflects
a major shift in public preferences from noninterestearning demand balances to time balances and other
short-term liabilities such as CD’s and RP’s. Re­
calling Chart 1, it appears that since 1970 businesses
have economized on money balances more than
households. This conclusion is also supported by a
comparison of the growth rates in demand deposits
held by these two groups. The compound annual
9 Net total liabilities are defined as total liabilities exclu­
sive of deposits due to other commercial banks.




rate of growth of household demand deposits over
the eight-year period 1970-1978 was 8.3 percent,
about a third greater than the 6.2 percent rate for
business deposits [5].
Chart 2 shows that, as the share of demand de­
posits to net total liabilities has declined, the shares
of time deposits other than negotiable CD’s, nonne­
gotiable CD’s, and purchased funds have all in­
creased. From their inception in 1961, negotiable
CD’s have grown to nearly 10 percent of net total
liabilities. Purchased funds, defined to include Fed­
eral funds and repurchase agreements, have in only
ten years grown to such an extent that they equaled
nearly 9 percent of the commercial banking system’s
liabilities in 1978. Savings deposits declined in im­
portance as a source of funds until 1974, falling from
25 to 18 percent of net total liabilities. After the 1975
regulatory change which allowed businesses to hold
savings accounts, however, savings balances gained
15

m o d e r a t e ly in im p o r t a n c e , r e a c h in g 2 2 p e r c e n t o f n e t
t o t a l l i a b ilit ie s i n 1 9 7 8 .
T h e c h a r t s h o w s a s t e a d ily in c r e a s in g c o n c e n t r a -

tlG il o f ba!irC Ila b illtiC S ±XT tH O 3C fG 7 IT-3 HGt 3llb jC C t tG
R e g u la t io n O in t e r e s t r a t e c e ilin g s . N e g o t ia b le C D ’s
a n d p u r c h a s e d f u n d s a r e la r g e ly f r e e o f d e p o s it r a t e
r e g u la t io n a n d , t h e r e f o r e , o f f e r t h e p u b lic p a r t ic u la r ly

a t t r a c t iv e a lt e r n a t iv e s t o h o ld in g s t e r ile d e m a n d d e ­
p o s it o r lo w - e a r n i n g s a v in g s d e p o s it b a la n c e s . D e ­
m a n d a n d s a v in g s d e p o s its c o m b in e d , w h ic h a t o n e
♦-v-x <-i

*A

*-v-\

a

n r

n 'f

K n n l/’

K o lo tlP D

s h e e ts , h a v e f a lle n in r e la t iv e im p o r t a n c e f r o m 9 0
p e r c e n t o f t o t a l lia b ilit ie s i n 1 9 6 0 t o o n ly 5 3 p e r c e n t
in 1 9 7 8 .

V. Financial Innovation and Monetary Control
R o u g h ly s p e a k in g , m o n e t a r y c o n t r o l m e a n s m a n ­
a g e m e n t o f t h e s u p p ly o f m o n e y b a la n c e s h e ld b y th e
p u b lic a t d e p o s it o r y in s t it u t io n s . T h e F e d e r a l R e ­
s e r v e is c o n c e r n e d w i t h t h e m a n a g e m e n t o f a g g r e g a te
m o n e y b a la n c e s b e c a u s e th e s e b a la n c e s a r e a m a jo r
d e t e r m in a n t o f a g g r e g a t e s p e n d in g . A g g r e g a t e e x ­
p e n d i t u r e b y t h e p u b lic is , in t u r n , a k e y d e t e r m in a n t
o f e m p lo y m e n t a n d t h e r a t e o f in f la t io n . T h e f in a n ­
c ia l in n o v a t io n s d e s c r ib e d e a r lie r a p p e a r t o h a v e
in t e r f e r e d w i t h t h e F e d e r a l R e s e r v e ’ s a b i l i t y t o c o n ­
tr o l m o n e y g ro w th .
A s im p le v ie w o f m o n e t a r y
c o n t r o l is s e t o u t b e lo w t o ill u s t r a t e t h e c h a n n e ls
t h r o u g h w h ic h t h i s in t e r f e r e n c e h a s b e e n f e lt .
C on trol P ro b le m s D u e to Financial In n ovation

T h e F e d e r a l R e s e r v e c o n t r o ls t h e m o n e y s u p p ly
p r i m a r i l y b y b u y in g a n d s e llin g T r e a s u r y s e c u r itie s .
P a y m e n ts m a d e b y th e F e d e ra l R e s e rv e w h e n it
p u r c h a s e s s e c u r it ie s c o n t r ib u t e t o w h a t is k n o w n a s
t h e m o n e t a r y b a s e . T h e m o n e t a r y b a s e c o n s is ts o f
c u r r e n c y p lu s t h e r e s e r v e s o f t h e b a n k in g s y s te m .
S in c e b a n k s h o ld r e s e r v e s t h a t a r e o n ly a f r a c t i o n o f
t h e i r d e p o s its , e a c h d o ll a r o f r e s e r v e s in t h e b a n k in g
s y s te m s u p p o r t s s e v e r a l d o lla r s ’ w o r t h o f d e p o s its .
T h e s t o c k o f d e m a n d d e p o s its in t h e b a n k in g s y s ­
t e m c o n s t it u t e s t h e b u lk o f w h a t is c a lle d t h e b a s ic
m o n e y s u p p ly o r M i . M i h a s h i s t o r i c a ll y s e r v e d a s
t h e n a t io n ’ s p a y m e n t s m e d iu m o r t r a n s a c t io n s b a l­
a n c e s , i.e ., m o n e y h e ld f o r t h e p u r p o s e o f m a k in g
p a y m e n ts . B e c a u s e o f it s r e la t i o n t o e x p e n d it u r e ,
M i is a n im p o r t a n t m o n e t a r y a g g r e g a t e f o r t h e F e d ­
e r a l R e s e r v e t o c o n t r o l.
T o p r o v i d e a f r a m e w o r k f o r a n a ly s is o f m o n e t a r y
c o n t r o l, M i m a y b e t h o u g h t o f a s t h e p r o d u c t o f t h e
s t o c k o f b a s e m o n e y t im e s a c o e f f ic ie n t , m , c a lle d
t h e m o n e y m u l t i p l i e r , i.e ., M i = m • [b a s e m o n e y ] .
T h e F e d e r a l R e s e r v e c a n n o t c o n t r o l M i d ir e c t l y .
I n s t e a d , i t m u s t d o s o i n d i r e c t ly b y b u y in g o r s e llin g
T r e a s u r y s e c u r it ie s t o m a n ip u la t e t h e s t o c k o f b a s e
16




m o n e y . F o r e x a m p le , i f t h e F e d e r a l R e s e r v e w a n t s
t o r a is e M x b y $ 1 0 0 a n d t h e m o n e y m u l t i p l i e r , m , is
10, it w o u ld n e e d to b u y $ 1 0 w o r th o f T r e a s u r y
s e c u r itie s t o b r i n g a b o u t t h e d e s ir e d $ 1 0 0 in c r e a s e .
T h e F e d e r a l R e s e r v e c a n e x e r c is e r e a s o n a b ly c lo s e
c o n t r o l o v e r t h e s u p p ly o f t r a n s a c t io n s b a la n c e s b y
o p e r a t in g o n t h e s t o c k o f b a s e m o n e y , r e ly in g o n a
r e la t i v e ly p r e d ic t a b le m o n e y m u l t i p l i e r t o a c h ie v e
t h e d e s ir e d r e s u lt s o n M x . H o w e v e r , t h e r a p id p a c e
o f f in a n c ia l in n o v a t i o n h a s m a d e t h e t a s k m o r e d i f f i ­
c u lt . F i r s t , g r o w t h o f in t e r e s t - b e a r in g s u b s t it u t e s f o r
d e m a n d d e p o s its a n d c u r r e n c y h a s m a d e M x a le s s
a c c u r a t e m e a s u r e o f t o t a l t r a n s a c t io n s b a la n c e s ; a n d
s e c o n d , g r o w t h o f th e s e s u b s t it u te s is d i f f i c u l t t o
p r e d ic t . M o r e o v e r , g o o d d a t a c o v e r a g e is n o t y e t
a v a ila b le b e c a u s e n o t a ll f in a n c ia l in s t it u t io n s o f f e r in g
t r a n s a c t io n s b a la n c e s a r e r e q u ir e d t o r e p o r t t o t h e
F e d e ra l R e s e rv e . T h e r e fo r e , th e F e d e r a l R e s e rv e
d o e s n o t k n o w w h e t h e r t o in t e r p r e t a c h a n g e i n M i
a s a c h a n g e in t o t a l t r a n s a c t io n s b a la n c e s o r s im p ly a
s u b s t it u t i o n b y t h e p u b lic o f s o m e n e w l y c r e a t e d
s h o r t - t e r m a s s e t f o r d e m a n d d e p o s its . T h i s m e a n s
t h a t e v e n i f t h e m o n e y m u l t i p l i e r w e r e t o r e m a in
r e la t i v e ly s ta b le , i t w o u l d b e d i f f i c u l t f o r t h e F e d e r a l
R e s e r v e t o k n o w h o w t h e s t o c k o f b a s e m o n e y s h o u ld
b e m a n ip u la t e d t o a f f e c t t o t a l t r a n s a c t io n s b a la n c e s
b e c a u s e M i h a s b e c o m e a le s s r e lia b le m e a s u r e o f
s u c h b a la n c e s .
U n f o r t u n a t e l y , t h e m o n e y m u l t i p l i e r is n o t e v e n
i n v a r ia n t w i t h r e s p e c t t o s u b s t it u t io n s f r o m d e m a n d
d e p o s its in t o o t h e r t y p e s o f l i q u i d a s s e ts . T h e r e a s o n
is t h a t c u r r e n t la w r e q u ir e s b a n k s t o h o ld r e s e r v e s
a g a in s t d e m a n d d e p o s its ( a t g r a d u a t e d r a t e s o f 7 t o
1 6 p e r c e n t ) t h a t a r e h ig h e r t h a n r e s e r v e r e q u ir e ­
m e n t s o n d e m a n d d e p o s it s u b s t it u te s . R e s e r v e r e ­
q u ir e m e n t s o n N O W a c c o u n ts , f o r e x a m p le , a r e o n ly
3 p e r c e n t a n d t h e r e is c u r r e n t l y a n 8 p e r c e n t m a r ­
g in a l r e s e r v e r e q u ir e m e n t o n R P ’ s ( s e e f o o t n o t e 4 ) .
T h i s m e a n s t h a t i f d e p o s ito r s s h if t f r o m d e m a n d

d e p o s its t o N O W a c c o u n ts o r R P ’s, e x c e s s r e s e r v e s
a r e c r e a t e d w h ic h e n a b le t h e f in a n c ia l s y s te m t o
e x p a n d lo a n s a n d in c r e a s e it s d e p o s it lia b ilit ie s . I n
o th e r w o rd s , th e m o n e y m u lt ip lie r ( f o r a n a p p r o p r i­
a te m e a s u r e o f t r a n s a c t io n s b a la n c e s ) c a n r is e w i t h a
s h if t f r o m d e m a n d d e p o s its t o N O W a c c o u n t s o r
R P ’ s b e c a u s e o f t h e d if f e r e n t r e s e r v e r e q u ir e m e n t s
o n th e s e lia b ilit ie s .
I f c u r r e n t la w s p r o h i b i t i n g t h e p a y m e n t o f in t e r e s t
o n d e m a n d d e p o s its a r e n o t c h a n g e d , c o n t in u i n g f i ­
n a n c ia l in n o v a t i o n c o u ld e v e n t u a lly le a d t o t h e e l i m i ­
n a t io n o f t r a d i t i o n a l n o n in t e r e s t - b e a r in g d e m a n d
d e p o s its . I f r e s e r v e r e q u ir e m e n t s o n t h e s u b s t it u t e d
lia b ilit ie s r e m a in lo w , t h e m o n e y m u l t i p l i e r w i l l b e ­
c o m e v e r y la r g e . A la r g e r m u l t i p l i e r is l i k e l y t o h a v e
g r e a t e r p r e d ic t io n e r r o r , a n d t h e r e f o r e is l i k e l y t o
m a k e c o n t r o llin g m o n e y g r o w t h m o r e d i f f i c u l t .
E v e n c h a n g e s in t h e le v e l o f in t e r e s t r a t e s c a n
in d u c e c h a n g e s i n t h e m o n e y m u l t i p l i e r .
H ig h e r
in t e r e s t r a te s , f o r e x a m p le , p r o v i d e a d d it io n a l in c e n ­
t iv e f o r in d i v id u a ls a n d c o r p o r a t io n s t o t a k e a d v a n ­
ta g e o f in t e r e s t - b e a r in g s u b s t it u te s f o r d e m a n d d e ­
p o s it s . C o m p o u n d in g t h e p r o b le m is t h e f a c t t h a t
t h e s h o r t - r u n w illin g n e s s o f t h e p u b lic t o s u b s t it u t e
in t o in t e r e s t - e a r n in g a s s e ts o r a lt e r n a t i v e t r a n s a c t io n s
b a la n c e s is u n c e r t a in . T h e s p e e d o f s u b s t it u t i o n m o s t
l i k e l y d e p e n d s , f o r e x a m p le , o n t h e t im e h o r iz o n
o v e r w h ic h in d i v id u a ls a n t ic ip a t e in t e r e s t r a t e s t o
r e m a in h ig h . B e c a u s e a v e r a g e r e q u ir e d r e s e r v e s a r e
d e c r e a s e d o r in c r e a s e d a s a r e s u l t o f th e s e s u b s t it u ­
t io n s , t h e M i m o n e y m u l t i p l i e r c a n r is e a n d f a l l w i t h
in t e r e s t r a te s . H o w e v e r , b e c a u s e t h e d e g r e e o f s u b ­
s t i t u t i o n is u n c e r t a in , s o is t h e r e la t io n s h ip b e tw e e n
in t e r e s t r a t e s a n d t h e m u l t i p l i e r . G r e a t e r u n c e r t a i n t y
a b o u t th e m u lt ip lie r m a k e s i t m o r e d if f ic u lt f o r th e
F e d e ra l R e s e rv e to c o n tro l M i th r o u g h c o n tr o l o f
th e m o n e ta ry b a se .
T h e a p p a r e n t w e a k e n in g o f F e d e r a l R e s e r v e c o n ­
t r o l o v e r t h e v o lu m e o f t r a n s a c t io n s b a la n c e s h a s
s p a w n e d a n u m b e r o f p r o p o s a ls f o r b a s ic r e f o r m t o
im p r o v e t h e q u a lit y o f t h e S y s t e m ’ s m o n e y c o n t r o l
m e c h a n is m . A n u m b e r o f s u c h p r o p o s a ls h a v e b e e n
d is c u s s e d a t le n g t h in C o n g r e s s io n a l h e a r in g s o n
f in a n c ia l a n d b a n k in g r e f o r m . S o m e h a v e b e e n in c o r ­
p o r a t e d in le g is la t iv e p r o p o s a ls t h a t a r e i n v a r io u s
s ta g e s o f c o n s id e r a t io n b y t h e C o n g r e s s a n d m ig h t b e
a c te d o n in 1 9 8 0 . A b r ie f c r it iq u e o f t h o s e p r o p o s a ls
d e s ig n e d t o im p r o v e m o n e t a r y c o n t r o l is p r e s e n te d in
t h e s e c tio n s t h a t f o l lo w .




E xten d in g the C ov era ge of L e g a l R eserv e R e ­

S h ifts b e tw e e n d e p o s it in s tr u m e n ts
w i t h d if f e r e n t r e s e r v e r e q u ir e m e n t s a c c o u n t f o r m u c h
o f th e u n p r e d i c t a b ilit y i n t h e m o n e y m u l t i p l i e r . E x ­
t e n d in g u n if o r m r e s e r v e r e q u ir e m e n t s t o a ll t r a n s ­
a c tio n s b a la n c e s a t c o m m e r c ia l b a n k s w o u ld t h e r e f o r e
b e u s e f u l in im p r o v in g m o n e t a r y c o n t r o l. H o w e v e r ,
i f r e g u la t o r s c o n t in u e d t o im p o s e s ig n i f i c a n t ly lo w e r
r e s e r v e r e q u ir e m e n t s o n d e p o s its h e ld o u t s id e c o m ­
m e r c ia l b a n k s , i t w o u l d b e o f o n ly l im it e d v a lu e . D e ­
p o s it i n s t it u t io n s w h o s e t r a n s a c t io n s - t y p e a c c o u n ts
a r e n o n r e s e r v a b le w i l l b e a b le t o o f f e r in t e r e s t r a te s
a b o v e th o s e o f in s t it u t io n s t h a t m u s t h o ld a la r g e r
p o r t io n o f t h e i r f u n d s in n o n in t e r e s t - e a r n in g r e q u ir e d
re s e rv e s .
N o n r e s e r v a b le b a la n c e s w o u l d t h e r e f o r e
t e n d t o d r iv e r e s e r v a b le b a la n c e s o u t o f u s e . T h e r e ­
s u lt in g m o n e y m u l t i p l i e r b e t w e e n t h e s t o c k o f t r a n s ­
a c tio n s b a la n c e s a n d t h e m o n e t a r y b a s e w o u l d c o n s e ­
q u e n t ly b e m u c h h ig h e r . C o n t r o lli n g t h e s t o c k o f
t r a n s a c t io n s b a la n c e s w i t h t h e m o n e t a r y b a s e w o u l d
b e m o r e d i f f i c u l t , b e c a u s e e a c h d o ll a r e r r o r i n c o n ­
t r o l l i n g t h e b a s e w o u l d t h e n h a v e a g r e a t e r e ff e c t o n
t h e s to c k o f t r a n s a c t io n s b a la n c e s .
quirem ents

R a d ic a l e x p a n s io n in t h e u s u a l c o v e r a g e o f r e s e r v e
r e q u ir e m e n t s w o u l d a p p e a r t o b e n e c e s s a r y t o e l i m i ­
n a te d if f e r e n t r e s e r v e r e q u ir e m e n t s a m o n g p o t e n t ia l
t r a n s a c t io n s b a la n c e s w h i l e a t t h e s a m e t im e p r e ­
v e n t in g t h e m o n e y m u l t i p l i e r f r o m in c r e a s in g . T h e
p r o b le m is t o d e v is e a la w t h a t w o u l d a llo w o n ly
th o s e d e p o s its n o t u s e d a s t r a n s a c t io n s b a la n c e s t o
q u a lif y a s n o n r e s e r v a b le .
F o r e x a m p le , t h e la w
m ig h t s ta te t h a t c u s t o m e r o r d e r s t o t r a n s f e r f u n d s b e
d e la y e d a t le a s t a w e e k f o r a n a c c o u n t t o q u a l i f y a s
n o n r e s e r v a b le . B u t t h i s r u le m ig h t b e c ir c u m v e n t e d
b y s e t t in g u p r e v o l v in g c e r t if ic a t e s m a t u r in g e v e r y
e ig h t d a y s , s o t h a t o n e - e ig h t h o f t h e a c c o u n t c o u ld b e
t r a n s f e r r e d o n a n y b u s in e s s d a y . T h i s s im p le e x ­
a m p le illu s t r a t e s t h e p o t e n t ia l d i f f i c u l t y in e n f o r c in g a
la w r e q u ir in g a ll b a la n c e s u s e d f o r t r a n s a c t io n s p u r ­
p o s e s t o h a v e t h e s a m e r e s e r v e r e q u ir e m e n t s a s
d e m a n d d e p o s its . 10
R em oval

of

R e g u la to r y

C eilin gs

on

In terest

I f p r o h ib it io n s a g a in s t o f f e r in g c o m p e t i­
t iv e r a te s o f in t e r e s t a t d e p o s it o r y i n s t it u t io n s w e r e
e lim in a t e d , t h e n in t e r e s t r a t e s o n d e p o s its a t th e s e
in s t it u t io n s w o u l d t e n d t o m o v e m o r e c lo s e ly w i t h
t h e g e n e r a l le v e l o f in t e r e s t r a te s .
F o r e x a m p le ,
R ates

10 This illustration is taken from Cagan [2].

17

in t e r e s t d if f e r e n t ia ls b e tw e e n d e p o s its a n d o t h e r
liq u i d a s s e ts s u c h a s m o n e y m a r k e t m u t u a l f u n d s
w o u l d b e c o m e m o r e s ta b le . T h i s w o u ld g r e a t ly r e ­
d u c e t h e in c e n t iv e t o s w it c h f i u m Li u .ii6 c iL iio iib t v u c
d e p o s its t o h ig h e r y ie ld in g liq u id a s s e ts w h e n in t e r e s t
r a t e s r is e .
M o n e t a r y c o n t r o l w o u l d b e im p r o v e d f o r t w o r e a ­
s o n s a s a r e s u l t o f t h i s r e g u la t o r y r e f o r m . F i r s t ,
b e c a u s e t h e r e w o u l d b e le s s s w it c h in g a m o n g liq u i d
a s s e ts w i t h c h a n g e s in t h e le v e l o f in t e r e s t r a te s , a
g iv e n s t o c k o f b a n k r e s e r v e s w o u ld p r o d u c e a m o r e
s ta b le b a s ic m o n e y s u p p ly , M i . S e c o n d , b e c a u s e t h e
in c e n t iv e f o r u s e o f a lt e r n a t i v e ty p e s o f t r a n s a c t io n s
b a la n c e s w o u l d b e r e d u c e d , M i w o u ld b e c o m e a m o r e
c o m p r e h e n s iv e m e a s u r e o f t r a n s a c t io n s b a la n c e s . T h e
F e d e r a l R e s e r v e ’ s d a t a o n t r a n s a c t io n s b a la n c e s
w o u l d b e c o m e m o r e r e lia b le s in c e i t w o u ld n o t , a s i t
c u r r e n t l y d o e s , d e p e n d o n a n e s tim a t e o f t h e e x t e n t
t o w h ic h n e w l y c r e a t e d liq u i d a s s e ts s u c h a s R P ’ s o r
M M F ’ s a r e b e in g u s e d a s t r a n s a c t io n s b a la n c e s .
F in a n c ia l in t e r m e d ia t io n f o r b a n k s in v o lv e s lo n g e r
m a t u r it i e s o n a s s e ts t h a n lia b ilit ie s . C o n s e q u e n t ly ,
a v e r a g e r e t u r n s o n b a n k a s s e ts t h a t p r o v id e in c o m e
t o p a y in t e r e s t o n d e m a n d d e p o s its c h a n g e m o r e
s lo w ly t h a n s h o r t - t e r m in t e r e s t r a te s .
T h e re fo re ,
e v e n i f d e p o s its w e r e t o p a y in t e r e s t , d e p o s it r a te s
m a y n o t m o v e p e r f e c t ly t o g e t h e r w i t h o t h e r s h o r t ­
t e r m r a te s .
H o w e v e r , t h e le v e l o f in t e r e s t r a te s
o v e r lo n g e r p e r io d s o f t im e v a r ie s la r g e ly b e c a u s e o f

c h a n g e s i n in f l a t i o n a r y a n t ic ip a t io n s . T h e e ff e c t o f
a n t ic ip a t e d i n f la t io n is r e f le c t e d in a ll in t e r e s t r a te s .
T h e r e f o r e , r a t e s p a id o n d e m a n d d e p o s its w o u ld
m o v e in lin e w it h o t i ie r r a te s nti u s e n d e r iraeis^ A c p
r e s u lt , p a y in g in t e r e s t o n d e m a n d d e p o s its w o u ld
g r e a t ly im p r o v e t h e s e c u la r s t a b i l i t y o f t h e m o n e y
m u l t i p l i e r a n d f a c i lit a t e l o n g - r u n m o n e t a r y c o n t r o l.
L o w e r in g the L o n g -r u n R a te of M o n e y G row th

S in c e t h e r a t e o f m o n e y g r o w t h is a m a j o r d e t e r m i­
n a n t o f t h e lo n g - r u n r a t e o f i n f la t io n , t h e s e c u la r
r a t e o f in f l a t i o n c a n b e lo w e r e d i f r e a s o n a b ly lo w
s e c u la r m o n e y g r o w t h is m a in t a in e d . A lo w e r r a t e
o f in f l a t i o n w o u l d r e d u c e in t e r e s t r a te s . A s a r e s u lt ,
in c e n t iv e s t o s u b s t it u t e n e w f o r m s o f in t e r e s t - b e a r in g
t r a n s a c t io n s b a la n c e s f o r t r a d i t i o n a l d e m a n d d e p o s its
w o u l d b e r e d u c e d , e v e n i f in t e r e s t p a y m e n ts o n t h e
l a t t e r c o n t in u e t o b e p r o h ib it e d .
T h e consequent
r e d u c t io n in f in a n c ia l in n o v a t i o n w o u l d g r e a t ly f a c i l i ­
t a t e m o n e t a r y c o n t r o l. 11
11 This conclusion must be qualified by recognizing that
the desire of thrift institutions to offer a greater variety
of banking services may be independent of the rate of
inflation and level of nominal interest rates.
To the
extent that this is true and to the extent that relevant
prohibitions are relaxed, thrift institutions may behave
more like banks in the future. This would mean that
even if the rate of inflation is reduced and nominal
interest rates come down, thrift institution liabilities may
become more like transactions balances and their signifi­
cance in money supply measurement may have to be
reconsidered.

VI. Conclusion
T h i s a r t ic le h a s h ig h lig h t e d s o m e im p o r t a n t c a u s e s
a n d c o n s e q u e n c e s o f t h e r a p id p a c e o f f in a n c ia l in n o ­
v a t io n o f r e c e n t y e a r s , e s p e c ia lly a s i t r e la te s t o t h e
n a t io n ’ s p a y m e n ts s y s te m . F i r s t , h ig h m a r k e t i n ­
t e r e s t r a te s , d if f e r e n t r e s e r v e r e q u ir e m e n t s o n v a r io u s
t y p e s o f d e p o s its , a n d le g a l r e s t r ic t io n s o n t h e p a y ­
m e n t o f in t e r e s t o n d e m a n d d e p o s its h a v e t o g e t h e r
p r o v i d e d in c r e a s e d in c e n t iv e f o r t h e m a r k e t t o c r e a te
a n d u s e n e w k in d s o f d e p o s it lia b ilit ie s . S e c o n d , r a p id
d e v e lo p m e n t o f c o m p u t e r a n d c o m m u n ic a t io n s t e c h ­
n o lo g y h a s c o n t r ib u t e d t o t h is o u tc o m e . T h i r d ,
r e g u la t o r s h a v e a llo w e d g r e a t e r c o m p e t it io n a m o n g
f in a n c ia l i n s t it u t io n s , t h e r e b y p r o m o t in g m o r e r a p id
in n o v a t io n .
B e c a u s e f in a n c ia l in n o v a t i o n in v o lv e s c r e a t io n o f
m o n e y s u b s t it u t e s , i t c a u s e s p r o b le m s f o r m o n e t a r y
c o n t r o l. I n p a r t ic u la r , d i f f i c u l t y in f o r e c a s t in g g r o w t h

18




o f d e m a n d d e p o s it s u b s t it u t e s
b ilit y o f th e m o n e y m u ltip lie r .
o n d e m a n d d e p o s it s u b s t it u t e s
to k n o w th e e x te n t o f th e ir u s e ,
h a r d t o e s tim a t e t h e t o t a l s t o c k

r e d u c e s t h e p r e d ic t a ­
I n a d d it io n , s in c e d a ta
a r e lim it e d , i t is h a r d
a n d c o n s e q u e n t ly , i t is
o f m oney.

F o r t u n a t e ly , r e f o r m s c a n e a s e t h is m o n e t a r y c o n ­
t r o l p r o b le m . T h e m o s t im p o r t a n t o f th e s e in c lu d e
e x t e n d in g t h e c o v e r a g e o f le g a l r e s e r v e r e q u ir e m e n t s
t o a ll d e p o s its u s e d a s p a y m e n ts b a la n c e s a n d r e ­
m o v in g r e s t r ic t io n s o n in t e r e s t p a y a b le o n d e p o s its .
A d o p t i o n o f th e s e r e f o r m s s h o u ld g o a lo n g w a y
t o w a r d i m p r o v in g m o n e t a r y c o n t r o l.
Marvin Goodfriend
James Parthemos
Bruce Summers

References
1. “ A Proposal for Redefining the Monetary Aggre­
gates.” Study by the staff of the Board of Gov­
ernors of the Federal Reserve System.
Federal
Reserve Bulletin (January 1979), pp. 13-42.
2.

Cagan, Phillip. “ Financial Developments and the
Erosion of Monetary Controls.”
Reprint from
American Enterprise Institute, Contemporary Eco­
nomic Problems, 1979.

3. Cook, Timothy Q., and Duffield, Jeremy G. “ Money
Market Mutual Funds: A Reaction to Government




Regulation or a Lasting Financial Innovation?”
Economic Review, Federal Reserve Bank of Rich­
mond (July/August 1979), pp. 15-31.
4. Kimball, Ralph C.
“ The Maturing of the N O W
Account in New England.” N ew England Economic
Review, Federal Reserve Bank of Boston (July/
August 1978), pp. 27-42.
5.

Summers, Bruce J.
“ Demand Deposits: A Com­
parison of the Behavior of Household and Business
Balances.” Economic Review, Federal Reserve Bank
of Richmond (July/August 1979), pp. 2-14.

19

HIGHLIGHTS
E a i ' i i i i i t i s a n d C a i. i i a l A c c o u n t s
u
i w -------ak m i n ir c
* p
^
b e f o r e p a y m e n ts t o t h e U n it e d S ta te s T r e a s u r y
in c r e a s e d b y $ 1 6 6 , 4 9 7 , 6 8 1 .3 9 t o $ 7 5 9 ,3 7 4 ,0 5 2 .1 3
i n 1 9 7 9 . S i x p e r c e n t s t a t u t o r y d iv id e n d s t o t a lin g
$ 3 , 4 8 5 , 2 5 2 . 3 4 w e r e p a id t o F i f t h D i s t r i c t m e m b e r
b a n k s , a n d t h e s u m o f $ 7 5 4 ,2 8 6 ,8 4 9 .7 9 w a s t u r n e d
o v e r t o t h e U n i t e d S ta te s T r e a s u r y .
C a p i t a l s t o c k in c r e a s e d b y $ 1 ,6 0 1 ,9 5 0 .0 0 t o
$ 5 8 , 2 3 2 , 8 0 0 . 0 0 a s m e m b e r b a n k s in c r e a s e d t h e i r
s t o c k h o ld in g s in t h is B a n k , a s r e q u ir e d b y la w ,
t o r e f le c t t h e r is e in t h e ir o w n c a p it a l a n d s u r p lu s
a c c o u n t s . T h e B a n k ’s s u r p lu s a c c o u n t in c r e a s e d
$ 1 , 6 0 1 , 9 5 0 . 0 0 t o $ 5 8 ,2 3 2 ,8 0 0 .0 0 .
D is c o u n t R a te T h e R ic h m o n d R e s e rv e B a n k ,
f o l l o w i n g d e c is io n s b y it s B o a r d o f D ir e c t o r s a n d
a p p r o v a l b y t h e B o a r d o f G o v e r n o r s , r a is e d it s
d is c o u n t r a t e f o u r t im e s d u r in g t h e y e a r t o b r in g
i t in t o a lig n m e n t w i t h s h o r t - t e r m m a r k e t in t e r e s t
r a t e s a n d h e lp c o m b a t s t r o n g in f la t io n a r y fo r c e s
i n t h e e c o n o m y . T h e d is c o u n t r a te , w h ic h h a d
b e e n 9 y 2 p e r c e n t s in c e N o v e m b e r 2 , 1 9 7 8 , w a s
r a is e d t o 1 0 p e r c e n t o n J u l y 2 0 ; t o 1 0 ^ p e r c e n t
o n A u g u s t 1 7 ; a n d t o 11 p e r c e n t o n S e p te m b e r 1 9 .
O n O c t o b e r 8 , t h e d is c o u n t r a t e w a s r a is e d a f u l l
p e r c e n ta g e p o in t t o 1 2 p e r c e n t a s o n e o f a p a c k a g e
o f p o li c y a c t io n s t a k e n o n O c t o b e r 6 t o a s s u r e
b e t t e r c o n t r o l o v e r t h e m o n e t a r y a g g r e g a te s , to
h e lp c u r b s p e c u la tiv e e x c e s s e s in f in a n c ia l, f o r e ig n
e x c h a n g e , a n d c o m m o d it y m a r k e ts , a n d t h e r e b y t o
d a m p e n i n f l a t i o n a r y fo r c e s .
T o e n h a n c e t h e a v a il a b ilit y o f c o lla t e r a l f o r
b o r r o w i n g a t t h e d is c o u n t w in d o w , t h e B o a r d o f
G o v e r n o r s in J a n u a r y a u t h o r iz e d t h e R e s e r v e
B anks

e fte c H v ? c u r r e n c y p r o c e s s in g c a p a b ilit y .
They
c o u n t , v e r i f y d e n o m in a t io n , detect counterfeit^
s e p a r a te f i t f r o m u n f i t c u r r e n c y , s t r a p n o te s i n f i t
c o n d it io n , a n d d e s t r o y n o te s d e t e r m in e d t o b e
u n f i t . T h e q u a lit y o f n o te s i n c ir c u la t io n s h o u ld
im p r o v e a c c o r d in g ly b e c a u s e e a c h i n d i v i d u a l n o t e
w i l l b e e x a m in e d f o r f it n e s s b e f o r e b e in g p u t in t o
c ir c u la t io n .
C h e c k C le a r in g O p e r a tio n s
W e s t V ir g in ia
b a n k e r s a t t h e i r a n n u a l c o n v e n t io n in J u l y v o te d
t o j o i n t h e V i r g i n i a A u t o m a t e d C le a r in g H o u s e
A s s o c ia t io n . U n t i l t h a t t im e t h e p o r t io n o f W e s t
V i r g i n i a s e r v e d b y t h e C h a r le s t o n O f f ic e , w h ic h
in c lu d e s a ll b u t t h i r t e e n c o u n t ie s in t h e S ta t e , w a s
t h e o n ly a r e a in t h e n a t io n n o t h a v in g a c c e s s t o t h e
p a y m e n t s e r v ic e s p r o v id e d b y a c o m m e r c ia l a u t o ­
m a t e d c le a r in g h o u s e ( A C H ) . T h e C h a r le s t o n
O f f ic e , w h ic h w i l l o p e r a t e t h e A C H , p la n s t o
i n i t i a t e t h e c o m m e r c ia l A C H o p e r a t io n i n J a n u ­
a ry 1980.

3 . T o a c c e p t lo a n p a r t ic ip a t io n s a s c o lla t e r a l.

F is c a l A g e n c y
A la r g e p a r t o f t h e s a v in g s
b o n d o p e r a t io n w a s a u t o m a t e d , a n d a r r a n g e m e n t s
h a v e b e e n m a d e t o la u n c h in e a r ly 1 9 8 0 a n e w
o n - lin e s e c u r it ie s t r a n s f e r s y s te m w i t h t e r m in a ls
a t h ig h v o lu m e c o m m e r c ia l b a n k s . I n a d d it io n , a
n e w p r o g r a m o f a c c e le r a te d r e m it t a n c e s o f s a v in g s
b o n d s a le s p r o c e e d s w a s s t a r t e d d u r in g t h e y e a r ,
a n d p r e p a r a t io n s h a v e b e e n m a d e f o r t h e p h a s in g
o u t o f S e r ie s E a n d H s a v in g s b o n d s a n d r e p la c in g
t h e m in 1 9 8 0 w i t h n e w S e r ie s E E a n d H H E n e r g y
B onds.
N o n c a s h c o lle c t io n s e r v ic e s f o r c o r p o r a t e a n d
m u n i c ip a l s e c u r itie s c o u p o n s w e r e m o d e r n iz e d in
O c t o b e r a n d p u t o n a c a s h c o lle c t io n b a s is . U n d e r
t h i s n e w p r o c e d u r e , m e m b e r b a n k s w i l l r e c e iv e
c r e d i t f o r m a t u r e d c o u p o n s a c c o r d in g t o a p r e ­
d e t e r m in e d t im e s c h e d u le r e g a r d le s s o f a c tu a l
c o lle c t io n t im e . B y s u b m i t t in g c o u p o n s i n a d v a n c e
o f m a t u r i t y d a te , m e m b e r b a n k s c a n b e a s s u r e d o f
m o r e u n i f o r m s e r v ic e a n d m o r e t im e ly c r e d it s t o
t h e i r r e s e r v e a c c o u n ts .

C ash
H i g h s p e e d c u r r e n c y p r o c e s s in g m a ­
c h in e s , lik e t h e t w o in s t a lle d i n B a lt im o r e la s t
y e a r , w e r e d e liv e r e d t o t h e C h a r lo t t e O f f ic e in
J u n e a n d t o t h e R ic h m o n d O f f ic e in J u ly . T h e s e
m a c h in e s s h o u ld p r o v id e a n a u t o m a t e d , c o s t-

C o m p u t e r O p e r a tio n s
T h is y e a r t w o n e w
s y s te m s w e r e im p le m e n t e d a t t h e R ic h m o n d O f f ic e
t o f a c i lit a t e g a t h e r in g a n d c o m p i lin g f in a n c ia l s ta ­
t is t ic s . T h e f i r s t is a n o n - lin e s y s te m w h ic h p r o ­
v id e s q u ic k e r a n d m o r e a c c u r a t e p r o c e s s in g a n d

1. T o p e r m i t m e m b e r b a n k s , in a p p r o p r ia t e
c ir c u m s t a n c e s , t o k e e p p h y s ic a l p o s s e s s io n o f
t h e i r o w n c o lla t e r a l p le d g e d t o s e c u re b o r ­
r o w in g s .
2 . T o a c c e p t p a p e r o f f o r e ig n c o m p a n ie s a s
c o lla t e r a l.

20




d i s t r i b u t i o n o f in f o r m a t io n f r o m t h e W e e k ly
R e p o r t s o f C o n d it io n s u b m it t e d b y la r g e D i s t r i c t
b a n k s . T h e s e c o n d s y s te m s u b s t a n t ia lly r e d u c e s
t h e t im e r e q u ir e d t o a c c o m m o d a t e c h a n g e s in
e x is t in g r e p o r t s o r t h e a d d it io n o f t o t a l l y n e w
re p o rts .
M a j o r a lt e r a t io n s w e r e m a d e t o t h e S e c u r it ie s
C u s t o d y S y s te m . T h e s e c h a n g e s in c lu d e d r e p la c ­
in g i n d i v i d u a l d e p o s it t ic k e t s w i t h a d a il y a c t i v i t y
s t a t e m e n t a n d u s in g t h e is s u e p o o lin g c o n c e p t f o r
b o o k e n t r y s e c u r itie s . W i t h t h e in c lu s io n o f t h e
C h a r lo t t e O f f ic e in A p r i l , a ll D i s t r i c t o ff ic e s a r e
n o w u s in g t h e s a m e c u s to d y s y s te m . T h e n e x t
p h a s e w i l l b e t o in s t a ll a n o n - lin e C P D ( C o m m i s ­
s io n e r o f P u b lic D e b t ) s y s te m w h ic h w i l l a llo w
m e m b e r b a n k s t o in i t i a t e a n d r e c e iv e s e c u r it y
t r a n s f e r s a t t h e i r o w n t e r m in a ls .
T w o m o re m e m b e r b a n k c o m p u te rs w e re c o n ­
n e c te d t o t h e F i f t h D i s t r i c t C o m m u n ic a t io n s S y s ­
t e m i n 1 9 7 9 , r a is in g t h e t o t a l n u m b e r o f b a n k
c o m p u t e r in t e r f a c e s t o s ix . T e r m in a ls w e r e i n ­
s t a lle d in f o u r a d d it io n a l m e m b e r b a n k s b r in g i n g
th e to ta l to 2 7 F if t h D is t r ic t b a n k s d ir e c tly c o n ­
n e c te d t o t h e F e d e r a l R e s e r v e C o m m u n ic a t io n s
S y s te m .
I n a r e la t e d F e d e r a l R e s e r v e C o m m u n ic a t io n s
S y s te m p r o je c t , t h e R ic h m o n d a n d N e w Y o r k
O f f ic e s a n d t h e D e p a r t m e n t o f t h e T r e a s u r y
j o i n t l y p a r t ic ip a t e d in a n a u t o m a t e d L e t t e r o f
C r e d it p r o g r a m .
T h i s p r o je c t p r o v id e s r a p id
p a y m e n t o f f u n d s t o p a r t ic i p a t in g b a n k s f o r t h e
d is b u r s e m e n t o f m o n e y t o g o v e r n m e n t s p o n s o r e d
p r o g r a m s . T h e L e t t e r o f C r e d it p r o g r a m , w h ic h
a t t h e p r e s e n t t im e in c lu d e s o n ly b a n k s i n t h e
F i f t h D i s t r i c t , w i l l b e e x te n d e d t o o t h e r b a n k s
t h r o u g h o u t t h e U n i t e d S ta te s i n t h e n e a r f u t u r e .
N e w B u ild in g - B a lt im o r e I n M a y th e B o a r d
o f G o v e r n o r s a p p r o v e d t h e c o n c e p t u a l d e s ig n a n d
b u d g e t f o r t h e n e w B a lt im o r e B r a n c h b u il d in g .
S h o r tly th e r e a fte r th e W h it in g - T u r n e r C o n tr a c t­
in g C o m p a n y w a s s e le c te d a s C o n s t r u c t io n C o n ­
s u lt a n t / M a n a g e r . T h e d e s ig n f o r t h e n e w b u il d in g
w a s c o m p le t e d i n e a r ly f a l l a n d s u b m it t e d t o t h e
B o a r d o f G o v e r n o r s f o r a p p r o v a l. A f t e r a p p r o v a l
w a s g r a n t e d in e a r ly N o v e m b e r , g r o u n d b r e a k in g
c e r e m o n ie s w e r e h e ld o n D e c e m b e r 7 , 1 9 7 9 . E x ­
p e c te d c o m p le t io n d a t e f o r t h e n e w b u il d in g is
1982.




F e d e r a l R e s e r v e M e m b e r s h ip T h e f o llo w in g
n e w ly c h a r t e r e d b a n k s in t h e F i f t h D i s t r i c t o p e n e d
f o r b u s in e s s d u r in g 1 9 7 9 a s m e m b e r s o f t h e
F e d e ra l R e s e rv e S y s te m :
National Banks
Stonewall National Bank
Weston, West Virginia

January 2

State Banks
The Community Bank of Forest
Forest, Virginia
The State Bank of the Alleghenies
Covington, Virginia
The George Mason Bank
Fairfax, Virginia

February 5

February 26

May 10

Farmers and Miners Bank of Lee County
Pennington Gap, Virginia

July 2

Big Stone Gap Bank and Trust Company
Big Stone Gap, Virginia

July 20

Jefferson Bank of the Valley
Fishersville, Virginia

August 1

First Russell County Bank and Trust Company
Lebanon, Virginia
August 3

T h e f o l lo w in g S t a t e - c h a r t e r e d b a n k s c o n v e r t e d t o
m e m b e r s h ip in t h e F e d e r a l R e s e r v e S y s te m d u r in g
1979:
Valley Bank and Trust Company
Bluefield, West Virginia
Farmers and Merchants Bank, Inc.
of Amherst, Virginia
Amherst, Virginia
The Peoples Bank of Hanover County
Mechanicsville, Virginia

April 26

July 26

August 23

C h a n g e s in D ir e c t o r s
I n J u ly th e B o a rd o f
G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s te m a p ­
p o in t e d M a c e o A . S lo a n , E x e c u t iv e V ic e P r e s i­
d e n t a n d C h ie f O p e r a t in g O f f ic e r , N o r t h C a r o lin a
M u tu a l L ife In s u ra n c e C o m p a n y , D u rh a m , N o r th
C a r o lin a , C h a ir m a n o f t h e B o a r d o f D ir e c t o r s o f
t h e F e d e r a l R e s e r v e B a n k o f R ic h m o n d .
M r.
S lo a n ’ s a p p o in t m e n t f i l l e d a v a c a n c y c r e a t e d b y
th e d e a th o f E . A n g u s P o w e ll. T h e B o a r d o f
G o v e r n o r s a ls o a p p o in t e d S te v e n M u l l e r , P r e s i­
d e n t, T h e J o h n s H o p k i n s U n i v e r s i t y a n d H o s p i t a l,
B a lt im o r e , M a r y la n d , a s D e p u t y C h a ir m a n o f t h e
R ic h m o n d R e s e r v e B a n k ’ s B o a r d o f D ir e c t o r s .

2
1

P a u l E . R e ic h a r d t , C h a ir m a n o f th e B u a iu a n d
C h ie f E x e c u t iv e O f f ic e r , W a s h in g t o n G a s L i g h t
C o m p a n y , W a s h in g t o n , D . C ., w a s a p p o in t e d b y
t h e B o a r d o f G o v e r n o r s t o f i l l M r . P o w e ll’s u n e x ­
p ir e d t e r m .
F i f t h D i s t r i c t m e m b e r b a n k s e le c te d o n e C la s s
A a n d o n e C la s s B d ir e c t o r t o t h r e e - y e a r t e r m s o n
t h e R ic h m o n d B o a r d o f D ir e c t o r s in e a r ly f a l l.
W i l l i a m M . D ic k s o n , P r e s id e n t a n d S e n io r T r u s t
O f f ic e r , T h e F i r s t N a t io n a l B a n k in R o n c e v e r t e ,
R o n c e v e r t e , W e s t V i r g i n i a , w a s e le c te d b y b a n k s
in G r o u p 2 a s a C la s s A d ir e c t o r , s u c c e e d in g F r a n k
B . R o b a r d s , J r . , P r e s id e n t , R o c k H i l l N a t io n a l
B a n k , R o c k H i l l , S o u t h C a r o lin a , w h o s e t e r m
e x p ir e d a t t h e e n d o f 1 9 7 9 . E le c t e d a s a C la s s B
d ir e c t o r b y b a n k s i n G r o u p 3 w a s J a m e s A .
C h a p m a n , J r . , C h a ir m a n o f t h e B o a r d a n d C h ie f
E x e c u t iv e O f f ic e r , I n m a n M i l l s , I n m a n , S o u t h
C a r o lin a .
M r . C h a p m a n succeeded A n d re w L .
C la r k , P r e s id e n t , A n d y C la r k F o r d , I n c . , P r in c e ­
t o n , W e s t V i r g i n i a , w h o s e t e r m e x p ir e d D e c e m ­
b e r 31, 1979.
T h e R ic h m o n d B o a r d r e a p p o in t e d A . R .
R e p p e r t , P r e s id e n t , T h e U n io n N a t io n a l B a n k o f
C la r k s b u r g , C la r k s b u r g , W e s t V i r g i n i a , t o a
t h r e e - y e a r t e r m o n t h e B a lt im o r e B o a r d . H u g h D .
S h ir e s , P r e s id e n t a n d C h ie f E x e c u t iv e O f f ic e r ,
T h e F i r s t N a t io n a l B a n k a n d T r u s t C o m p a n y o f
W e s t e r n M a r y la n d , C u m b e r la n d , M a r y la n d , a ls o
w a s a p p o in t e d t o a t h r e e - y e a r t e r m o n t h e B a l t i ­
m o r e B o a r d t o s u c c e e d L a c y I . R ic e , J r . , P r e s i­
d e n t , T h e O ld N a t io n a l B a n k o f M a r t in s b u r g ,
M a r t in s b u r g , W e s t V i r g i n i a , w h o s e t e r m e x p ir e d
D e c e m b e r 3 1 , 1 9 7 9 . W . B . A p p le , J r . , P r e s id e n t ,
F i r s t N a t io n a l B a n k o f R e id s v ille , R e id s v ille ,
N o r t h C a r o lin a , w a s r e a p p o in t e d a C h a r lo t t e
B r a n c h d ir e c t o r f o r a t h r e e - y e a r t e r m .
J. B .
S c a r b o r o u g h , C h a ir m a n a n d P r e s id e n t , P e e D e e
S t a t e B a n k , T im m o n s v ille , S o u t h C a r o lin a , w a s
a p p o in t e d t o a t h r e e - y e a r t e r m o n t h e C h a r lo t t e
B o a r d , s u c c e e d in g T h o m a s L . B e n s o n , P r e s id e n t ,
T h e C o n w a y N a t io n a l B a n k , C o n w a y , S o u t h
C a r o lin a . T h i s a p p o in t m e n t w a s e ff e c t iv e J a n u ­
a ry 1, 1 9 8 0 .
A t y e a r - e r id , t h e B o a r d o f G o v e r n o r s r e d e s ig ­
n a t e d M a c e o A . S lo a n , E x e c u t iv e V ic e P r e s id e n t
a n d C h ie f O p e r a t in g O f f ic e r , N o r t h C a r o lin a
M u tu a l L if e In s u ra n c e C o m p a n y , D u rh a m , N o r th
C a r o lin a , a s C h a ir m a n o f t h e B o a r d f o r 1 9 8 0 .

2
2



S te v e n Iv T u iie r . P r e s id e n t
I h e T n h n c J r io p k m s
U n i v e r s i t y a n d H o s p i t a l, B a lt im o r e , M a r y la n d ,
w a s r e d e s ig n a t e d D e p u t y C h a ir m a n o f t h e B o a r d
fo r 1980.
T h e B o a r d o f G o v e r n o r s r e a p p o in t e d P a u l E .
R e ic h a r d t , C h a ir m a n o f t h e B o a r d a n d C h ie f
E x e c u t iv e O f f ic e r , W a s h in g t o n G a s L i g h t C o m ­
p a n y , W a s h in g t o n , D . C ., t o a t h r e e - y e a r t e r m .
E d w a r d H . C o v e ll, V ic e P r e s id e n t a n d G e n e r a l
M a n a g e r , C o u n t r y P r id e F o o d s L i m i t e d , D e lm a r v a D iv i s i o n , E a s t o n , M a r y la n d , w a s a p p o in t e d
b y th e B o a r d o f G o v e rn o r s to a th r e e -y e a r te r m
o n t h e B a lt im o r e B o a r d . M r . C o v e ll s u c c e e d e d
I . E . K i l l i a n , P r e s id e n t , K i l l i a n E n t e r p r is e s , I n c . ,
G ib s o n I s la n d , M a r y la n d , w h o s e t e r m e x p ir e d a t
t h e e n d o f 1 9 7 9 . R e a p p o in t e d t o t h e C h a r lo t t e
B o a rd f o r a th re e -y e a r te r m w a s N a o m i G .
A lb a n e s e , D e a n , S c h o o l o f H o m e E c o n o m ic s ,
U n i v e r s i t y o f N o r t h C a r o lin a , G r e e n s b o r o , N o r t h
C a r o lin a .
T h e B o a rd o f D i­
r e c t o r s r e a p p o in t e d J . O w e n C o le , C h a ir m a n o f
t h e B o a r d , F i r s t N a t io n a l B a n k o f M a r y la n d ,
B a lt im o r e , M a r y la n d , t o a o n e - y e a r t e r m a s th e
F i f t h F e d e r a l R e s e r v e D i s t r i c t r e p r e s e n t a t iv e t o
t h e F e d e r a l A d v i s o r y C o u n c il b e g in n in g J a n u ­
a r y 1 , 1 9 8 0 . T h e t w e lv e - m e m b e r C o u n c il, c o n ­
s is t in g o f o n e m e m b e r f r o m e a c h o f t h e F e d e r a l
R e s e r v e D is t r i c t s , m e e ts in W a s h in g t o n a t le a s t
f o u r t im e s a y e a r w i t h t h e S y s t e m ’ s B o a r d o f
G o v e r n o r s t o d is c u s s b u s in e s s c o n d it io n s a n d o t h e r
t o p ic s o f c u r r e n t in t e r e s t t o t h e S y s te m .
F ed eral A d v iso r y C ou n cil

C h a n ges in O ffic ia l S ta ff O . L o u i s M a r t i n , J r . ,
A s s is t a n t V ic e P r e s id e n t a t t h e C h a r lo t t e O f f ic e ,
d ie d o n M a r c h 1 5 , 1 9 7 9 a f t e r a n e x te n d e d illn e s s .
A t t h e C o m m u n ic a t io n s a n d R e c o r d s C e n t e r in
C u lp e p e r , D a le M . C u n n in g h a m , A s s is t a n t V ic e
P r e s id e n t , r e s ig n e d a s o f S e p t e m b e r 1 4 , 1 9 7 9 .
T w o p r o m o t io n s a n n o u n c e d a t t h e R ic h m o n d
O f f ic e in c lu d e d R o b e r t B . H o l l i n g e r , J r . t o V ic e
P r e s id e n t , e f f e c t iv e S e p t e m b e r 1 7 , a n d D o n n a G .
V a u g h n t o A s s is t a n t C a s h ie r , e f f e c t iv e J a n u a r y 1 ,
1 9 8 0 . M r . H o l l i n g e r h a s r e s p o n s ib i lit y f o r t h e
C o m p u t e r P la n n in g , C o m p u t e r S e r v ic e s , a n d D a t a
P r o c e s s in g D e p a r t m e n t s , w h ile M r s . V a u g h n w i l l
b e i n c h a r g e o f t h e C o m p u t e r P la n n in g D e p a r t ­
m e n t.

Summary of Operations
Check Clearing and Collection

1979

1978r

Dollar amount
Commercial bank checks1 ___________________________________________

714,089,000,000

627,945,000,000

Government checks2 __________________________________________ ___ __

63,013,000,000

64,390,000,000

Return ite m s________________________________________________________

5,676,940,000

4,780,000,000

Number of items
Commercial bank checks1 ___________________________________________

1,389,330,000

1,300,530,000

Government checks2 ________________________________________________

87,800,000

96,400,000

Return ite m s_________________________________________________________

18,623,000

16,629,000

10,179,492,700

9,163,200,000

C urrency and Coin
Currency disbursed— Dollar am ount_________________________________
Coin disbursed— Dollar amount ______________________________________

348,661,050

274,113,000

Dollar amount of currency destroyed ________________________________

2,546,100,000

1,728,251,000

Dollar amount ______________________________________________________

10,063,636

6,858,000

Number _____________________________________________________________

1,495,549

1,086,405

Daily average of currency destroyed

D isco u n t and Credit
Dollar amount
23,096,013,800

21,110,996,000

Daily average loans outstanding___________________________________

Total loans made during y e a r ______________________________________

125,243,000

102,704,000

Number of banks borrowing during the y e a r ________________________

137

131

Dollar amount ______________________________________________________ 308,530,971,050

262,984,431,000

F isca l A g e n c y A ctiv ities
Marketable securities delivered or redeemed
Number _____________________________________________________________

213,738

196,622

Dollar amount ______________________________________________________

72,019,342

69,577,000

Number _____________________________________________________________

224,372

201,974

Dollar amount ______________________________________________________

510,114,499

585,922,000

Number _____________________________________________________________

11,767,172

11,706,584

Dollar amount ______________________________________________________

1,071,204,205

870,989,000

Number _____________________________________________________________

12,350,954

12,850,881

Coupons redeemed

Savings bond and savings note issues

Savings bond and savings note redemptions

T ra n sfers o f F u n ds
Dollar amount _________________________________________________________

2,215,380,011,105

1,763,218,000,000

Number ________________________________________________________________

1,947,639

1,636,631

r Revised.
1 Excluding checks on this Bank.
2 Including postal money orders.




23

Comparative Financial Statements

A sse ts:

D ec . 31, 1979

D e c . 31, 1978

Gold certificate account _______________________________________________

$ 1,292,576,481.10

Special Drawing Rights certificate account__________________________

161,000,000.00

116,000,000.00

Coin --------------- ----------------------------------------------------------------------------------------

44,639,596.20

23,225,897.74

Loans to member banks ____________________________________________

164,909,000.00

48,471,200.00

Federal agency obligations --------------------------------------------------------------

672,851,758.16

646,503,670.75

3,705,423,089.10

3,452,035,398.11

Notes ----------------------------------------------------------------------------------------------

4,626,870,992.09

4,491,632,934.02

Bonds ----------------------------------------------------------------------------------------------

1,191,854,543.41

1,020,641,115.96

TOTAL U. S. GOVERNMENT SECURITIES ___________________________

9,524,148,624.60

8,964,309,448.09

TOTAL LOANS AND SECURITIES ___________________________________

10,361,909,382.76

9,659,284,318.84

Cash items in process of collection____________________________________

2,821,954,663.42

2,431,868,863.49

83,446,999.67

79,932,514.94

$

973,696,100.00

LOANS AND SECURITIES:

U. S. Government securities:
Bills -----------------------------------------------------------------------------------------------Certificates _______________________________________________________

Bank premises ________________________________________________________
Furniture and equipment, n e t _________________________________________

7,758,728.35

6,214,881.47

Other assets ___________________________________________________________

326,310,848.43

263,374,961.73

Interdistrict settlement account______________________________________

— 361,656,862.10

-262,141,449.44

$14,737,939,837.83

$13,291,456,088.77

$10,304,492,825.00

$ 9,248,851,866.00

T O T A L A S S E T S ___________ __________________________________

L ia b ilitie s :
Federal Reserve notes ________________________________________________
d e p o s it s :

Member bank reserves _____________________________________________

1,308,242,753.39

1.781.185.839.09

U. S. Treasurer— general account_________________________________

315,585,848.33

247,634,722.29

Foreign _____________________________________________________________

15,847,000.00

10.945.800.00

Other ________________________________________________________________

74,424,344.28

53,117,295.81

TOTAL DEPOSITS _________________________________________________

1,714,099,946.00

2,092,883,657.19

Deferred availability cash items _____________________________________

2,430,601,041.20

1.679.837.331.10

Other liabilities _______________________________________________________

172,280,425.63

156,621,534.48

T O T AL L IA B IL IT IE S _______________________________________

14,621,474,237.83

13,178,194,388.77

58,232,800.00

56.630.850.00

________________________________________________________________

______58,232,800.00

56.630.850.00

T O T A L L IA B IL IT IE S A N D C AP ITA L A C C O U N TS ______

$14,737,939,837.83

$13,291,456,088.77

C apital A c c o u n t s :
Capital paid i n ________________________________________________________
Surplus

24




Earnings and Expenses
E A R N IN G S :

1978

1979

Loans to member ban ks__________________________________________________

$ 13,256,414.35

Interest on U. S. Government securities ________________________________

817,737,338.67

Foreign currencies _______________________________________________________

______ 152,310.66

t o t a l c u r r e n t e a r n i n g s _____________________________
_

_____________

7,617,868.41
679,295,906.61

3,641,489.85

Other earnings____________________________________________________________

$

104,981.86
_______ 51,256.24

834,787,553.53

687,070,013.12

Operating expenses (including depreciation on bank premises) after
deducting reimbursements received for certain Fiscal Agency and
other expenses __________________________________________________________

53,546,507.46

49,803,238.50

Cost of Federal Reserve currency_______________________________________

7,215,432.61

6,130,501.70

60,761,940.07

55,933,740.20

774,025,613.46

631,136,272.92

EXPENSES:

net

EXPENSES _______________________________________________________

CURRENT N E T E AR N IN G S _____________________________________
ADDITIONS TO CURRENT NET EARNINGS ____________________________________

______ 839,715.89

2,700,178.61

DEDUCTIONS FROM CURRENT NET EARNINGS:

Loss on sales of U. S. Government securities (net) ________________

12,573,629.68

10,667,111.81

Losses on Foreign Exchange transactions____________________________

193,568.04

27,306,830.10

A ll other ______________________________________________________________

83,179.50

143,038.88

TOTAL DEDUCTIONS ___________________________________________________

12,850,377.22

N E T AD D IT IO N S OR D E D U C T IO N S ____________________________

-12,010,661.33

Assessment for expenses of Board of Governors_______________________
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 SU R Y
Dividends paid ___________________________________________________________

-35,416,802.18

2,640,900.00

2,843,100.00

$759,374,052.13

$592,876,370.74

$

$

3,485,252.34

Payments to U. S. Treasury (interest on Federal Reserve notes) ____

754,286,849.79

Transferred to surplus __________________________________________________

1,601,950.00

T O T A L ______________________________________________________________

38,116,980.79

3,343,866.57

587,995,404.17
1,537,100.00

$759,374,052.13

$592,876,370.74

Balance at close of previous y e a r _______________________________________

$ 56,630,850.00

$ 55,093,750.00

Addition account of profits for year ____________________________________

1,601,950.00

Surplus A ccou n t

B A L A N C E A T CLOSE OF CUR R E N T Y E A R ___________________

$ 58,232,800.00

1,537,100.00
$ 56,630,850.00

C apital Stock A cc o u n t
(Representing amount paid in, which is 50% of amount subscribed)
Balance at close of previous y e a r _______________________________________

$ 56,630,850.00

Issued during the year __________________________________________________

3,296,950.00

Cancelled during the y e a r ________________________________________________

1,695,000.00

59,927,800.00

B A L A N C E A T CLOSE OF C U R R E N T Y E A R ___________________




$ 58,232,800.00

$ 55,093,750.00
1,906,000.00
56,999,750.00
______ 368,900.00
$ 56,630,850.00

25

Directors

(December 31, 1979)

R ich m o n d
Maceo A. Sloan ____________

_Chairman of the Board

Steven Muller ___________________ Deputy Chairman of the Board

C lass A
Vincent C. Burke, Jr. __________ Chairman of the Board and Chief Executive Officer
The Riggs National Bank of Washington, D. C.
Washington, D. C.
(Term expires December SI, 1981)
Frederic H. Phillips ____________Senior Vice President, Virginia National Bank
Roanoke, Virginia
(Term expires December 31, 1980)
Frank B. Robards, Jr. _________ President, Rock Hill National Bank
Rock Hill, South Carolina
(Term expired December 81, 1979)
Succeeded b y:

William M. Dickson
President and Senior Trust Officer
The First National Bank in Ronceverte
Ronceverte, W est Virginia
(Term expires December 31, 1982)

C la ss B
Andrew L. Clark _______________ President, Andy Clark Ford, Inc.
Princeton, W est Virginia
(Term expired December 31, 1979)
Succeeded b y:

James A . Chapman, Jr.
Chairman of the Board and Chief Executive Officer
Inman Mills
Inman, South Carolina
(Term expires December 31, 1982)

Thomas A . Jordan ______________ President, Stuart Furniture Industries, Inc.
Asheboro, North Carolina
(Term expires December 31, 1980)
Paul G. Miller __________________Chairman, President, and Chief Executive Officer, Commercial Credit Company
Baltimore, Maryland
(Term expires December 31, 1981)

C la ss C
Steven Muller ___________________ President, The Johns Hopkins University and Hospital
Baltimore, Maryland
(Term expires December 31, 1980)
Paul E. Reichardt ______________ Chairman of the Board and Chief Executive Officer
Washington Gas Light Company
Washington, D. C.
(Term expires December 31, 1982)
Maceo A . Sloan ________________ Executive Vice President and Chief Operating Officer
North Carolina Mutual Life Insurance Co.
Durham, North Carolina
(Term expires December SI, 1981)

M e m b e r o f Fed eral A d v is o r y C ouncil
J. Owen Cole ___________________ Chairman of the Board, First National Bank of Maryland
Baltimore, Maryland
(Term expires December SI, 1980)

26




Baltimore
Pearl C. Brackett------------------------Assistant/Deputy Manager, Baltimore Regional Chapter of American Red Cross
Baltimore, Maryland
(Term expires December SI, 1980)
Catherine B. Doehler __________ Director of Development, Baltimore Regional Chapter of American Red Cross
Baltimore, Maryland
(Term expires December SI, 1980)
Joseph M. Gough, J r . ____________President, The First National Bank of St. M ary's
Leonardtown, Maryland
(Term expires December SI, 1980)
*1. E. Killian ____________________ President, Killian Enterprises, Inc.
Gibson Island, Maryland
(Term expired December 31, 1979)
Succeeded b y :

Edward H. Covell
Vice President, Country Pride Foods Limited
General Manager, Delmarva Division
Easton, Maryland
(Term expires December SI, 1982)

Joseph H. McLain ______________ President, Washington College
Chestertown, Maryland
(Term expires December SI, 1981)
A . R. R eppert___________________ President, The Union National Bank of Clarksburg
Clarksburg, W est Virginia
(Term expires December SI, 1982)
Lacy I. Rice, Jr. ________________ President, The Old National Bank of Martinsburg
Martinsburg, W est Virginia
(Term expired December SI, 1979)
Succeeded b y :

Hugh D. Shires
President and Chief Executive Officer
The First National Bank and Trust Company of
Western Maryland
Cumberland, Maryland
(Term expires December SI, 1982)

C harlotte
Naomi G. Albanese _____________ Dean, School of Home Economics, University of North Carolina at Greensboro
Greensboro, North Carolina
(Term expires December 31, 1982)
W . B. Apple, J r . ________________ President, First National Bank of Reidsville
Reidsville, North Carolina
(Term expires December SI, 1982)
Thomas L. Benson _____________ President, The Conway National Bank
Conway, South Carolina
(Term expired December 31, 1979)
Succeeded b y :

J. Banks Scarborough
Chairman and President
Pee Dee State Bank
Timmonsville, South Carolina
(Term expires December SI, 1982)

Hugh M. Chapman _____________ Chairman of the Board
The Citizens and Southern National Bank of South Carolina
Columbia, South Carolina
(Term expires December SI, 1981)
*Robert E. Elberson _____________President, Chief Executive Officer, and Director, Hanes Corporation
Winston-Salem, North Carolina
(Term expires December 31, 1980)
John T. Fielder ________________ President, J. B. Ivey and Company
Charlotte, North Carolina
(Term expires December 31, 1980)
Henry P onder___________________ President, Benedict College
Columbia, South Carolina
(Term expires December 31, 1981)
♦Branch Board Chairman.




27

Officers

(January 1, 1980)

R ich m on d
Robert P. Black, President

Robert D. Bouck. Assistant Counsel

George C. Rankin, First Vice President

James R. Slate, Assistant Counsel

Welford S. Farmer, Senior Vice President
James Parthemos, Senior Vice President and
Director of Research

Donna G. Vaughn, Assistant Cashier
David B. Ayres, Jr., General Auditor
H. Lewis Garrett, Assistant General Auditor

John F. Rand, Senior Vice President
Raymond E. Sanders, Jr., Senior Vice President
B altim o re
Elizabeth W . Angle, Vice President
Lloyd W . Bostian, Jr., Vice President

Jimmie R. Monhollon, Senior Vice President

J. Alfred Broaddus, Jr., Vice President

William E. Pascoe, III, Vice President

George B. Evans, Vice President

Gerald L. Wilson, Vice President

Roy L. Fauber, Vice President
William C. Glover, Vice President
Robert B. Hollinger, Jr., Vice President
William D. Martin, III, Vice President and
General Counsel
Robert D. McTeer, Jr., Vice President

Ronald B. Duncan, Assistant Vice President
Ronald E. Gould, Assistant Vice President
Charles P. Kahler, Assistant Vice President
Robert A . Perry, Assistant Vice President
Victor Turyn, Assistant Vice President

Arthur V . Myers, Jr., Vice President
Chester D . Porter, Jr., Vice President
Aubrey N. Snellings, Vice President

C harlotte
Stuart P. Fishburne, Senior Vice President

Andrew L. Tilton, Vice President
James F. Tucker, Vice President
Joseph F. Viverette, Vice President
J. Lander Allin, Jr., Assistant Vice President
Fred L. Bagwell, Assistant Vice President
Jackson L. Blanton, Assistant Vice President

Thomas E. Snider, Vice President
Winfred W . Keller, Assistant Vice President
Harry B. Smith, Assistant Vice President
Robert F. Stratton, Assistant Vice President
Jefferson A . Walker, Assistant Vice President

Timothy Q. Cook, Research Officer
William E. Cullison, Research Officer
Wyatt F. Davis, Chief Examiner

C harleston
Richard L. Hopkins, Assistant Vice President

William C. Fitzgerald, Assistant General Counsel
Bradley H. Gunter, Assistant Vice President and
Secretary

C olu m bia

John C. Horigan, Assistant Vice President
Thomas M . Humphrey, Research Officer
Harold T . Lipscomb, Assistant Vice President

Boyd Z. Eubanks, Vice President
R. Wayne Stancil, Assistant Vice President

Hobert D . Pierce, Assistant Vice President
Joseph C. Ramage, Assistant Vice President

C ulpeper

Barthonhue W . Reese, Assistant Vice President
James D. Reese, Assistant Vice President

John G. Stoides, Vice President

Frank D . Stinnett, Jr., Assistant Vice President

Albert D. Tinkelenberg, Vice President

Jack H. Wyatt, Assistant Vice President

James G. Dennis, Assistant Vice President

28










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