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K. ANDERSON

1984 Annual Report




RESEARCH L IB R A R Y
Feci£i al R e s e r v e Bank

of St. Louis




Federal Reserve
Bank of Richmond
S E V E N T IE T H A N N U A L REPO RT 1984

Contents
The Evolution and Policy Implications
of Phillips Curve Analysis

4

Early Versions of the Phillips Curve

4

Introduction of Shift Variables

9

The Expectations-Augmented
Phillips Curve and the
Adaptive-Expectations Mechanism

10

Statistical Tests of the
Natural Rate Hypothesis

13

From Adaptive Expectations to
Rational Expectations

15

Evaluation of Rational Expectations

16

Concluding Comments

17

Appendix

18

Highlights

20

Summary of Operations

23

Comparative Financial Statements

24

Directors

26

Officers

28




ISSN 0164-0798

L IB R A R Y O F CON G RESS 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
Public Services Department, Federal Reserve Bank of Richmond,
P. O. Box 27622, Richmond, Virginia
23261.




March 14, 1985

T o Our Member Banks:

W e are pleased to present the 1984 Annual Report of the
Federal Reserve Bank of Richmond.

The Report’s feature

article traces the evolution and public policy implications of
Phillips curve analysis.

The Report also includes highlights

of the year, a summary of operations, comparative financial
statements, and current lists of directors and officers of our
Baltimore,

Charleston,

Charlotte,

Columbia,

Culpeper, and

Richmond Offices.
On behalf of our directors and staff, we wish to thank
you for the cooperation and support you have extended to us
throughout the past year.

Sincerely yours,

President

The Evolution
and Policy
Implications of
Phillips Curve
Analysis
Thomas M. Humphrey




At the core of modern macroeco­
nomics is some version or another of
the famous Phillips curve relation­
ship between inflation and unem­
ployment. The Phillips curve, both
in its original and more recently re­
formulated expectations-augmented
versions, has two main uses.
In
theoretical models of inflation, it
provides the so-called “ missing
equation” that explains how changes
in nominal income divide themselves
into price and quantity components.
On the policy front, it specifies
conditions contributing to the effec­
tiveness (or lack thereof) of expan­
sionary and disinflationary policies.
For example, in its expectationsaugmented form, it predicts that the
power of expansionary measures to
stimulate real activity depends crit­
ically upon how price anticipations
are formed. Similarly, it predicts
that disinflationary policy will either
work slowly (and painfully) or
swiftly (and painlessly) depending
upon the speed of adjustment of
price expectations. In fact, few
macro policy questions are discussed
without at least some reference to an
analytical framework that might be
described in terms of some version of
the Phillips curve.
As might be expected from such a
widely used tool, Phillips curve
analysis has hardly stood still since
its beginnings in 1958. Rather it has
evolved under the pressure of events
and the progress of economic theo­
rizing, incorporating at each stage
such new elements as the natural
rate hypothesis, the adaptive expec­
tations mechanism, and most re­
cently, the rational expectations hy­
pothesis. Each new element ex­
panded its explanatory power. Each
radically altered its policy implica­
tions. As a result, whereas the
Phillips curve was once seen as
offering a stable enduring trade-off
for the policymakers to exploit, it is
now widely viewed as offering no
trade-off at all. In short, the orig­
inal Phillips curve notion of the po­
tency of activist fine-tuning has
given way to the revised Phillips
curve notion of policy ineffective­
ness. The purpose of this article is to
trace the sequence of steps that led to
this change. Accordingly, the para­
graphs below sketch the evolution
4

of Phillips curve analysis, empha­
sizing in particular the theoretical
innovations incorporated into that
analysis at each stage and the policy
implications of each innovation.
I.
EARLY VERSIONS OF
THE PHILLIPS CURVE
The
idea
of
an
inflationunemployment trade-off is hardly
new. It was a key component of the
monetary doctrines of David Hume
(1752)
and
Henry
Thornton
(1802). It was identified statisti­
cally by Irving Fisher in 1926,
although he viewed causation as
running from inflation to unemploy­
ment rather than vice versa. It was
stated in the form of an econometric
equation by Jan Tinbergen in 1933
and again by Lawrence Klein and
Arthur Goldberger in 1955. Finally,
it was graphed on a scatterplot chart
by A. J. Brown in 1955 and pre­
sented in the form of a diagrammatic
curve by Paul Sultan in 1957. De­
spite these early efforts, however, it
was not until 1958 that modern
Phillips curve analysis can be said
to have begun. That year saw the
publication of Professor A. W.
Phillips’ famous article in which he
fitted a statistical equation w = f ( U )
to annual data on percentage rates of
change of money wages (w ) and the
unemployment rate (U ) in the
United Kingdom for the period
1861-1913. The result, shown in a
chart like Figure 1 with wage infla­
tion measured vertically and unem­
ployment horizontally, was a smooth,
downward-sloping convex curve that
cut the horizontal axis at a positive
level of unemployment.
The curve itself was given a
straightforward interpretation: it
showed the response of wages to the
excess demand for labor as proxied
by the inverse of the unemployment
rate. Low unemployment spelled
high excess demand and thus up­
ward pressure on wages.
The
greater this excess demand the faster
the rise in wages. Similarly, high
unemployment spelled negative ex­
cess demand (i.e., excess supply)
that put deflationary pressure on
wages. Since the rate of change of

wages varied directly with excess
demand, which in turn varied in­
versely with unemployment, wage
inflation won Id nse with riccrcssing
unemployment and fall with increas­
ing unemployment as indicated by
the negative slope of the curve.
Moreover, owing to unavoidable
frictions in the operation of the labor
market, it followed that some fric­
tional unemployment would exist
even when the market was in equi­
librium, that is, when excess labor
demand was zero and wages were
stable. Accordingly, this frictional
unemployment was indicated by the
point at which the Phillips curve
crosses the horizontal axis. A c­
cording to Phillips, this is also the
point to which the economy returns
if the authorities cease to maintain
disequilibrium in the labor market
by pegging the excess demand for
labor. Finally, since increases in
excess demand would likely run into
diminishing marginal returns in re­
ducing unemployment, it followed
that the curve must be convex— this
convexity showing that successive
uniform decrements in unemploy­
ment would require progressively
larger increments in excess demand
(and thus wage inflation rates) to
achieve them.

F ig ure 1

E A R L Y PH ILL IPS C U R V E
w Wage In fla tio n Rate (%)

Popularity of the
Phillips Paradigm

A t u n e m p lo y m e n t ra te U f th e labo r m a rk e t
is in e q u ilib riu m and wages are stable.

At

lo w e r u n e m p lo y m e n t rates excess dem and
exists to b id up wages. A t h igh er u n e m p lo y ­
m e n t rates excess s u p p ly exists to b id d o w n
wages.

T h e curve's convex shape shows th a t

increasing excess dem and fo r la b o r runs in to
d im in is h in g m a rgina l re tu rn s in re d u c in g u n ­
e m p lo y m e n t.

T hus successive u n ifo rm de­

creases in u n e m p lo y m e n t (h o riz o n ta l gray
a rro w s) re q u ire progressively larger increases
in excess de m and and hence wage in fla tio n
rates (ve rtical

blu e a rro w s) as we go fro m

p o in t a to b to c to d along th e curve.




Once equipped with the foregoing
theoretical foundations, the Phillips
curve gained swift acceptance among
economists and policymakers alike.
It is important to understand why
this was so. At least three factors
probably contributed to the attrac­
tiveness of the Phillips curve. One
was the remarkable temporal sta­
bility of the relationship, a stability
revealed by Phillips’ own finding
that the same curve estimated for the
pre-World War I period 1861-1913
fitted the United Kingdom data for
the post-World War II period 194857 equally well or even better. Such
apparent stability in a two-variable
relationship over such a long period
of time is uncommon in empirical
economics and served to excite inter­
est in the curve.
5

A second factor contributing to
the success of the Phillips curve was
its ability to accommodate a wide
varieW of inflation theories. The
Phillips curve itself explained infla­
tion as resulting from excess demand
that bids up wages and prices. It
was entirely neutral, however, about
the causes of that phenomenon. Now
excess demand can of course be gen­
erated either by shifts in demand or
shifts in supply regardless of the
causes of those shifts. Thus a
demand-pull theorist could argue
that excess-demand-induced infla­
tion stems from excessively expan­
sionary aggregate demand policies
while a cost-push theorist could
claim that it emanates from tradeunion monopoly power and real
shocks operating on labor supply.
The Phillips curve could accommo­
date both views. Economists of
rival schools could accept the Phil­
lips curve as offering insights into
the nature of the inflationary process
even while disagreeing on the causes
of and appropriate remedies for
inflation.
Finally, the Phillips curve ap­
pealed to policymakers because it
provided a convincing rationale for
their apparent failure to achieve full
employment with price stability—
twin goals that were thought to be
mutually compatible before Phillips’
analysis. When criticized for failing
to achieve both goals simultaneously,
the authorities could point to the
Phillips curve as showing that such
an outcome was impossible and that
the best one could hope for was
either arbitrarily low unemployment
or price stability but not both. Note
also that the curve, by offering a
menu of alternative inflation-unemployment combinations from which
the authorities could choose, pro­
vided a ready-made justification for
discretionary intervention and acti­
vist fine tuning. Policymakers had
but to select the best (or least unde­
sirable) combination on the menu
and then use their policy instruments
to achieve it. For this reason too
the curve must have appealed to
some policy authorities, not to men­
tion the economic advisors who sup­
plied the cost-benefit analysis under­
lying their choices.

From W age-Change Relation
to Price-Change Relation
A s noted above, the initial Phillips
curve depicted a relation between
unem ploym ent and w age inflation.
Policym akers,
how ever,
usually
specify inflation targets in terms of
rates o f change of prices rather than
wages.
A ccordin gly, to make the
Phillips curve m ore useful to p olicy ­
makers, it was therefore necessary to
transform it from a w age-change
relationship to a price-change rela­
tionship. This transform ation was
achieved by assuming that prices are
set by applying a constant m ark-up
to unit labor cost and so m ove in
step with wages— or, m ore precisely,
m ove at a rate equal to the differ­
ential between the percentage rates
of grow th of wages and productivity
(th e latter assumed zero h e re ). T he
result o f this transform ation was the
price-change Phillips relation

Figure 2
TRADE-OFFS AND
ATTAINABLE COMBINATIONS

p Price In flation Rate (%)

The position or location o f the Phillips
curve defines the fro n tie r or set of
attainable inflation-unem ploym ent com bi­
nations. Using m onetary and fiscal policies,
the authorities can attain all com binations
lying upon the fro n tie r itself but none in
the shaded region below it. In this way the
curve acts as a constraint on demandmanagement policy choices. The slope
o f the curve shows the trade-offs or rates
o f exchange between the tw o evils o f
in flatio n and unem ploym ent.




(1 )

p ^ a x (U )

w here p is the rate of price inflation,
x ( U ) is overall excess demand in
labor and hence product markets—
this excess demand being an inverse
function o f the unem ploym ent rate—
and a is a price-reaction coefficient
expressing the response of inflation
to excess demand. F rom this equa­
tion the authorities could determine
h ow much unem ploym ent w ould be
associated with any given target rate
of inflation. T h ey could also use it
to measure the effect of policies
undertaken to obtain a m ore fa v o r­
able Phillips curve, i.e., policies
aimed at low ering the price-response
coefficient and the amount of unem ­
ploym ent associated with any given
level of excess demand.

Trade-Offs and Attainable
Combinations
T h e foregoin g equation specifies
the position (o r distance from o ri­
g in ) and slope of the Phillips curve
— tw o features stressed in policy
discussions o f the early 1960s. A s
seen by the policym akers of that era,
the cu rve’s position fixes the inner
boundary, or frontier, o f feasible
(attainable) com binations o f infla­
tion and unem ploym ent rates (see
6

F igure 2 ) . Determ ined by the struc­
ture of labor and product markets,
the position o f the curve defines the
set o f all coordinates o f inflation and
unem ployment rates the authorities
could achieve via implementation of
m onetary and fiscal policies. U sing
these
m acroecon om ic
demandmanagement policies the authorities
could put the econ om y anywhere on
the curve. T h ey could not, however,
operate to the left o f it. T h e Phillips
curve was view ed as a constraint
preventing them from achieving still
low er levels of both inflation and un­
employment. Given the structure of
labor and product markets, it would
be im possible fo r m onetary and fiscal
policy alone to reach inflationunem ploym ent com binations in the
region to the left of the curve.
T h e slope o f the curve was inter­
preted as show ing the relevant policy
trade-offs (rates o f exchange be­
tween policy goa ls) available to the
authorities. A s explained in early
Phillips curve analysis, these trade­
offs arise because o f the existence of
irreconcilable conflicts am ong policy
objectives. W h e n the goals of full
em ploym ent and price stability are
not sim ultaneously achievable, then
attempts to m ove the econom y closer
to one will necessarily m ove it fu r­
ther away from the other. T h e rate
at which one ob jective must be given
up to obtain a little bit m ore of the
other is measured by the slope of the
Phillips curve. F o r exam ple, when
the Phillips cu rve is steeply sloped,
it means that a small reduction in
unem ploym ent w ould be purchased
at the cost of a large increase in the
rate of inflation.
C onversely, in
relatively flat portions of the curve,
considerably low er unem ploym ent
could be obtained fairly cheaply, that
is, at the cost o f only slight increases
in inflation.
K n ow led ge of these
trade-offs w ould enable the authori­
ties to determine the price-stability
sacrifice necessary to buy any given
reduction in the unem ploym ent rate.

The Best Selection on the
Phillips Frontier
T h e preceding has described the
early view o f the Phillips curve as a
stable, enduring trad e-off perm itting

Figure 3
THE BEST SELECTION ON
THE MENU OF CHOICES
p

Price In flation Rate

The bowed-out curves are social d is u tility
contours. Each contour shows all the com ­
binations o f in fla tio n and unem ploym ent
resulting in a given level o f social cost or
harm. The closer to the origin, the lower
the social cost. The slopes o f these contours
reflect the relative weights th a t society (or
the policy a u th o rity ) assigns to the evils o f
in fla tio n and unem ploym ent. The best
com bination o f in flatio n and unem ploy­
m ent th a t the policym akers can reach, given
the Phillips curve constraint, is the m ix
appearing on the low est attainable social
d is u tility contour. Here the additional
social benefit from a u n it reduction in
unem ploym ent w ill just be w orth the
extra in flatio n cost o f doing so.




the authorities to obtain permanently
low er rates of unem ploym ent in e x ­
change fo r permanently higher rates
o f in fla t io n o r v ic e versa. Put differ­
ently, the curve was interpreted as
ottering a menu of alternative m llation-unem ploym ent
combinations
from which the authorities could
choose.
Given the menu, the au­
thorities’ task was to select the p ar­
ticular inflation-unem ploym ent m ix
resulting in the smallest social cost
(see F igure 3 ) .
T o do this, they
w ould
have to
assign
relative
weights to the twin evils in a ccord ­
ance with their view s of the co m ­
parative harm caused by each. Then,
using m on eta ry/fisca l policy, they
would m ove along the Phillips curve,
trading off unem ploym ent for infla­
tion (o r vice versa ) until they
reached the point at w hich the addi­
tional benefit from a further redu c­
tion in unem ploym ent was just
w orth the extra inflation cost of
doin g so. H ere w ould be the opti­
mum, or least undesirable, m ix of
inflation and unem ploym ent. A t this
point the econ om y w ould be on its
low est attainable social disutility
contour (th e bow ed -ou t curves radi­
ating outw ard from the origin of
F igu re 3 ) allow ed by the Phillips
curve constraint.
H ere the unemploym ent-inflation
com bination
chosen w ould be the one that m ini­
mized social harm. It was of course
understood that if this outcom e in­
volved a positive rate o f inflation,
continuous excess m oney grow th
w ould be required to maintain it.
F or without such m onetary stimulus,
excess demand w ould disappear and
the econ om y w ou ld return to the
point at w hich the Phillips curve
crosses the horizontal axis.

Different Preferences,
Different Outcomes
It was also recognized that p olicy ­
makers might differ in their assess­
ment of the com parative social cost
o f inflation vs. unem ploym ent and
thus assign different policy weights
to each. P olicym akers w ho believed
that unem ploym ent was m ore unde­
sirable than rising prices w ould as­
sign a much higher relative weight
to the form er than w ould p o licy ­
makers w ho ju d g ed inflation to be

7

the w orse evil. H ence, those with a
marked aversion to unem ployment
w ould prefer a point higher up on
the Phillips curve than w o u ld those
m ore anxious to avoid inflation, as
shown in F igu re 4. W hereas one
political administration might opt
for a high pressure econom y on the
grounds that the social benefits of
low unem ploym ent exceeded the
harm done by the inflation necessary
to achieve it, another administration
might deliberately aim for a low
pressure econom y because it believed
that som e econom ic slack was a rela­
tively painless means o f eradicating
harmful inflation.
Both groups
w ould o f course prefer com binations
to the southwest of the Phillips c o n ­
straint, dow n closer to the figu re’s
origin (th e ideal point of zero infla­
tion and zero unem ploym ent). A s
pointed out before, however, this
w ould be im possible given the struc­
ture o f the econom y which deter­
mines the position or location o f the
Phillips frontier. In short, the p oli­
cym akers w ould be constrained to
com binations lying on this boundary,
unless they w ere prepared to alter
the econ om y ’s structure.

Pessimistic Phillips Curve and
the “ Cruel Dilemma”
In the early 1960s, there was
much discussion of the so-called
“ cruel-dilem m a” problem im posed
by an unfavorable Phillips curve.
T h e cruel dilemma refers to certain
pessim istic situations where none of
the available combinations on the
menu o f policy choices is acceptable
to the m ajority o f a country’s voters
(see F igu re 5 ) . F or example, sup­
pose there is som e m axim um rate of
inflation, A , that voters are just
w illing to tolerate without rem oving
the party in pow er. Likewise, sup­
pose there is som e maxim um toler­
able rate of unem ployment, B. A s
shown in Figure 5, these limits d e­
fine the zone of acceptable or politi­
cally feasible com binations of infla­
tion and unem ployment. A Phillips
curve that occupies a position any­
w here within this zone will satisfy
society’s demands for reasonable
price stability and high em ploym ent.
But if both limits are exceeded and
the cu rve lies outside the region of

satisfactory outcom es, the system ’ s
perform ance w ill fall short o f what
was expected of it, and the resulting
discontent may severely aggravate
political and social tensions.
If, as some analysts alleged, the
Phillips curve tended to be located
so far to the right in the chart that
no portion of it fell within the zone
of acceptable com binations, then the
policym akers w ould indeed be co n ­
fronted with a painful dilemma. A t
best they could hold only one of the
variables, inflation or unem ploy­
ment, dow n to acceptable levels. But
they could not hold both simultan­
eously within the limits o f toleration.
Faced with such a pessim istic P h il­
lips curve, policym akers armed only
with traditional dem and m anage­
ment policies w ould find it im pos­
sible to achieve com binations o f in­
flation and unem ploym ent acceptable
to society.

Policies to Shift the
Phillips Curve
It was this concern and frustration
over the seeming inability of m on e­
tary/fiscal policy to resolve the unem ploym ent-inflation dilemma that
induced some econom ists in the early
1960s to urge the adoption o f in­
com es (w a g e -p rice ) and structural
(labor-m arket) policies. M o n e ta r y /
fiscal policies alone were thought to
be insufficient to resolve the cruel
dilemma since the m ost these p oli­
cies could do was to occu py alterna­
tive positions on the pessim istic
Phillips curve. T hat is, m onetaryfiscal policies could m ove the econ o­
m y along the given curve, but they
could not m ove the curve itself into
the zone of tolerable outcom es. W h at
was needed, it was argued, w ere new
policies that w ould twist or shift the
Phillips frontier tow ard the origin of
the diagram.
O f these measures, incom es p oli­
cies w ould be directed at the priceresponse coefficient linking inflation
to excess demand.
Either by d e­
creeing this coefficient to be zero (as
with w age-price fre e z e s), or by re­
placing it with an officially mandated
rate of price increase, or sim ply by
persuading sellers to moderate their
wage and price demands, such p oli­
cies w ould low er the rate o f inflation




Figure 4
DIFFERENT PREFERENCES,
DIFFERENT POLICY CHOICES
p

Price Inflation Rate
Phillips Curve C onstraint
In fla tion -U n e m p lo ym en t
C hoice of an
U nem ploym ent-Averse
Adm in istration

Social D isu tility C ontours:
U nem ploym ent Weighted
M ore Heavily
In fla tio n Weighted
M ore Heavily

Figure 5
PESSIMISTIC PHILLIPS CURVE
AND THE "CRU EL DILEMMA"

i Price Inflation Rate
Pessimistic or Unfavorable
Phillips Curve; Lies
Outside the Zone of
Tolerable Outcomes

Choice of an
Inflation-Averse
A d m inistration

D ifferent political adm inistrations may
d iffe r in their evaluations o f the social
harmfulness o f in fla tio n relative to th a t of
unem ploym ent. Thus in their policy delib­
erations they w ill attach d ifferent relative
weights to the tw o evils o f in flatio n and un­
em ploym ent. These weights w ill be re­
flected in the slopes o f the social d is u tility
contours (as those contours are interpreted
by the policymakers). The relatively fla t
contours reflect the views o f those attaching
higher relative weight to the evils o f infla­
tio n ; the steep contours to those assigning
higher w eight to unem ploym ent. An unem­
ployment-averse adm inistration w ill choose
a p o in t on the Phillips curve involving more
in flatio n and less unem ploym ent than the
com bination selected by an inflation-averse
adm inistration.
8

Phillips C urve
Shifted D o w n by
Incomes and/or
Structural Policies

A
B

= M axim um Tolerable Rate o f In flation
= M axim um Tolerable Rate of U nem ploym ent

Given the unfavorable Phillips curve, policy­
makers are confronted w ith a cruel choice.
They can achieve acceptable rates o f in fla ­
tio n (p oint a) or unem ploym ent (point b)
but n o t both. The rationale fo r incomes
(wage-price) and structural (labor m arket)
policies was to s h ift the Phillips curve down
into the zone o f tolerable outcomes.

associated with any given level of
unem ploym ent and thus twist down
the Phillips curve.
T h e unstated
prem ise was that w age-price controls
would hold inflation dow n while
excess demand was being used to
boost employm ent.
Should incom es policies p rove un
w orkable or prohibitively expensive
in terms of their resource misallocation and restriction-of-freedom costs
then the authorities could rely solely
on m icroeconom ic structural policies
to im prove the trade-off.
B y en­
hancing the efficiency and p erform ­
ance of labor and product markets,
these latter policies could low er the
Phillips curve by reducing the
amount of unem ploym ent associated
with any given level of excess de­
mand. T hus the rationale fo r such
measures as job-training and re­
training program s, job-in form ation
and job-cou n selin g services, reloca­
tion subsidies, anti-discrim ination
laws and the like was to shift the
Phillips frontier dow n so that the
econ om y could obtain better inflation-unem ploym ent com binations.

II.

INTRODUCTION OF
SHIFT VARIABLES
U p until the m id-1960s the P hil­
lips curve received widespread and
largely uncritical acceptance.
F ew
questioned the usefulness, let alone
the existence, of this construct. In
policy discussions as well as e co ­
nom ic textbooks, the Phillips curve
was treated as a stable, enduring
relationship or menu o f policy
choices. B eing stable (an d barring
the application of incomes and struc­
tural p o licie s), the menu never
changed.
E m pirical studies of the 19001958 U . S. data soon revealed, h ow ­
ever, that the menu for this country
was hardly as stable as its original
British counterpart and that the
Phillips curve had a tendency to
shift over time.
A ccord in g ly , the
trad e-off equation was augmented
with additional variables to account
for such movements. T h e inclusion
of these shift variables m arked the
second stage of Phillips curve analy­




sis and meant that the trade-off
equation could be written as
(2 )
-»■
*

VV11C 1C

p — a x ( U ) -j- z
<r

C,

iO

Ct

-»r

♦»

V

r\-f

U l

V»1 A f

V U i X U U IV /O

productivity, profits, trade union
effects, unem ploym ent dispersion
and the like— thought capable of
shifting the inflation-unem ploym ent
trade-off.
In retrospect, this vector or list
was deficient both for what it in­
cluded and what it left out. E xclu d ed
at this stage w ere variables repre­
senting inflation expectations— later
shown to be a chief cause o f the
shifting short-run Phillips curve. O f
the variables included, subsequent
analysis w ould reveal that at least
three— productivity,
profits,
and
measures o f union m on op oly pow er
— were redundant because they co n ­
stituted underlying determinants of
the demand for and supply o f labor
and as such w ere already captured
by the excess demand variable, U .
T his criticism , how ever, did not
apply to the unem ploym ent disper­
sion variable, changes in w hich w ere
independent of excess dem and and
w ere indeed capable o f causing shifts
in the aggregate Phillips curve.
T o explain h ow the dispersion of
unem ploym ent across separate m icro
labor markets cou ld affect the aggre­
gate trade-off, analysts in the early
1960s used diagrams similar to F ig ­
ure 6. That figure depicts a repre­
sentative
m icrom arket
Phillips
curve, the exact replica o f w hich is
presum ed to exist in each local labor
market and aggregation over which
yields the m acro Phillips curve.
A cco rd in g to the figure, if a given
national unem ploym ent rate U *
w ere equally distributed across local
labor markets such that the same
rate prevailed in each, then wages
everywhere w ou ld inflate at the
single rate indicated by the point w *
on the curve. But if the same a ggre­
gate unem ploym ent w ere unequally
distributed across local markets, then
wages in the different markets w ould
inflate at different rates. Because of
the cu rve’s con vexity (w h ich ren d­
ers w age inflation m ore responsive
to leftward than to rightw ard devi­
ations from average unem ploym ent
along the cu rv e ) the average of these

9

Figure

6

EFFECTS OF UNEMPLOYMENT
DISPERSION
w

Wage In fla tio n Rate

If aggregate unem ploym ent at rate U* were
evenly distributed across individual labor
markets such th a t the same rate prevailed
everywhere, then wages would inflate at the
rate w* both locally and nationally. But if
aggregate unem ploym ent U * is unequally
distributed such that rate UA exists in
m arket A and U g in m arket B, then wages
w ill inflate at rate
in the form er m arket
and Wg in the latter. The average o f these
local in flatio n rates at aggregate unem ploy­
m ent rate U* is w Q which is higher than
in fla tio n rate w* o f the no-dispersion case.
C onclusion: The greater the dispersion of
unem ploym ent, the higher the aggregate
in fla tio n rate associated w ith any given
level of aggregate unem ploym ent. Unem­
ploym ent dispersion shifts the aggregate
Phillips curve rightward.

wage inflation rates w ould exceed
the rate of the no-dispersion case. In
short, the diagram suggested that,
for any given aggregate unem ploy­
ment rate, the rate o f aggregate
wage inflation varies directly with
the dispersion o f unemployment
across microm arkets, thus displacing
the macro Phillips curve to the right.
F rom this analysis, econom ists in
the early 1960s concluded that the
greater the dispersion, the greater
the outward shift of the aggregate
Phillips curve.
T o prevent such
shifts, the authorities w ere advised
to apply structural policies to m ini­
mize the dispersion of unem ploy­
ment across industries, regions, and
occupations. A lso, they were advised
to minimize unem ploym ent’s disper­
sion over time since, with a con vex
Phillips curve, the average inflation
rate w ould be higher the m ore un­
em ploym ent is allowed to fluctuate
around its average (m ea n ) rate.

A Serious Misspecification
T he preceding has shown how
shift variables were first in corp o­
rated into the Phillips curve in the
early to m id-1960s. N otably absent
at this stage were variables repre­
senting price expectations.
T o be
sure, the past rate o f price change
was sometimes used as a shift vari­
able to represent catch-up or cost-ofliving adjustm ent factors in wage
and price demands. Rarely, however,
was it interpreted as a p ro x y for
anticipated inflation. N ot until the
late 1960s w ere expectational vari­
ables fully incorporated into Phillips
curve equations. B y then, o f course,
inflationary expectations had becom e
too prom inent to ignore and many
analysts w ere perceiving them as the
dominant cause of observed shifts in
the Phillips curve.
C oinciding with this perception
was the belated recognition that the
original Phillips curve involved a
misspecification that could only be
corrected by the incorporation of a
price-expectations variable in the
trade-off.
T h e original Phillips
curve was expressed in terms of
nom inal w age changes, w = f ( U ) .
Since neoclassical econom ic theory
teaches that real rather than nominal
wages adjust to clear labor markets,




how ever, it follow s that the Phillips
curve should have been stated in
terms of real wage changes. Better
still (sin ce wage bargains are made
with an eye to the fu tu re ), it should
have been stated in terms o f
ex­
pected real wage changes, i.e., the
differential between the rates of
change o f nominal w ages and e x ­
pected future prices, w — pe= f ( U ) .
In short, the original Phillips curve
required a price-expectations term to
render it correct.
R ecognition of
this fact led to the developm ent of
the expectations-augm ented Phillips
curve described below.

III.
THE EXPECTATIONS-AUGMENTED
PHILLIPS CURVE AND THE
ADAPTIVE-EXPECTATIONS
MECHANISM
T h e original Phillips curve equa­
tion gave w ay to the expectationsaugmented version in the early
1970s. T hree innovations ushered in
this change. T he first was the re­
specification of the excess demand
variable. O riginally defined as an in­
verse function o f the unem ploym ent
rate, x ( U ) , excess demand was
redefined as the discrepancy or gap
between the natural and actual rates
o f unem ployment, U n — U .
T he
natural (o r full em ploym ent) rate of
unem ploym ent itself was defined as
the rate that prevails in steady-state
equilibrium when expectations are
fully realized and incorporated into
all wages and prices and inflation is
neither accelerating nor decelerating.
It is natural in the sense ( 1 ) that it
represents normal full-em ploym ent
equilibrium in the labor and hence
com m odity markets, ( 2 ) that it is
independent o f the steady-state infla­
tion rate, and ( 3 ) that it is deter­
mined by real structural forces
(m arket frictions and im perfections,
jo b inform ation and labor mobility
costs, tax laws, unem ploym ent sub­
sidies, and the like) and as such is
not susceptible to manipulation by
aggregate demand policies.
T h e second innovation was the
introduction of price anticipations
into Phillips curve analysis result­
ing in the expectations-augm ented
equation
10

(3 )

p =

a ( U N- U ) + p e

where excess demand is n ow written
as the gap between the natural and
actual unem ployment rates and pe is
the price expectations variable repre­
senting the anticipated rate of infla­
tion.
T his expectations variable
entered the equation with a coeffi­
cient of unity, reflecting the assump­
tion that price expectations are com ­
pletely incorporated in actual price
changes. T h e unit expectations c o ­
efficient implies the absence of
m oney illusion, i.e., it implies that
people are concerned with the e x ­
pected real purchasing p ow er of the
prices they pay and receive (o r ,
alternatively, that they wish to main­
tain their prices relative to the prices
they expect others to be ch argin g)
and so take anticipated inflation into
account. A s will be shown later, the
unit expectations coefficient also im ­
plies the com plete absence o f a trade­
o ff between inflation and unem ploy­
ment in long-run equilibrium when
expectations are fully realized. N ote
also that the expectations variable is
the sole shift variable in the equa­
tion. A ll other shift variables have
been omitted, reflecting the view,
prevalent in the early 1970s, that
changing price expectations w ere the
predominant cause of observed shifts
in the Phillips curve.

Expectations-Generating
Mechanism
T h e third innovation was the in­
corporation
o f an
expectationsgenerating mechanism into Phillips
curve analysis to explain h ow the
price expectations variable itself was
determined.
Generally a simple
adaptive
expectations
or
errorlearning mechanism was used. A c ­
cording to this mechanism, expecta­
tions are adjusted (a d a p ted ) by
some fraction of the forecast error
that occurs when inflation turns out
to be different than expected.
In
symbols,
(4 )

pe =

b (p

p e)

where the dot over the price exp ec­
tations variable indicates the rate of
change (tim e derivative) o f that
variable, p — pe is the expectations or
forecast error (i.e., the difference be­

tween actual and expected price in­
fla tion ), and b is the adjustm ent
fraction. A ssum ing, fo r example,
an adjustm ent fraction o f /l 2, equa­
tion 4 says that if the actual and
expected rates of inflation are 10
percent and 4 percent, respectively—
i.e., the expectational error is 6
percent— then the expected rate of
inflation will be revised upward by
an amount equal to half the error, or
3 percentage points. Such revision
will continue until the expectational
error is eliminated.
A nalysts also dem onstrated that
equation 4 is equivalent to the p rop o­
sition that expected inflation is a
geom etrically
declining
weighted
average of all past rates of inflation
with the w eights sum m ing to one.
T his unit sum of weights ensures
that any constant rate o f inflation
eventually w ill be fully anticipated,
as can be seen by w riting the errorlearning mechanism as
(5 )

pe =

S v ip -i

where 2 indicates the operation of
summing the past rates o f inflation,
the subscript i denotes past time
periods, and Vi denotes the weights
attached to past rates o f inflation.
W ith a stable inflation rate p un­
changing over time and a unit sum
of weights, the equation’s right-hand
side becom es simply p, indicating
that when expectations are form u ­
lated adaptively via the errorlearning scheme, any constant rate
of inflation w ill indeed eventually be
fully anticipated. Both versions of
the adaptive expectations mechanism
(i.e., equations 4 and 5) were
com bined with the expectationsaugmented Phillips equation to e x ­
plain the mutual interaction of actual
inflation, expected inflation, and e x ­
cess demand.

The Natural Rate Hypothesis
T hese three innovations— the re­
defined excess demand variable, the
expectations
augmented
Phillips
curve, and the error-learning mecha­
nism— form ed the basis o f the cele­
brated natural rate and acceleration­
ist hypotheses that radically altered
econom ists’ and policym akers’ views
of the Phillips curve in the late




1960s and early 1970s. A cco rd in g
to the natural rate hypothesis, there
exists no permanent trade-off be­
tween unem ploym ent and inflation
since real econ om ic variables tend to
be independent of nominal ones in
steady-state equilibrium.
T o be
sure, trade-offs may exist in the
short run.
F o r exam ple, surprise
inflation, if unperceived by wage
earners, may, by raising product
prices relative to nominal wages and
thus low erin g real wages, stimulate
em ploym ent tem porarily. But such
trade-offs are inherently transitory
phenom ena that stem from unex­
pected inflation and that vanish once
expectations (an d the wages and
prices em bodying them ) fully adjust
to inflationary experience.
In the
long run, when inflationary surprises
disappear and expectations are real­
ized such that wages reestablish their
preexisting levels relative to product
prices, unem ploym ent returns to its
natural (equ ilibriu m ) rate.
This
rate is com patible with all fully
anticipated steady-state rates o f in­
flation, im plying that the long-run
Phillips cu rve is a vertical line at the
natural rate o f unem ployment.
E quation 3 em bodies these con clu ­
sions.
T hat equation, when rear­
ranged to read p — p e= a ( U N— U ) ,
states that the trade-off is between
unexpected inflation (th e difference
between actual and expected infla­
tion, p — pe) and unem ployment.
That is, on ly surprise price increases
could induce deviations of unem ploy­
ment from its natural rate.
The
equation also says that the trade-off
disappears when inflation is fully
anticipated (i.e., when p — pe equals
z e r o ), a result guaranteed for any
steady rate o f inflation by the errorlearning m echanism ’s unit sum of
weights. M oreover, accordin g to the
equation, the right-hand side must
also be zero at this point, which im ­
plies that unem ploym ent is at its
natural rate.
T h e natural rate o f
unem ploym ent is therefore com pat­
ible with any constant rate o f infla­
tion provided it is fully anticipated
(w hich it eventually must be by
virtue o f the error-learning weights
adding to o n e ). In short, equation 3
asserts that inflation-unem ploym ent
trade-offs cannot exist when infla­
tion is fully anticipated. A n d equa11

Figure 7
THE NATURAL RATE
HYPOTHESIS AND ADJUSTMENT
TO STEADY-STATE EQUILIBRIUM

Price In fla tio n Rate

Natural Rate
of U ne m p lo ym en t

The vertical line L through the natural rate
of unem ploym ent
is the long-run steady
state Phillips curve along which all rates of
in fla tio n are fu lly anticipated. The downward-sloping lines are short-run Phillips
curves each corresponding to a d iffe ren t
given expected rate o f inflatio n. Attem pts
to low er unem ploym ent from the natural
rate U|y| to
by raising in fla tio n to 3 per­
cent along the short-run trade-off curve S q
w ill only induce shifts in the short-run curve
to S^, S 2 , S 3 as expectations adjust to the
higher rate o f inflation. The economy
travels the path A B C D E to the new steady
state eq uilibrium , p oint E, where unem ploy­
m ent is at its preexisting natural rate but
in fla tio n is higher than it was originally.

Figure

8

THE ACCELERATIONIST
HYPOTHESIS
p

tion 5 ensures that this latter con d i­
tion must obtain fo r all steady infla­
tion rates such that the long-run
Phillips cu rve is a vertical line at the
natural rate o f unem ploym ent.1
T h e message o f the natural rate
hypothesis was clear.
A higher
stable rate o f inflation could not
buy a permanent drop in joblessness.
M ovem ents to the left along a shortrun Phillips cu rve only provok e expectational w a g e /p rice adjustments
that shift the curve to the right and
restore unem ploym ent to its natural
rate (see F igu re 7 ) . In sum, Phillips
curve trade-offs are inherently tran­
sitory phenom ena.
A ttem pts to
exploit them w ill only succeed in
raising the perm anent rate o f infla­
tion w ithout accom plishing a lasting
reduction in the unem ploym ent rate.

Price Inflation Rate
The Accelerationist Hypothesis

Since the adjustm ent of expected to actual
in fla tio n works to restore unem ploym ent to
its natural equilibrium level U|yj at any
steady rate of in flatio n , the authorities must
continually raise (accelerate) the in flatio n
rate if they wish to peg unem ploym ent at
some a rb itrarily low level such as U^. Such
acceleration, by generating a continuous
succession o f in fla tio n surprises, perpetually
frustrates the fu ll adjustm ent o f expecta­
tions that w ould return unem ploym ent to
its natural rate. Thus attem pts to peg
unem ploym ent at
w ill provoke explo­
sive, ever-accelerating inflation.
The
econom y w ill travel the path AB C D w ith
the rate o f in flatio n rising from zero to p-j
to P 2 to pg etc.




T h e expectations-augm ented P hil­
lips curve, when com bined with the
error-learning process, also yielded
the celebrated accelerationist hy­
pothesis that dom inated many policy
discussions in the inflationary 1970s.
T his hypothesis, a corollary o f the
natural rate concept, states that
since there exists no long-run trade­
off between unem ploym ent and infla­
tion, attempts to peg the form er
variable below its natural (equ ilib­
riu m ) level must produce everincreasing inflation. Fueled by p ro ­
gressively faster m onetary expan­
sion, such price acceleration w ould
keep actual inflation always running
ahead o f expected inflation, thereby
perpetuating the inflationary sur­
prises that prevent unem ployment
from returning to its equilibrium
level (see F igu re 8 ) .
1 Actually, the long-run Phillips curve
may become positively sloped in its
upper ranges as higher inflation leads
to greater inflation variability (volatil­
ity, unpredictability) that raises the
natural rate of unem­
ployment. Higher and
hence more variable
and erratic inflation
can raise the equilib­
rium level of unem­
U
ployment by generat­
ing increased uncertainty that inhibits
business activity and by introducing
noise into market price signals, thus
reducing the efficiency of the price
system as a coordinating and allocating
mechanism.

12

A ccelerationists
reached
these
conclusions via the follow in g route.
T h ey noted that equation 3 posits
that unem ploym ent can differ from
its natural level only so long as
actual inflation deviates from e x ­
pected inflation.
But that same
equation together with equation 4
implies that, by the very nature of
the error-learning mechanism, such
deviations cannot persist unless in ­
flation is continually accelerated so
that it always stays ahead of e x ­
pected inflation.2 I f inflation is not
accelerated, but instead stays co n ­
stant, then the gap between actual
and expected inflation will eventu­
ally be closed. T h erefore accelera­
tion is required to keep the gap open
if unem ploym ent is to be maintained
below its natural equilibrium level.
In other w ords, the long-run trade­
o ff im plied by the accelerationist h y­
pothesis is betw een, unem ploym ent
and the rate of acceleration of the
inflation rate, in contrast to the co n ­
ventional trade-off between unem ­
ploym ent and the inflation rate itself
as im plied by the original Phillips
cu rve.3

Policy Implications of
the Natural Rate and
Accelerationist Hypotheses
A t least tw o policy implications
stem med from the natural rate and
accelerationist propositions.
First,
the authorities could either peg un­
em ploym ent or stabilize the rate of
inflation but not both. If they pegged

2 Taking the time derivative of equa­
tion 3, then assuming that the deviation
of U from U N is pegged at a constant
level by the authorities such that its
rate of change is zero, and then substi­
tuting equation 4 into the resulting
expression yields
p = b(p — pe)
which says that the inflation rate must
accelerate to stay ahead of expected
inflation.
3 The proof is simple. Merely substi­
tute equation 3 into the expression pre­
sented in the preceding footnote to
obtain
p = b a (U N— U )
which says that the trade-off is between
the rate of acceleration of inflation p
and unemployment U relative to its
natural rate.

unem ploym ent, they w ould lose co n ­
trol of the rate of inflation because
the latter accelerates when unem ­
ploym ent is held below its natural
level. Alternatively, if they stabilized
the inflation rate, they w ould lose
control o f unem ploym ent since the
latter returns to its natural level at
any steady rate of inflation. Thus,
contrary to the original Phillips h y­
pothesis, they could not peg unem ­
ploym ent at a given constant rate of
inflation.
T hey could, how ever,
ch oose the steady-state inflation rate
at w hich unem ploym ent returns to
its natural level.
A second policy im plication stem­
m ing from the natural rate hypothe­
sis was that the authorities could
ch oose from am ong alternative tran­
sitional adjustm ent paths to the de­
sired steady-state rate of inflation.
Suppose the authorities wished to
m ove from a high inherited inflation
rate to a zero or other low target
inflation rate. T o do so, they must
low er inflationary expectations, a
m a jor determinant of the inflation
rate. But equations 3 and 4 state
that the only way to low er expecta­
tions is to create slack capacity or
excess supply in the econom y. Such
slack raises unem ploym ent above its
natural level and thereby causes the
actual rate of inflation to fall below
the expected rate so as to induce a
dow n w ard revision o f the latter.4
T h e equations also indicate that how
fast inflation com es d ow n depends
on the amount of slack created.5
M uch slack means fast adjustm ent
and a relatively rapid attainment of
the inflation target. C onversely, little
slack means sluggish adjustm ent
and a relatively slow attainment of
the inflation target. T hus the p olicy
ch oice is between adjustm ent paths
offerin g high excess unem ploym ent

4 The proof is straightforward. Simply
substitute equation 3 into equation 4 to
obtain
pe= b a ( U N— U ).
This expression
will be adjusted
negative) only
ceeds its natural

says that expectations
downward (pe will be
if unemployment ex­
rate.

5 Note that the equation developed in
footnote 3 states that disinflation will
occur at a faster pace the larger the
unemployment gap.




for a short time or low er excess un­
em ploym ent for a long time (see
F igure 9 ) .6

IV.
STATISTICAL TESTS OF THE
NATURAL RATE HYPOTHESIS
/T ' u „

X iiC

6 Controls advocates proposed a third
policy choice: use ws-gc-pricc controls
to hold actual below expected inflation
so as to force a swift reduction of the
latter.
Overlooked was the fact that
controls would have little impact on
expectations unless the public was con­
vinced that the trend of prices when
controls were in force was a reliable
indicator of the future price trend after
controls were lifted.
Convincing the
public would be difficult if controls had
failed to stop inflation in the past.
Aside from this, it is hard to see why
controls should have a stronger impact
on expectations than a preannounced,
demonstrated policy of disinflationary
money growth.

— -----------j : ___ 1_____________________ ]

p i CCCUlilg

iidS

CA.dillli.lCCi

j.1 - _
L11C

third stage o f Phillips curve analysis
in which the natural rate hypothesis
was form ed. T h e fourth stage in­
volved statistical testing of that hy­
pothesis. T hese tests, conducted in
the early to m id-1970s, led to criti­
cism s o f the adaptive-expectations or
error-learning m odel o f inflationary
expectations and thus helped pre­
pare the way fo r the introduction of
the alternative rational expectations
idea into Phillips curve analysis.
T h e tests themselves were mainly
concerned with estimating the nu-

Figure 9
ALTERNATIVE DISINFLATION PATHS

p Price Inflation Rate

p Price In fla tio n Rate

Pa

ACB = Fast d isinflation path involving high
excess unem ploym ent fo r a short
tim e.

A D E B = Gradualist d isinflation path involving low excess unem ploym ent fo r
a lo n g tim e.

To move from hig h-inflation p o in t A to zero-inflation p o in t B the authorities must firs t travel
along short-run Phillips curve S a , lowering actual relative to expected inflation and thereby
inducing the downward revision o f expectations th a t shifts the short-run curve leftward u n til
point B is reached. Since the speed o f adjustm ent o f expectations depends upon the size o f
the unem ploym ent gap, it fo llow s th a t p oint B w ill be reached faster via the high excess unem­
ploym ent path ACB than via the low excess unem ploym ent path A D EB . The choice is between
high excess unem ploym ent fo r a short tim e or low excess unem ploym ent fo r a long tim e.
13

m erical value o f the coefficient on
the price-expectations variable in
the expectations-augm ented Phillips
cu rve equation. If the coefficient is
one, as in equation 3, then the
natural rate hypothesis is valid and
no lon g-ru n inflation-unem ploym ent
tra d e-off exists for the policym akers
to exploit. But if the coefficient is
less than one, the natural rate h y­
pothesis is refuted and a long-run
tra d e-off exists.
Analysts empha­
sized this fact by w riting the e x p ec­
tations augmented equation as

Figure 10

(6 )

THE EXPECTATIONS
COEFFICIENT AND THE
LONG-RUN STEADY-STATE
PHILLIPS CURVE
p

Price In fla tio n Rate

p = a ( U N— U)-f</>pe

w here
is the coefficient (w ith a
value of between zero and o n e ) at­
tached to the price expectations vari­
able.
In long-run equilibrium, of
course, expected inflation equals
actual inflation, i.e., pe= p . Setting
expected inflation equal to actual
inflation as required for long-run
equilibrium and solving for the ac­
tual rate o f inflation yields

(7) P = ^ ( U

n-U ).

B esides show ing that the long-run
Phillips curve is steeper than its
short-run counterpart (since the
slope parameter o f the form er,
a / ( l — <f>), exceeds that of the latter,
a ) , equation 7 shows that a long-run
tra d e-off exists only if the expecta­
tions coefficient </> is less than one.
I f the coefficient is one, how ever, the
slope term is infinite, which means
that there is no relation between in­
flation and unem ploym ent so that
the tra d e-off vanishes (see F igure

10).

Statistical tests o f the natural rate hypo­
thesis sought to determ ine the magnitude
o f the expectations coefficient 0 in the
long-run steady-state Phillips curve equation
p

- tV

un

- u )-

A coefficient o f one means th a t no perma­
nent trade-off exists and the steady-state
Phillips curve is a vertical line through the
natural rate o f unem ploym ent. Conversely,
a coefficient o f less than one signifies the
existence o f a long-run Phillips curve trade­
o ff w ith negative slope fo r the policym akers
to exploit. N ote th a t the long-run curves
are steeper than the short-run ones, indi­
cating that permanent trade-offs are less
favorable than tem porary ones.




M an y o f the empirical tests esti­
mated the coefficient to be less than
unity and concluded that the natural
rate hypothesis was invalid. But this
con clu sion was sharply challenged
by econom ists w ho contended that
the tests contained statistical bias
that tended to w ork against the natu­
ral rate hypothesis.
T hese critics
pointed out that the tests typically
used adaptive-expectations schemes
as em pirical proxies for the unob­
servable price expectations variable.
T h e y further showed that if these
p rox ies w ere inappropriate measures
o f inflation expectations then esti­
mates o f the expectations coefficient

14

could well be biased dow nw ard. If
so, then estimated coefficients o f less
than one constituted no d isp roof of
the natural rate hypothesis. Rather
they constituted evidence o f inade­
quate measures o f expectations.

Shortcomings of the AdaptiveExpectations Assumption
In connection with the foregoing,
the critics argued that the adaptiveexpectations scheme is a grossly in­
accurate
representation
of
how
people form ulate price expectations.
T h ey pointed out that it postulates
naive expectational behavior, h old ­
ing as it does that people form an­
ticipations solely from a weighted
average o f past price experience with
weights that are fix ed and indepen­
dent o f econom ic conditions and
policy actions. It im plies that people
look only at past price changes and
ignore all other pertinent in form a­
tion— e.g.,
m oney
grow th
rate
changes, exchange rate m ovem ents,
announced policy intentions and the
like— that could be used to reduce
expectational errors.
T hat people
w ould fail to exploit inform ation that
w ould im prove expectational accu­
racy seems implausible, how ever.
In short, the critics contended that
adaptive expectations are not w holly
rational if other inform ation besides
past price changes can im prove in­
flation predictions.
M any
econom ists
have
since
pointed out that it is hard to accept
the notion that individuals w ould
continually form price anticipations
from any scheme that is inconsistent
with the way inflation is actually
generated in the econom y.
B eing
different from the true inflationgenerating mechanism, such schemes
w ill produce expectations that are
systematically w ron g. If so, rational
forecasters w ill cease to use them.
F or exam ple, suppose inflation w ere
actually accelerating or decelerating.
A cco rd in g to equation 5, the adap­
tive expectations m odel w ould sys­
tematically underestimate the infla­
tion rate in the form er case and
overestimate it in the latter. U sin g a
unit weighted average o f past infla­
tion rates to forecast a steadily rising
or falling rate w ould yield a suc­
cession o f on e-w ay errors.
The

discrepancy between actual and e x ­
pected inflation w ould persist in a
perfectly predictable way such that
forecasters w ould be provided free
the inform ation needed to correct
their mistakes. P erceiving these p er­
sistent expectational mistakes, ra­
tional individuals w ould quickly
abandon the error-learning model
for m ore accurate expectationsgenerating schemes. O n ce again, the
adaptive-expectations mechanism is
im plausible because of its incom pati­
bility with rational behavior.

V.
FROM ADAPTIVE EXPECTATIONS
TO RATIONAL EXPECTATIONS
T h e shortcom ings of the adaptive
expectations approach to the m odel­
ing of expectations led to the in cor­
poration of the alternative rational
expectations approach into Phillips
curve analysis. A ccord in g to the ra­
tional expectations hypothesis, indi­
viduals will tend to exploit all avail­
able pertinent inform ation about the
inflationary process when making
their price forecasts.
If true, this
means that forecasting errors ulti­
mately could arise only from random
(u n foreseen ) shocks occurring to
the econom y.
A t first, o f course,
price forecasting errors might also
arise because individuals initially
possess limited or incom plete in for­
mation about, say, a new policy re­
gim e, econom ic structure, or infla­
tion generating mechanism. But it
is unlikely that this latter condition
w ould persist. F or if the public were
truly rational, it w ould quickly learn
from these inflationary surprises or
prediction errors (data on which it
acquires costlessly as a side condition
of buying g o o d s) and incorporate
the free new inform ation into its
forecasting
procedures,
i.e.,
the
source of forecasting mistakes w ould
be sw iftly perceived and systemati­
cally eradicated. A s know ledge of
p olicy and the inflationary process
im proved, forecasting models w ould
be continually revised to produce
m ore accurate predictions. S oon all
systematic (p red ictable) elements
influencing the rate o f inflation
w ould becom e know n and fully
understood, and individuals’ price




expectations w ould constitute the
m ost accurate (unbiased) forecast
consistent with that know ledge.7
W h en this happened the econom y
w ould con verge to its rational e x ­
pectations equilibrium and people’s
price expectations w ould be the same
as those implied by the actual infla­
tion generating mechanism. A s in­
corporated in natural rate Phillips
curve models, the rational expecta­
tions hypothesis implies that there­
after, except fo r unavoidable sur­
prises due to purely random shocks,
price expectations w ould always be
correct and the econom y w ould al­
ways be at its long-run steady-state
equilibrium.

Policy Implications of
Rational Expectations
T h e strict (flexible price, instan­
taneous market clearing) rationalexpectations approach has radical
p olicy implications. W h en in corp o­
rated into natural rate Phillips curve
equations, it implies that systematic
policies— i.e., those based on feed­
back control rules defining the au­
thorities’ response to changes in the
econ om y— cannot
influence
real
variables such as unemployment
even in the short run, since people
w ould have already anticipated what
the policies are goin g to be and acted
upon those anticipations. T o have
an impact on output and em ploy­
ment, the authorities must be able
to create a divergence between actual
and expected inflation. T his follow s
from the proposition that inflation
influences real variables only when
it is unanticipated.
T o low er un­
em ploym ent in the Phillips curve
equation p — pe = a ( U N— U ) , the
authorities must be able to alter the
actual rate o f inflation without
simultaneously causing an identical
change in the expected future rate.
T his may be impossible if the public
can predict policy actions.
P olicy actions, to the extent they
are systematic, are predictable. Sys­

7 Put differently, rationality implies
that current expectational errors are
uncorrelated with past errors and with
all other known information, such cor­
relations already having been perceived
and exploited in the process of improv­
ing price forecasts.

15

tematic policies are sim ply feedback
rules or response functions relating
policy variables to past values of
other econ om ic variables.
These
policy response functions can be esti­
mated and incorporated into fore­
casters’ price predictions. In other
w ords, rational individuals can use
past observations on the behavior of
the authorities to discover the p olicy
rule. O n ce they know the rule, they
can use current observations on the
variables to w hich the policym akers
respond to predict future policy
m oves. Then, on the basis o f these
predictions, they can correct for the
effect o f anticipated policies before­
hand by m aking appropriate ad ju st­
ments to nominal w ages and prices.
Consequently, when stabilization ac­
tions do occur, they will have no im ­
pact on real variables like unem ploy­
ment since they will have been dis­
counted and neutralized in advance.
In short, rules-based policies, being
in the inform ation set used by ra­
tional forecasters, will be perfectly
anticipated and fo r that reason will
have no im pact on unem ploym ent.
T h e only conceivable w ay that policy
can have even a short-run influence
on real variables is fo r it to be u n ex­
pected, i.e., the policym akers must
either act in an unpredictable ran­
dom fashion or secretly change the
policy rule. A pa rt from such tactics,
which are incom patible with most
notions o f the proper conduct of
public policy, there is no w ay the
authorities can influence real vari­
ables, i.e., cause them to deviate from
their natural equilibrium levels. T h e
authorities can, how ever, influence a
nominal variable, nam ely the infla­
tion rate, and should concentrate
their efforts on doin g so if som e par­
ticular rate (e .g ., z e ro ) is desired.
A s fo r disinflation strategy, the
rational expectations approach gen ­
erally calls fo r a preannounced sharp
swift reduction in m oney grow th —
p rovided o f course that the g overn ­
m ent’s com m itm ent to ending infla­
tion is sufficiently credible to be
believed.
H a v in g chosen a zero
target rate of inflation and having
con vin ced the public o f their deter­
m ination to achieve it, the policy au­
thorities should be able to do so
w ithout creating a costly transitional
rise in unem ploym ent. F or, given

that rational expectations adjust in­
finitely faster than adaptive exp ec­
tations to a credible preannounced
disinflationary policy, the transition
to price stability should be relatively
quick and painless.

No Exploitable Trade-Offs
T o summarize, the rationality hy­
pothesis, in con ju n ction with the
natural rate hypothesis, denies the
existence of exploitable Phillips
cu rve trade-offs in the short run a?
well as the long.
In so doing, it
differs from the adaptive expecta­
tions version of natural rate Phillips
cu rve models. U n d er adaptive e x ­
pectations, short-run trade-offs exist
because expectations do not adjust
instantaneously to eliminate forecast
errors arising from policy-engineered
changes in the inflation rate. W ith
expectations adapting to actual in­
flation with a lag, m onetary policy
can generate unexpected inflation
and consequently influence real vari­
ables in the short run. T h is cannot
happen under rational expectations
w here both actual and expected in­
flation adjust identically and instan­
taneously
to
anticipated
policy
changes.
In short, under rational
expectations, system atic policy can­
not induce the expectational errors
that generate short-run
Phillips
cu rves.8 Phillips curves m ay exist,
to be sure. But they are purely ad­
ventitious phenom ena that are en­
tirely the result of unpredictable
random shocks and cannot be e x ­
ploited by policies based upon rules.
In sum, no role remains fo r sys­
tematic counter-cyclical stabilization
p olicy in Phillips curve m odels em ­
b odyin g rational expectations and
the natural rate hypothesis. T h e only
thing such p olicy can influence in

8 Note that the rational expectations
hypothesis also rules out the acceler­
ationist notion of a stable trade-off
between unemployment and the rate of
acceleration of the inflation rate.
If
expectations are formed consistently
with the way inflation is actually gen­
erated, the authorities will not be able
to fool people by accelerating inflation
or by accelerating the rate of acceler­
ation, etc. Indeed, no systematic policy
will work if expectations are formed
consistently with the way inflation is
actually generated in the economy.




these models is the rate o f inflation
which adjusts im mediately to e x ­
pected changes in m oney grow th.
Since the models teach that the full
effect of ruies-based policies is 011

th e in f la t io n ra te , i t f o llo w s t h a t th e

authorities— provided they believe
that the models are at all an accurate
representation of the way the w orld
w orks— should
concentrate
their
efforts on controlling that nominal
inflation variable since they cannot
systematically influence real vari­
ables. These propositions are dem on­
strated with the aid o f the expository
model presented in the A pp en d ix.

VI.
EVALUATION OF RATIONAL
EXPECTATIONS
T he preceding has shown h ow the
rational
expectations
assumption
combines with the natural rate hy­
pothesis
to
yield
the
policyineffectiveness conclusion that no
Phillips curves exist fo r policy to
exploit even in the short run. Given
the importance of the rational exp ec­
tations com ponent in m odern P hil­
lips curve analysis, an evaluation of
that com ponent is n ow in order.
O ne advantage o f the rationalexpectations hypothesis is that it
treats expectations form ation as a
part of optim izing behaviour. B y so
doing, it brings the theory o f price
anticipations into accord with the
rest of econom ic analysis. T h e latter
assumes that people behave as ra­
tional optimizers in the production
and purchase of good s, in the choice
of jobs, and in the making of invest­
ment decisions. F o r consistency, it
should assume the same regarding
expectational behavior.
In
this
sense,
the
rationalexpectations theory is superior to
rival explanations, all of which im ply
that expectations may be consistently
w rong. It is the only theory that
denies that people make systematic
expectation errors. N ote that it does
not claim that people possess perfect
foresight or that their expectations
are always accurate. W h a t it does
claim is that they perceive and elim i­
nate regularities in their forecasting
mistakes. In this way they discover
the actual inflation generating p ro ­
16

cess and use it in form in g price e x ­
pectations.
A n d with the public’ s
rational expectations of inflation
being the same as the mean v a lu e of
the in f la t io n
g e n e r a tin g process,

tllO S e e x o e c ta tio n s c a n n o t h e wrnncr
T*
o
on average. A n y errors will be ran­
dom , not systematic. T he same can­
not be said fo r other expectations
schemes, how ever. N ot being identi­
cal to the expected value of the true
inflation generating process, those
schemes will p rodu ce biased expecta­
tions that are system atically w rong.
Biased expectations schemes are
difficult to ju stify theoretically. Sys­
tematic mistakes are harder to e x ­
plain than is rational behavior. T rue,
nobody really know s h ow expecta­
tions are actually form ed.
But a
theory that says that forecasters
do not continually make the same
mistakes seems intuitively m ore
plausible than theories that im ply the
opposite. C onsidering the profits to
be made from im proved forecasts, it
seems inconceivable that systematic
expectational errors w ould persist.
S om ebody w ou ld surely notice the
errors, correct them, and profit by
the corrections. T ogeth er, the profit
m otive and com petition w ould re­
duce forecasting errors to random ­
ness.
Criticisms of the Rational
Expectations Approach
Despite its logic, the rational e x ­
pectations hypothesis still has many
critics. Som e still maintain that e x ­
pectations are basically nonrational,
i.e., that m ost people are too naive or
uninform ed to form ulate unbiased
price expectations.
O verlooked is
the counterargum ent that relatively
uninform ed people often delegate the
responsibility fo r form ulating ra­
tional forecasts to inform ed special­
ists and that professional forecasters,
either through their ability to sell
superior forecasts or to act in behalf
o f those w ithout same, will ensure
that the econ om y will behave as if
all people were rational. O ne can
also note that the rational expecta­
tions hypothesis is m erely an im ­
plication of the uncontroversial as­
sum ption o f profit (an d utility)
m axim ization and that, in any case,
econom ic analysis can hardly p ro­

ceed without the rationality assum p­
tion. O ther critics insist, how ever,
that expectational rationality cannot
hold during the transition to new
policy regim es or other structural
changes in the econom y since it re­
quires a long time to understand
such changes and learn to adjust to
them. A gainst this is the counter­
argument that such changes and
their effects are often foreseeable
from the econom ic and political
events that precede them and that
people can quickly learn to predict
regim e changes just as they learn to
predict the w orkings o f a given re­
gim e.
T his is especially so when
regim e changes have occu rred in the
past.
H aving experienced such
changes, forecasters will be sensitive
to their likely future occurrence.
M ost of the criticism , how ever, is
directed not at the rationality as­
sum ption per se but rather at an­
other key assumption underlying its
policy-ineffectiveness result, namely
the assumption o f no policym aker
inform ation or maneuverability ad­
vantage over the private sector.
T his assumption states that private
forecasters possess exactly the same
inform ation and the ability to act
upon it as do the authorities. Critics
hold that this assumption is im plaus­
ible and that if it is violated then the
policy ineffectiveness result ceases to
hold.
In this case, an exploitable
short-run Phillips curve reemerges,
allow ing some limited scope for sys­
tematic m onetary policies to reduce
unem ployment.
F or example, suppose the authori­
ties possess m ore and better in for­
mation than the public. H aving this
inform ation advantage, they can p re­
dict and hence respond to events
seen as purely random by the public.
T hese policy responses will, since
they are unforeseen by the public,
affect actual but not expected infla­
tion and thereby change unem ploy­
ment relative to its natural rate in
the (in verted ) Phillips curve equa­
tion U N— U — (1 / a ) ( p — p e) .
Alternatively, suppose that both
the authorities and the public possess
identical inform ation but that the
latter grou p is constrained by lon g ­
term contractual obligations from
exploiting that inform ation. F o r e x ­
ample, suppose w orkers and em ploy­




ers make labor contracts that fix
nominal wages fo r a longer period of
time than the authorities require to
change the m oney stock. W ith nom ­
inal wages fixed and prices respond­
ing to m oney, the authorities are in a
position to low er real wages and
thereby stimulate employment with
an inflationary monetary policy.
In these ways, contractual and in­
form ational constraints are alleged
to create output and employm entstimulating opportunities for system­
atic stabilization policies.
Indeed,
critics have tried to demonstrate as
much by incorporating such co n ­
straints into rational expectations
Phillips curve models similar to the
one outlined in the A pp en d ix of this
article.
Proponents of the rational e x p ec­
tations approach, however, doubt
that such constraints can restore the
potency of activist policies and gen­
erate exploitable Phillips curves.
T hey contend that policymaker in­
form ation advantages cannot long
exist when governm ent statistics are
published immediately upon collec­
tion, when people have wide access
to data through the news media and
private data services, and when even
secret policy changes can be pre­
dicted from preceding observable
(and ob v iou s) econom ic and politi­
cal pressures. Likewise, they note
that fixed contracts permit monetary
policy to have real effects only if
those effects are so inconsequential
as to provide no incentive to re­
negotiate existing contracts or to
change the optimal type of contract
that is negotiated. A n d even then,
they note, such m onetary changes
becom e ineffective when the con ­
tracts expire. M ore precisely, they
question the w hole idea of fixed con ­
tracts that underlies the sticky wage
case for policy activism. T hey point
out that contract length is not in­
variant to the type o f policy being
pursued but rather varies with it
and thus provides a weak basis for
activist fine-tuning.
Finally, they insist that such p oli­
cies, even if effective, are inappro­
priate.
In their view , the proper
role for policy is not to exploit in­
form ational and contractural con ­
straints to systematically influence
real activity but rather to neutralize

17

the constraints or to m inim ize the
costs o f adhering to them. T hus if
people fo rm biased price forecasts,
then the policym akers should publish
unbiased forecasts. A nd if the policy
authorities have inform ational ad­
vantages over private individuals,
they should make that inform ation
public rather than attempting to
exploit the advantage.
T hat is, if
inform ation is costly to collect and
process, then the central authority
should gather it and make it freely
available.
Finally, if contractual
w ages and prices are sticky and
costly to adjust, then the authorities
should m inim ize these price adju st­
ment costs by follow in g policies that
stabilize the general price level.
In short, advocates o f the rational
expectations approach argue that
feasibility alone constitutes insuffi­
cient justification fo r activist p oli­
cies. P olicies should also be socially
beneficial.
A ctivist policies hardly
satisfy this latter criterion since their
effectiveness is based on deceiving
people into m aking expectational
errors. T h e proper role for policy is
not to influence real activity via
deception but rather to reduce in for­
mation deficiencies, to eliminate
erratic variations o f the variables
under the policym akers’ control, and
perhaps also to m inim ize the costs of
adju sting prices.

VII.
CONCLUDING COMMENTS
T h e preceding paragraphs have
traced the evolution o f Phillips curve
analysis. T h e chief conclusions can
be stated succinctly.
T h e Phillips
cu rve concept has changed radically
over the past 25 years as the notion
o f a stable enduring trade-off has
given
w ay
to
the
p olicyineffectiveness view that no such
tra d e-off exists fo r the policym akers
to exploit.
Instrumental to this
change w ere the natural rate and
rational
expectations
hypotheses,
respectively. T h e form er says that
trade-offs arise solely from exp ecta­
tional errors w hile the latter holds
that system atic m acroeconom ic sta­
bilization policies, by virtue of their
very predictability, cannot possibly
generate such errors. Taken to ­
gether, the tw o hypotheses im ply

that systematic dem and management
policies are incapable o f influencing
real activity, contrary to the predic­
tions of the original Phillips curve
analysis.
O n the positive side, the tw o hy­
potheses do im ply that the g overn ­
ment can contribute to econom ic
stability by follow in g policies to
minim ize the expectational errors
that cause output and em ploym ent to
deviate from their norm al fullcapacity levels.
F o r exam ple, the
authorities could stabilize the price
level so as to eliminate the surprise
inflation that generates confusion be­
tween absolute and relative prices
and that leads to perception errors.
Sim ilarly, they cou ld direct their
efforts at m inim izing random and
erratic variations in the m onetary
variables under their control. In so
doing, not only w ould they lessen the
num ber o f forecasting mistakes that
induce deviations from output’ s nat­
ural rate, they w ou ld reduce policy
uncertainty as well.
Besides the above, the natural
rate-rational expectations school also
notes that m icroecon om ic structural
policies can be used to achieve what
m acro
demand
policies
cannot,
namely a permanent reduction in the
unem ploym ent rate.
F or, by im ­
p rovin g the efficiency and perform ­
ance of labor and produ ct markets,
such m icro policies can low er the
natural rate of unem ploym ent and
shift the vertical Phillips curve to
the left.
A sim ilar argum ent was
advanced in the early 1960s by those
w h o advocated structural policies to
shift the Phillips curve. It is on this
point, therefore, that one should look
for agreement betw een those who
still affirm and those w h o deny the
existence of exploitable inflationunem ploym ent trade-offs.




APPENDIX
A SIMPLE ILLUSTRATIVE MODEL
T he policy ineffectiveness p ro p o ­
sition discussed in Section V of the
text can be clarified with the aid o f a
simple illustrative model.
T he
model consists o f four com ponents,
namely an (in v erted ) expectationsaugmented Phillips curve
(1 )

U N- U = ( l / a ) ( p - p e) ,

an inflation-generating mechanism
(2 )

p=m +e,

a policy reaction function or feed­
back control rule
(3 )

m = c ( U - i — U T) —
d ( p - i — Pt )+ M >

and a definition of rational inflation
expectations
(4 )

pe= E [ p | I ] .

H ere U and U n are the actual and
natural rates of unem ployment, p
and pe the actual and expected rates
o f inflation, m the rate of monetary
grow th per unit of real output (the
latter assumed to be constant except
for transitory disturbances), e and fi
are random error terms with mean
values of zero, E is the expectations
operator, I denotes all inform ation
available when expectations are
form ed, and the subscripts T and
— 1 denote target and previous peri­
od values of the attached variables.
O f these four equations, the first
expresses a trade-off between unem ­
ployment (relative to its natural
level) and surprise (u n exp ected )
inflation.1 E quation 2 expresses the
1 There exists a current dispute over
the proper interpretation of the Phillips
curve equation 1. The rational expec­
tations literature interprets it as an
aggregate supply function stating that
firms produce the normal capacity level
of output when actual and expected
inflation are equal but produce in ex­
cess of that level (thus pushing U
below U N) when fooled by unexpected
inflation. This view holds that firms
mistake unanticipated general price in­
creases for rises in the particular (rela­
tive) prices of their own products.
Surprised by inflation, they treat the
price increase as special to themselves

18

iale u f i n f l a t i o n p as the sum o f the
grow th rate o f m oney m and a ran­
dom shock variable e, the latter as­
sumed to have a mean (e x p e cte d )
value o f zero. In essence, this equa­
tion says that inflation is generated
by excess m oney grow th and tran­
sitory disturbances unrelated to
m oney grow th. Equation 3 says that
the policy authorities set the current
rate of m onetary grow th in an effort
to correct last period’s deviations of
the unem ployment and inflation
rates from their predeterm ined tar­
get levels, U t and pT. A lso, since
m oney grow th cannot be controlled
perfectly by the feedback rule, the
slippage is denoted by the random
variable jx with a mean of zero that
causes m oney grow th to deviate unpredictably from the path intended
by the authorities.
N ote that the
disturbance term fx can also repre­
sent deliberate m onetary surprises
engineered by the policy authorities.
Finally, the last equation defines
anticipated inflation pe as the m athe­
matical expectation o f the actual in­
flation rate conditional on all in for­
mation available when the expecta­
tion is form ed. Included in the set
o f available inform ation are the in­
flation generating mechanism, the
policy reaction function, and the
values o f all past and predeterm ined
variables in the model.
T o derive the policy-ineffectiveness
result, first calculate mathematical
expectations of equations 2 and 3.
R em em bering that the expected
values o f the random terms in those
equations are zero, this step yields
the expressions

and so expand output. A n alternative
interpretation views the equation as a
price-setting
relation
according
to
which businessmen, desiring to main­
tain their constant-market-share rela­
tive prices, raise their prices at the rate
at which they expect other businessmen
to be raising theirs and then adjust that
rate upward if demand pressure ap­
pears. Either interpretation yields the
same result: expectational errors cause
output and unemployment to deviate
from their natural levels. The devia­
tions disappear when the errors vanish.

(5 )

pe= m e and

(6) me==c(U-i—UT) —
d ( p - i — Pt)

w hich state that, under rational e x ­
pectations and systematic feedback
policy rules, the anticipated future
rate of inflation equals the expected
rate of m onetary grow th which in
turn is given by the deterministic
(k n o w n ) com ponent of the m one­
tary p olicy rule. T h e last step is to
substitute equations 2, 3, 5, and 6
into equation 1 to obtain the reduced
form expression

(7) UN- U = ( l / a ) ( e + f t )
which states that deviations o f un­
em ploym ent from its natural rate
result solely from inflation surprises
caused by random shocks.
T o see the policy ineffectiveness
result, note that only the unsystem ­
atic or unexpected random co m p o ­
nent o f monetary policy, m —
enters the reduced form equation.2
T h e systematic com ponent is absent.
T h is means that systematic (ru lesbased) m onetary policies cannot
affect the unem ploym ent rate. O nly
unexpected m oney grow th matters.
N o Phillips curve trade-offs exist for
systematic policy to exploit.3

2 N ote that both the monetary-surprise
equation m — m e = u and the pricesurprise equation p — pe= e embody the
famous orthogonality property accord­
ing to which forecast errors m — me and
p — pe are independent of (orthogonal
to) all information available when the
forecast is made.
In particular, the
forecast errors are independent of the
past and predetermined values of all
variables and of the systematic com­
ponents of the policy rule and inflationgenerating mechanism.
This is as it
should be. For if the errors were not
independent of the foregoing variables,
then information is not being fully ex­
ploited and expectations are not ra­
tional.
3 O f course random policy could affect
output. That is, the authorities could
influence real activity by manipulating
the disturbance term n in the policy re­
action function in a haphazard unpre­
dictable way. Randomness, however, is
not a proper basis for public policy.




19

Earnings and Capital Accounts

Highlights




Net earnings before payments to
the United States T reasury in­
creased in 1984 by $122,347,910.63
to $1,326,997,413.31. S ix percent
statutory dividends am ounting to
$4,554,218.39 were paid to Fifth
District member banks, and the sum
of $1,316,246,794.92 was turned
over to the U nited States Treasury.
Capital stock rose by $6,196,400
to $80,360,450 as mem ber banks
increased their shareholdings in this
Bank, as required by law, to reflect
the rise in their own capital and sur­
plus accounts. T he B ank’s surplus
account increased $6,196,400 to
$80,360,450.

Discount Rate
O n A pril 9 the discount rate was
raised from d>/l 2 percent to 9 percent.
T his change, the first since late 1982,
was undertaken in the light of a
relatively
wide
spread
between
short-term market rates and the dis­
count rate. T he discount rate was
then reduced to Sy2 percent effective
Novem ber 21. This reduction was
taken against the background of
growth in M l and M 2 in the low er
part of the desired ranges and in the
context of distinct m oderation in the
pace of business expansion, o f rela­
tive stability in producer and co m ­
modity prices, o f the restrained trend
of wages and costs, and of the co n ­
tinued strength of the dollar inter­
nationally.
F or essentially these
same reasons, and to bring the rate
into closer alignment with short­
term rates generally, the discount
rate was subsequently reduced to 8
percent on D ecem ber 24.

New Service Product
Developm ent of the F ed Online
X change called F O X (a new elec­
tronic access to inform ation and
services at the Fed through a m icro­
com puter for depository institu­
tions) began in 1984 with a pilot
program in N ovem ber for three par­
ticipating D istrict institutions. Initial
services will include origination, re­
ceipt, and return of A C H payments ;
provision o f inform ation on co n ­
temporaneous
required
reserves
20

( C R R ) ; and filling cash order re­
quests. T ransfer of funds and secur­
ities and other on-line services will
he added
to the
T^(-----)"x 1 *n r& n..........
gnm
^
-----

in
11 ‘

1985.

Electronic Payments
T he off-line w ire transfer oper­
ations in the B altim ore and Char­
lotte O ffices w ere consolidated with
those at the R ichm ond O ffice on
January 3, 1984. A s a result, all
Fifth District funds transfers, both
on-line and off-line, are handled by
the R ichm ond O ffice.

Communications and
Data Processing
T he year 1984 saw the establish­
ment of three additional bank com ­
puter links to the Fifth District
Com m unications System, raising the
total num ber o f com puter interfaces
to eleven. Term inals w ere installed
in seven financial institutions during
the year. F ou r on-line institutions
m erged with others, raising by three
the net total to 112 such institutions
handling w ire transfer of funds
through direct connections to the
Fifth D istrict C om m unications Sys­
tem. O f these institutions, 47 are
also processing securities transfers
(C P D s ).
Im plementation of the Federal
R eserve L o n g R ange A utom ation
Program , which involves standard­
ization
of applications
software
throughout the Federal R eserve
System, continued during 1984. T he
C ontem poraneous
R equired
R e­
serves ( C R R ) System and the Cus­
tomer Inform ation System (C I S )
were installed in F ebruary.
T he
developm ent of the resource-shared
General L edger M odule of the Inte­
grated A ccou n tin g System was com ­
pleted in A ugust.

Community Affairs and
Economic Information
In February 1984, the B oard of
G overnors redefined the role of the
Com m unity A ffa irs O fficer ( C A O )
at each R eserve Bank, and approved
a new set of responsibilities for the
position.
Basically, the C A O was
given the responsibility o f coord i-

nating the B ank’s educational efforts
in the area of com m unity reinvest­
ment and facilitating the provision of
inform ation to lenders, com m unity
groups,
system
exam iners,
and
others about the C om m unity R ein ­
vestment A ct and successful p ro ­
grams for com m unity investment,
reinvestment, small business lending,
and econom ic developm ent.
D uring the first quarter, the C om ­
munity A ffairs and E con om ic In fo r­
mation section launched C R O S S
S E C T I O N S , the newest of the
Bank’s publications. T h is publica­
tion is a quarterly newsletter co n ­
cerning business and econom ic de­
velopm ents in the Fifth District.

New Building - Charlotte
In O ctober, the Bank received ap­
proval from the B oard o f G overnors
to proceed with the conceptual de­
sign of a new Charlotte office build­
ing on East T rad e Street.

State Banks
Sailors and Merchants Bank and
Trust Company
Vienna, Virginia
August 13

The
follow in g
State-chartered
banks converted to membership in
the Federal R eserve System during
1984:
Cardinal State Bank,
National Association
Beckley, W e st Virginia
March 1
First Virginia Bank - Hanover
Ashland, Virginia
April 2
First Virginia Bank - Citizens
Clintwood, Virginia
April 2
First Virginia Bank of Tidewater
Norfolk, Virginia
October 1
Bank of Nitro, National Association
Nitro, W e st Virginia
December 26

Changes in Directors
Culpeper Office
T he C ontingency P rocessin g C en­
ter was established at the Culpeper
Facility to provid e back-up for data
processing to all Federal R eserve
Banks. It is operated by the staff of
the B oard of G overnors.

Federal Reserve Membership
T he follow in g new ly chartered
institutions in the Fifth D istrict
opened for business during 1984 as
members o f the Federal R eserve
S y stem :

National Banks
Greenville National Bank
Greenville, South Carolina
February 6
First National Bank, Louisville
Richmond, Virginia
M ay 4
The Anderson National Bank
Anderson, South Carolina
June 29
First Community Bank Oceana National
Oceana, W e s t Virginia
July 2
Citibank (M aryland),
National Association
Towson, Maryland
July 9




Fifth
District member banks
elected one Class A and one Class B
director to three-year terms on the
R ichm ond Board of Directors in
early fall.
R obert F . Baronner,
President & Chief E xecutive O fficer,
O n e V alley Bancorp of W est V ir ­
ginia, Inc. and Kanawha V alley
Bank, N .A ., Charleston, W est V ir ­
ginia, was elected by banks in Group
1 as a Class A director to succeed
Joseph A . Jennings, Chairman and
Chief E xecutive O fficer, United
V irgin ia
Bankshares,
Inc.
and
U nited V irgin ia Bank, Richm ond,
V irginia, w hose term expired at the
end o f 1984. F loyd D. Gottwald, Jr.,
Chairman of the Board & Chief
E xecu tive O fficer, Ethyl C orpora­
tion,
R ichm ond,
V irginia,
was
elected by banks in G roup 1 as a
Class B director to succeed Paul G.
M iller, D irector, Commercial Credit
Com pany,
Baltimore,
Maryland,
w hose term expired Decem ber 31,
1984.
T h e R ichm ond B oard o f Directors
appointed R aym ond V . H aysbert,
Sr., President and Chief Executive
O fficer, Parks Sausage Company,
Baltim ore, M aryland, to a three-year
term on the Baltim ore Board. H e
succeeded Pearl C. Brackett, Deputy
21

M anager (R e tir e d ), Baltim ore R e ­
gional Chapter of the A m erican N a ­
tional R ed Cross, Baltim ore, M a ry ­
land, w h ose term expired D ecem ­
ber 31, 1984. James M . Culberson,
Jr., Chairman and President, T h e
First National Bank o f R andolph
C ounty, A sh eb oro, N orth Carolina,
was appointed by the R ichm ond
B oard to a three-year term on the
C harlotte B oard to succeed H u gh
M . Chapman, Chairman of the
B oard and Chief E xecutive O fficer,
T h e Citizens and Southern National
Bank o f South Carolina, Colum bia,
South Carolina, w hose term expired
at the end o f 1984. T h e R ich m on d
B oard also appointed James G.
L indley, President and Chief E x e c u ­
tive O fficer, South Carolina N ation ­
al C orporation, and Chairman and
Chief E xecu tive O fficer, T h e South
Carolina National Bank, Columbia,
South Carolina, to fulfill the u n ex­
pired term o f John G. M edlin, Jr.,
Chairman o f the B oard and Chief
E xecu tiv e O fficer, T h e W ach ovia
C orporation and W a ch ovia Bank
and T rust C om pany, N .A ., W in ston Salem, N orth Carolina.
T h e B oard of G overn ors desig­
nated L e ro y T . Canoles, Jr., P resi­
dent, K aufm an & Canoles, N orfolk ,
V irgin ia, as Chairman o f the R ich ­
m ond B oard of D irectors for 1985.
R obert A .
Georgine,
President,
B uilding & Construction T rades
Departm ent, A F L -C I O , W a sh in g ­
ton, D . C., was named D eputy
Chairman fo r 1985.
A Class C director will be ap­
pointed by the B oard of G overn ors
to succeed W illiam S. Lee, Chair­
man o f the B oard and Chief E x e cu ­
tive O fficer, D uke P ow er Com pany,
Charlotte, N orth Carolina, w hose
term exp ired Decem ber 31, 1984.
T h e B oard of G overn ors reap­
pointed T hom as H . M a d d u x, In d e­
pendent Business A d v isor, T im on ium, M aryland, to a three-year term
on the B altim ore B oard. T h e B oard
o f G overn ors also appointed R obert
L . A lb righ t, President, Johnson C.
Smith U niversity, Charlotte, N orth
Carolina, to a three-year term on the
Charlotte B oard. Dr. A lb righ t suc­
ceeded H en ry P onder, President,
F isk U niversity, Nashville, T enn es­
see, w h ose term expired D ecem ­
ber 31, 1984.

R obert L. Tate, Chairman, Tate
Industries, Baltim ore,
M aryland,
was reelected Chairman o f the Balti­
m ore Board for 1 985; similarly,
W allace J. Jorgenson, President,
Jefferson-P ilot B roadcasting C om ­
pany, Charlotte, N orth Carolina,
was elected Chairman of the C har­
lotte Board.

Federal Advisory Council
T h e R ichm ond B oard o f D irec­
tors appointed John G. M edlin, Jr.,
Chairman of the B oard and Chief
E xecutive O fficer, T h e W ach ovia
C orporation and W a ch ov ia Bank
and T rust Com pany, N .A ., W in ston Salem, N orth Carolina, as the Fifth
Federal R eserve D istrict repre­
sentative to the Federal A d v isory
C ouncil for a one-year term begin­
ning January 1, 1985. T h e tw elvem em ber C ouncil, consisting o f one
m em ber from each o f the Federal
R eserve Districts, meets in W a sh ­
ington at least fou r times a year with
the B oard of G overn ors of the F ed ­




eral Reserve System to discuss busi­
ness conditions and other topics of
current interest.

A t the Baltim ore O ffice, R onald B.
Duncan was prom oted to V ice P resi­
dent.
I U „ . ______ J

n O v v a iu
V iia ii^

C

d

i l l

o

m

c

i a

i

u

i a

n

A lice H . L ingerfelt, Assistant
V ice President, elected to take early
retirement on M arch 1 after m ore
than 20 years of service in the F e d ­
eral R eserve System.
R obert B.
H ollinger, Jr., V ice President, re­
signed on A p ril 23, 1984. B radford
N. Carden was prom oted to A ssis­
tant V ice President in the Com puter
Services Department on M ay 1.
O n July 1 seven prom otions were
announced at the R ichm ond O f fic e :
Bruce J. Sum m ers to Senior V ice
President, D onna G. D ancy to V ice
President, K em per W . Baker, Jr. to
E conom ic
Inform ation
O fficer,
F loyd M . Dickinson, Jr. to E xam in ­
ing O fficer, E ugene W . Johnson, Jr.
to E xam ining O fficer, V irgin iu s H .
Rosson, Jr. to Com puter Planning
O fficer, and Gary W . Schem m el to
Data P rocessing Operations O fficer.

22

o

o.

____ j

v v n iie u e a u

w as

p ro­

m oted to Planning O fficer on A u ­
gust 1. O n Septem ber 1, Joseph F.
V iverette, Senior V ice President,
elected to take early retirement after
m ore than 32 years o f service. A lso
on this date, W alter A . V arvel, A s ­
sistant V ice President, resigned.
In D ecem ber the follow in g p rom o­
tions w ere announced to be effective
January 1, 1985 : In the R ichm ond
O ffice, W illiam E. Cullison, R obert
L. H etzel, and Thom as M . H u m ­
phrey w ere prom oted to V ice P resi­
dent and Jesse W . Seamster and
B obby D. W y n n were prom oted to
Assistant V ice P resid en t; M ichael
D otsey was prom oted to Research
O f fic e r ; and W illiam H . Benner
was transferred from the B oard of
G overn ors on January 1 to be
A ssistant V ice President in charge
o f the Personnel Department.
In
the B altim ore O ffice, John S. Frain
was prom oted to O perations O fficer.

Summary of Operations
C u rre n cy R e c e iv e d and V e r ifie d
Number of pieces_________________
Dollar amount ____________________

1984

1983

1,402,212,000
16,836,022,000

1,221,850,000
14,461,121,000

625,251,000
4,042,321,000

477,344,000
3,750,429,000

2,742,393,000
419,261,000

2,351,350,000
370,068,000

74,340,000
111.901.353.000

77.815.000
115.817.889.000

3,192,000
186.835.000

12.812.000
858.269.000

1,143,489,000
747.485.926.000

1,073,319,000
701.467.190.000

224.257.000
106,557,000,000

264.582.000
138,563,000,000

145,000
92,083,000

194,000
85,285,000

170,346
632,599,000

193,408
615,619,000

10,818,007
2,545,848,000

11,306,573
2,264,276,000

405,300
1,466,063,917,000

378,340
1,295,670,176,000

3,652,603
4,390,377,000,000

3,418,640
3,975,979,000,000

218,860,000
890,126,000

245,811,000
1,006,388,000

2,974
16,557,514,751

13,053,371,000

C u rre n cy V e r ifie d an d D e s tr o y e d
Number of pieces___________________
Dollar amount ______________________

C oin R e c e iv e d and V e r ifie d
Number of coin _____________
Dollar amount _______________

C h eck s H a n d le d
U. S. Government checks
Number ______________________
Dollar amount ______________
Postal money orders
Number ______________________
Dollar amount ______________
Commercial checks - processed*
Number ______________________
Dollar amount ______________
Commercial checks - packaged items
Number ___________________________
Dollar amount ___________________

C o lle c tio n s Ite m s H a n d le d
U. S. Government coupons paid
Number ______________________
Dollar amount ______________
Noncash items
Number ______________________
Dollar amount _______________

F is c a l A g e n c y A c tiv itie s
Issues, Redemptions, and Exchanges of U. S. Securities:
Definitive securities
Number _______________________________________________
Dollar amount ________________________________________
Book-entry
Number _______________________________________________
Dollar amount

T r a n s fe r o f F u n d s
Number of transfers sent and received
Dollar amount __________________________

F o o d S ta m p s R e d e e m e d
Number _________________
Dollar amount __________

L oans
Number ______
Dollar amount
Excluding checks on this Bank.




23

2,111

Comparative Financial Statement
Condition
A sse ts:
Gold certificate account ________________________________________

December 31, 1984

December 31, 1983

$

$

969,000,000.00

913,000,000.00

Special Drawing Rights certificate account___________________

408,000,000.00

408.000.000.00

Coin _____________________________________________________________

61,324,351.31

52,514,675.30

Loans to depository institutions _____________________________

234,493,417.00

199.796.000.00

Federal agency obligations __________________________________

699,180,268.37

717,888,798.46

Bills ________________________________________________________

5.920.203.669.83

5,464,938,617.48

Notes _______________________________________________________

5,436,946,614.24

5,309,096,246.27

Bonds _______________________________________________________

1,912,771,201.03

1,728,381,550.62

TOTAL U. S. GOVERNMENT SECURITIES ________________________

13,269,921,485.10

12,502,416,414.37

TOTAL LOANS AND SECURITIES ________________________________

14,203,595,170.47

13,420,101,212.83

Cash items in process of collection_____________________________

234,334,200.09

1,805,932,802.67

Bank premises __________________________________________________

103,225,985.39

105,342,572.84
20,736,884.65

LOANS AND SECURITIES:

U. S. Government securities:

Furniture and equipment, n e t __________________________________

19,838,990.76

Other assets ____________________________________________________

445,768,085.87

440,489,924.52

Interdistrict settlement account _______________________________

1.103.512.999.83

-72,522,267.57

Accrued service income_________________________________________

4,350,028.78

4,562,179.79

TO T AL A SSE TS _______________________________________

$17,552,949,812.50

$17,098,157,985.03

$15,427,571,917.00

$13,762,089,184.00

1,412,523,730.02

1,213,770,490.69

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

Depository institutions _______________________________________
Foreign _______________________________________________________

7,650,000.00

7,950,000.00

Other _________________________________________________________

63,288,240.79

40,394,832.69

TOTAL DEPOSITS _________________________________________________

1,483,461,970.81

1,262,115,323.38

Deferred availability cash items ______________________________

265,330,317.19

1,730,443,310.81

Other liabilities _________________________________________________

215,864,707.50

195,182,066.84

TO T A L L IA B IL IT IE S _________________________________

17,392,228,912.50

16,949,829,885.03

Capital paid in __________________________________________________

80.360.450.00

74.164.050.00

Surplus

_________________________________________________________

80.360.450.00

74.164.050.00

TO T AL LIA B ILITIE S AN D C APITAL ACCOUNTS

$17,552,949,812.50

$17,098,157,985.03

C apital A c c o u n t s :




24

Earnings and Expenses
1983

1984

E A R N IN G S :
$

Loans to depository institutions_________

8,647,599.16

$

6,448,728.41

Interest on U. S. Government securities

1,382,870,087.20

Foreign currencies ______________________

11,123,151.70

14,511,145.27

Income from services ____________________

47,747,216.12

39,056,539.42

Other earnings___________________________

597,344.85

502,295.75

TOTAL CURRENT EARNINGS _____________

1,450,985,399.03

1,321,002,388.70

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

75,867,077.28

72,674,030.05

Cost of earnings credits _________________________________________________

10,051,639.60

5,638,622.92

NET EXPENSES ________________________________________________________________

85,918,716.88

78,312,652.97

CURRENT N E T EARN IN G S _____________________________________

1,365,066,682.15

1,242,689,735.73

Profit on sales of U. S. Government securities (net)

3,945,944.78

1,767,544.71

All other ______________________________________________

4,997.44

16,030.10

3,950,942.22

1,783,574.81

1,260,483,679.85

EXPENSES:

ADDITIONS TO CURRENT NET EARNINGS :

TOTAL ADDITIONS ___________________________
DEDUCTIONS FROM CURRENT NET EARNINGS:

Losses on Foreign Exchange transactions

23,195,587.27

24,183,761.36

All other _________________________________

434,806.93

61,784.77

TOTAL DEDUCTIONS __________________________

23,630,394.20

24,245,546.13

-19,679,451.98

-22,461,971.32

N E T A D D IT IO N S OR D EDUCTIONS
Assessment for expenses of Board of Governors________________________

4.149.300.00

3,728,000.00

Federal Reserve currency costs __________________________________________

14,240,516.86

11,850,261.73

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

$1,326,997,413.31

$1,204,649,502.68

$

$

Dividends paid ___________________________________________________________

4,554,218.39

4,336,297.02

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

1,316,246,794.92

1,197,695,755.66

Transferred to surplus __________________________________________________

6.196.400.00

2,617,450.00

TO T A L ______________________________________________________________

$1,326,997,413.31

$1,204,649,502.68

$

$

S u rp lu s A c c o u n t
Balance at close of previous y e a r __________________________________

6,196,400.00

Addition of profits for y e a r ________________________________________
B A L A N C E A T CLOSE OF C U RRENT Y E A R _____________

74,164,050.00

$

80,360,450.00

71,546,600.00
2,617,450.00

$

74,164,050.00

$

71,546,600.00

C a p ita l S to c k A c c o u n t
(Representing amount paid in, which is 50% of amount subscribed)
$

Balance at close of previous year
Issued during the year __________

Cancelled during the y e a r ____________________________
$

B A L A N C E A T CLOSE OF CU RRENT Y E A R




25

74,164,050.00
6,731,600.00

3.857.300.00

80,895,650.00

75,403,900.00

535,200.00

1.239.850.00

80,360,450.00

$___74,164,050.00

D ir e c t o r s

(December 31, 1984)

R ich m o n d

_____________ Chairman o f the Board
Canoles, Jr. ________ D eputy Chairman o f the

William S. Lee
Leroy T.

Board

C lass A

________

Robert S. Chiles, Sr.

P resid en t/C h ief E xecutive O fficer, Greensboro National Bank
Greensboro, N orth Carolina
(T erm expires D ecem ber 31, 1986)

Willard H. Derrick

_________ President

Joseph A . Jennings

_________

and C hief E xecu tive O fficer
Sandy Spring National Bank and Savings Institution
Sandy Spring, Maryland
(T erm expires D ecem ber 31, 1985)

Chairman and Chief E xecu tive O fficer
United Virginia Bankshares, Inc. and United Virginia Bank
Richmond, Virginia
(T erm expired D ecem ber 31, 1981+)
Succeeded b y : Robert F. Baronner
President & C hief E xecutive O fficer
One Valley Bancorp of W e st Virginia, Inc. and
Kanawha Valley Bank, N .A .
Charleston, W e st Virginia
(T erm expires Decem ber 31, 1987)

C lass B
Thomas B. Cookerly _________ President, Broadcast Division, Allbritton Communications
Washington, D. C.
(T erm expires D ecem ber 31, 1986)

George Dean Johnson, Jr.

Paul G. Miller

____

Partner, Johnson, Smith, Hibbard, Cleveland, Wildman and Dennis
Spartanburg, South Carolina
(T erm expires D ecem ber 31, 1985)

_____________ Director,

Commercial Credit Company
Baltimore, Maryland
(T erm expired D ecem ber 31, 1981+)
Succeeded b y : Floyd D. Gottwald, Jr.
Chairman o f the Board & C hief E xecu tive O fficer
E th yl Corporation
Richmond, Virginia
(T erm expires D ecem ber 31, 1987)

C lass C
Leroy T. Canoles, Jr.

Robert A . Georgine

William S. Lee

________

President, Kaufm an & Canoles
N orfolk, Virginia
(T erm expires D ecem ber 31, 1986)

_________ President,

Building & Construction Trades Departm ent, A F L -C IO
Washington, D. C.
(T erm expires D ecem ber 31, 1985)

_____________ Chairman

of the Board and C hief E xecu tive O fficer, Duke P ow er Company
Charlotte, N orth Carolina
(T erm expired D ecem ber 31, 1981+)
Succeeded b y :
Successor will be appointed by Board of Governors

M e m b e r o f F e d e ra l A d v is o r y C o u n cil
Vincent C. Burke, Jr.




_______

Counsel, Steptoe & Johnson
Washington, D . C.
Director, The R iggs National Bank o f Washington, D. C.
and R iggs National Corporation
Washington, D. C.
(T erm expired D ecem ber 31, 1981+)
Succeeded b y :

John G. Medlin, Jr.
Chairman o f the Board and C hief E xecu tive O fficer
The W achovia Corporation and W achovia Bank and
Trust Company, N .A .
W inston-Salem , N orth Carolina
(T erm expires D ecem ber 31, 1985)

26

Baltimore
Pearl C. B r a c k e tt _____________

Deputy Manager (Retired)
Baltimore Regional Chapter of the American National Red Cross
Baltimore, Maryland
(Term expired December 31, 198U)
Succeeded by: Raymond V . Haysbert, Sr.
President and Chief Executive Officer
Parks Sausage Company
Baltimore, Maryland
(Term expires December 31, 1987)
Edward H . C o v e ll _____________ President, The Covell Company
Easton, Maryland
(Term expires December 31, 1985)
Charles W . H o ff III __________ President and Chief Executive Officer, Farmers and Mechanics National Bank
Frederick, Maryland
(Term expires December 31, 1986)
Thomas H . Maddux __________ Independent Business Advisor
Timonium, Maryland
(Term expires December 31, 1987)
Howard I. Scaggs ____________ Chairman of the Board, American National Building and Loan Association
Baltimore, Maryland
(Term expires December 31, 1985)
H ugh D. Shires ______________ Senior Vice President (Retired), The First National Bank of Maryland
Cumberland, Maryland
(Term expires December 31, 1985)
*Robert L. T a t e _________________Chairman, Tate Industries
Baltimore, Maryland
(Term expires December 31, 1986)
C h a rlotte
G. A lex B e r n h a r d t ____________ President,

Bernhardt Industries, Inc.
Lenoir, North Carolina
(Term expires December 31, 1985)
Hugh M. Chapman ___________ Chairman of the Board and Chief Executive Officer
The Citizens and Southern National Bank of South Carolina
Columbia, South Carolina
(Term expired December 31, 198U)
Succeeded by: James M. Culberson, Jr.
Chairman and President
The First National Bank of Randolph County
Asheboro, North Carolina
(Term expires December 31, 1987)
J. Donald Collier _____________ President and Chief Executive Officer, First National Bank
Orangeburg, South Carolina
(Term expires December 31, 1985)
John A . H a r d in _______________ Chairman of the Board and President, First Federal Savings Bank
Rock Hill, South Carolina
(Term expires December 31, 1986)
*W allace J. J orge n son __________ President, Jefferson-Pilot Broadcasting Company
Charlotte, North Carolina
(Term expires December 31, 1986)
John G. Medlin, Jr. ___________ Chairman of the Board and Chief Executive Officer
The Wachovia Corporation and Wachovia Bank and Trust Company, N.A.
Winston-Salem, North Carolina
(Appointed to Federal Advisory Council January 1, 1985)
Succeeded by: James G. Lindley
President and Chief Executive Officer
South Carolina National Corporation
Chairman and Chief Executive Officer
The South Carolina National Bank
Columbia, South Carolina
(Term expires December 31, 1985)
H enry Ponder ________________ President, Fisk University
Nashville, Tennessee
(Term expired December 31, 198A)
Succeeded by: Robert L. Albright
President
Johnson C. Smith University
Charlotte, North Carolina
(Term expires December 31, 1987)
*Branch Board Chairman.




27

(January 1, 1985)
R ic h m o n d
Robert P. Black,

President

Jimmie R. Monhollon,

Assistant Vice President
Assistant Vice President
Jackson L. Blanton, Assistant Vice President
W illiam A . Bridenstine, Jr., Assistant General Counsel
Bradford N . Carden, Assistant Vice President
Michael Dotsey, Research Officer
Harold T. Lipscomb, Assistant Vice President
Yash P. Mehra, Research Officer
G. Ronald Scharr, Assistant Vice President
Jesse W . Seamster, Assistant Vice President
James R. Slate, Assistant Counsel
R. W ayn e Stancil, Assistant Vice President
Roy H. W ebb, Research Officer
Jack H . W y a tt, Assistant Vice President
Bobby D. W yn n, Assistant Vice President
J. Lander Allin, Jr.,
W illiam H . Benner,

First Vice President

Senior Vice President
Roy L. Fauber, Senior Vice President
James Parthemos, Senior Vice President ayid
Director of Research
John F . Rand, Senior Vice President
Bruce J. Summers, Senior Vice President
W elford S. Farm er,

Vice President
Vice President
J. A lfred Broaddus, Jr., Vice President
Tim othy Q. Cook, Vice President
W illiam E . Cullison, Vice President
Donna G. D ancy, Vice President
W y a tt F. D avis, Vice President
John M. Denkler, Advisor
George B. E van s, Vice President
W illiam C. Fitzgerald, Associate General Counsel
W illiam C. Glover, Vice President
M arvin S. Goodfriend, Vice President
Robert L. Hetzel, Vice President
Thomas M. Hum phrey, Vice President
W illiam D. M artin III, Vice President and
General Counsel
A rthu r V . M yers, Jr., Vice President
Joseph C. Ram age, Vice President
James D. Reese, Vice President
John W . Scott, Vice President
Andrew L. Tilton, Vice President
James F . Tucker, Vice President
Fred L. Bagwell,

Lloyd W . Bostian, Jr.,

Economic Information Officer
Examining Officer
Betty M. Fahed, Statistical Officer
Sharon M. H aley, Corporate Secretary
Frances R. Hurdle, Loan Officer
Eugene W . Johnson, Jr., Examining Officer
Joseph F. Morrissette, Public Services Officer
Michael W . Newton, Budget and Control Officer
Lawrence P. Nuckols, Examining Officer
Virginius H . Rosson, Jr., Computer Planning Officer
Gary W . Schemmel, Data Processing Operations Officer
W illiam F . W hite, Examining Officer
Howard S. W hitehead, Planning Officer
Kemper W . Baker, Jr.,

Floyd M. Dickinson, Jr.,

General Auditor
Assistant General Auditor
Thomas P. Kellam, Audit Officer

David B. A yres, Jr.,
H. Lewis Garrett,

B a ltim o re

C h a rlo tte

Robert D. M cTeer, Jr.,

Senior Vice President

Albert D. Tinkelenberg,

Vice President
Vice President
Victor Turyn, Vice President
Gerald L. W ilson, Vice President
Ronald B. Duncan,

Jefferson A . W alker,

W illiam E . Pascoe III,

W oody Y . Cain,

Assistant Vice President
Assistant Vice President
Samuel W . Powell, Jr., Assistant Vice President
John S. Frain, Operations Officer
Ronald E . Gould,

C u lp e p e r
John G. Stoides,

C h a rleston

James G. Dennis,

Vice President




Senior Vice President
Assistant Vice President

James J. Florin III,

C olu m b ia
Boyd Z. Eubanks,

Vice President

Assistant Vice President
M arsha H . M alarz, Assistant Vice President
Francis L. Richbourg, Assistant Vice President
H arry B. Smith, Assistant Vice President
Robert F . Stratton, Assistant Vice President

Robert A . P erry,

Richard L. Hopkins,

Senior Vice President

Vice President

28

Special Projects Officer