The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
"' I' . / ,. HG2567 S3,£\1 1978 " . , ANNUAL REPORT 1978 FEDERAL RESERVE BANK OF SAN FRANCISCO '!I« 2 5C 7 5'3 1J1 / 9 71 Contents From the Board roo m 3 Nati onal Scene 4 Weste rn Business 7 Western Banking 10 Western Central Bank 19 Directors 24 Front Cover Prop osed design of new headquarters building fo r the Federal Reserve Bank of San Francisco, to be built near the foo t of San Francisco' s Market Street. Ground breaking for the 12-story, 653,OOO-square foot building is set for 1979. ederal neserve Bank of San Frc ci~t"o , / 1919 'SIl"""" John J. Balles (left) , President Joseph F. Alibrandi, Chairman of the Board 2 From the Boardroom The national and regional economies worked close to the limits of effectiv e capacity du ring 1978. We w elcom e the substantial gains in employment and income that accompa nied the nation 's production of more than $2 trillion of goods and services du ring the year. However, we remain very concerned about the severe inflation w hich is under mining the strength of an almost fou r-year-o ld business expansion, and which is also unde rmining the confidence of foreign nations in our ability to deal with this problem . clearing houses, Gov ernment direct-deposit pro grams, and the Federal Reserve w ire-transfer network. The staff conti nued to work on a five-year automa tion program, w ith an eye toward furthe r internal efficie ncies as wel l as improved services for all sectors of the economy. Bott om line, the San Francisco Reserve Bank onc e again led the Federal Reserve System in the cost effectiveness of operations , with an aggregate unit cost 15 percent belo w the System average. Productivity in these operational activities has increased 57 percent since 1974, following the Bank's developm ent of a majo r program of productiv ity imp rovement. But we realize that futu re productivity gains will depend heavily on the provision of up-to-date equipment and facilities. Thus, we plan to br eak ground this year fo r a San Francisco headquarters building which will replace obsolete facilities constructed more than a half century ago. Financial markets conti nued in 1978 to reflect the strains of a still-strong, but inflation-wracked , business expansion. Credit generally remained available, with $458 billion (annual rate) raised in the marke ts during the first three quarters of the year. (Incidenta lly, this is abo ut 50 percent more than the amount raised as recently as 1976.) But credit became increasingly costly as interest rates soared to recor d or near-record levels, reflecting tighter policy measures in the midst of growing market pressures, along with the effects of inflation expectations . For example, banks' prime business-lending rate rose from 7 314 to 11 314 percent over the cou rse of the year. M anagement benefitte d greatly during 1978 fro m the broad -based experience and judgment of the Bank's directors at Head Office and four branches. The directors not only pro vided guidance on major management deci sions and planning goals, but also supplied key info rmation on economic and financial conditions as a suppor t to the Federal Reserve's fo rmulation of monetary policy. Today , 37 pub lic-spirited men and women serve as directors , representing a great variety of economic interests and non -profit organizations from every area of the West. The Federal Rese rve acted aggressively to curb domestic inflation and to stem the decline in the international value of th e do llar. In late fall, w hen the do llar's position had worsened significantly, the Fed took several stro ng ac tions - raising its discount rate on member-bank bo rrow ings a full percentage point to a record 91/2 percent , imposing supplementa l reserve requirements on large time certificate s, and participating in a $30-billion support pack age fo r the dollar in collabo ration with the U.s. Treasury and foreign financial authorities. Federal Reserve actions, plus higher mon ey-market rates, cont ribu ted to a late-year slowdow n in the growth of the money supply. W e are grateful to these individuals, and also to those who completed terms as directo rs during 1978: Ronald S. Hanson (President and Chief Executive Officer, Fi rst Nation al Bank of Logan, Utah) at our San Francisco office; W . Gordon Ferguson (President, Natio nal Bank of Whittier, Californ ia) and Armando M . Rodr iguez (President, East Los Angeles College) at Los Angeles; Sam H. Bennion (President and Chief Executive Officer, V-1 Oil Company, lnc.. Idaho Fall s, Idaho) at Sal t Lake City; and Harry S. Goodfellow (Chairman of the Board and Chief Executive Officer, O ld National Bank of Washington) at Seattle. Special mention must be made o f Gilbert F. Bradley (Chairman of the Board and Chief Executive Officer, Valley Nationa l Bank of Arizona), who completed a third term as this District's representative on the Federal Adviso ry Council , a key advisory group to the Federal Reserve System. Finally, we wi sh to express our appreciation to our officers and staff, w hose dedication to the effic iency of Bank ope rations has enabled us to improve our services continu ally to the financial community and to the general public. The $295-billion regional economy served by the Federal Reserve Bank of San Francisco exhibited all of the pressure symptoms evident elsew here - and then some The pace of expansion was significantly faster in the West than in the rest of the nation , following a pattern set early in the decade. For example, Western commercial banks far outpaced othe r banks wi th a 17-percent gain in loans and inv estments, to a year-end total of $155 billion For the second straight year, this region experi enced a phenom enal growth in real-estate financing, and it cont inued to experience a surge in consumer borrowing and stro ng credit demands from smaller businesses . The San Francisco Reserve Bank met the needs of a growing Weste rn economy by providing an expanded amount of Reserve Bank services dur ing 1978. The Bank's personnel handled about 1.4 billion paper checks, plus abo ut 2 billion coins and 1 billion pieces of currency. At the same time, the Bank continued to extend its electronic payments capability , th rough such means as automated Joseph F. Alibrandi Chairman of the Board 3 John J Ball es President National Scene also exhibited considerable caution about the near-term outlook by holding inventories firmly in check. Indeed, inventory-sales ratios generally reached the lowest levels of the past fifteen years. Another sign of strength was a sharp, and long-awaited, pickup in export sales. During 1978, the national economy continued to benefit from the longest and strongest peacetime expansion of the past generation. In the process, employment surged while the jobless rolls declined substantially. But the other side of the coin was somewhat tarnished. The strong expansion was accompanied by a severe and accelerating inflation, which was aggravated in turn by an unprec edented decline in the international value of the dollar. / Industrial production increased more than 5 1 2 percent in 1978, matching the previous year's growth pace. The strongest increases occurred in such categories as busi ness equipment and construction supplies, reflecting the upturn in business investment and the continued boom in housing. By late-year, manufacturing production ap proached 86 percent of estimated capacity, not far below the 1973 peak, and imposed a heavy strain on usable industrial plant. The national economy produced $2.1 trillion worth of goods and services in 1978, although the growth rate (in real terms) moderated somewhat during the year. Real GNP increased almost 4 percent, compared with the previous year's 5-percent gain. Yet the nonfarm business sector of the economy expanded at roughly the same pace in both years. Moreover, the level of output reached in 1978 represented effective full employment, measured in terms of the available reserves of exper ienced workers and cost-effective plant capacity. Jobs and prices Similar pressures surfaced in the labor markets. During 1978, more than 3 million more workers found jobs adding to the unprecedented job-market boom that has generated 11 million new jobs since the early-1975 cyclical trough. ln the fall months of the year, the unemployment rate finally fell below 6 percent of the civilian labor force. Moreover, experienced workers were at a premium: the jobless rate for household heads, who comprise the core / of the labor force, fell to only 3 1 2 percent, and the volume of help-wanted advertising rose one-fourth higher than the 1977 figure. Varying tre nds Consumer spending for durable and nondurable goods decelerated during the year. Household disposable in come (in real terms) increased about 4 percent, roughly in line with the 1977 increase. But this gain largely reflected an upsurge in employment. Despite heavy reliance on debt financing, consumer buying of big-ticket items rose only moderately, with (for example) a flat trend in the number of auto sales. But surprisingly, housing activity remained on the high plateau reached the year before, in the face of soaring home prices and near-record mortgage rates. The strong business expansion was marred, however, by an unanticipated acceleration in the inflation rate, which now threatens to mark the 1970's as the most inflationary decade in the nation's peacetime history. Consumer prices increased 9 percent over the course of the year, compared with a rise of less than 7 percent in the preceding year. Early-year farm disasters pushed consumer food prices skyward, and the rapidly depreciating dollar made many foreign products more expensive - typified by the late-year announcement of a 14 V2 -percent increase in OPEC oil prices for 1979. Wage-push inflation worsened Business fixed investment continued to advance at a strong pace, increasing about 8 percent in real terms. Earlier in the expansion, investment spending had been concentrat ed in short-lived equipment (especially trucks and autos), but in 1978 the emphasis shifted to construction projects (especially factories and commercial buildings). While showing increased confidence in the future through this growing investment in long-lived projects, business firms 4 ( because of a 9-pe rcent jump in the business sector' s unit labor costs, brought about by weaken ing productivity in the face of soaring increases in labo r compensation. M or e basically, the w orsening of the inflation problem reflected the cont inuation of heavy Federal deficit spend- I ing, as well as the related difficulty of reducing mon ey supply grow th to levels compa tible w ith the achieve ment o f lon g-run price stability . of the majo r aggregates - M , (currency plus bank de mand deposits) and M 2 (currency plus all bank dep osits except large negotiab le CD's). But w hile M 2' s 8-percent growth fell w ithin the target range announced by the Fed early in the year, M ,'s 7-per cent growth exceeded the upper limit of its range. l Financial growth To tal funds raised in financial markets expanded substan tially during the year, but with variations in different secto rs of the market. Net Treasury bor row ings fell significantly belo w earlier pro jection s, due to both an increase in gove rnment receipts and a shortf all in expendi tures. Furthermore, heavy for eign investment in Treasury issues reduced the share of the deficit w hich had to be financed by domestic financial markets. In co ntrast, net offerings by Federally sponsored agencies tripled over their 1977 levels, reflec ting heavy borrowing by housingrelated agencies. Co rpor ations w ere less active in the capital markets than they had been during the earlier stages of the expansion, bu t they again relied heavily on the com mercial-paper market fo r funds . Co nsequently, banks failed to win back all of the groun d w hich they had lost earlier to these oth er competito rs for co rpo rate business. Dollar problems The do llar' s decline repre sent ed probably the least expect ed , and most disheartening, development o f the year. Prior to Novemb er, the trade -weighted value of the dollar had drop ped abou t 15 per cent from the year-b efor e level, and far more steeply against the yen, the mark and the Swiss franc. The 15-percent decline, by itself, may have added as much as 2 percentage poi nts to the past year 's rise in con sumer prices. Actuall y, the natio n' s trade accounts improved significantly over this period, w ith the trad e def icit in the fall mo nths being not much mor e than half the first-quarter peak. D espite that and oth er signs of improvement, fo reign investo rs sold dollars heavily dur ing 1978, appar ently out o f fear that U.s. inflation would get o ut of co ntro l. ( Policymakers moved in several wa ys to co nf ront the inflation problem throughout the year, and especially dur ing the fateful final we eks of O ctob er. To reduce cost push pr essures, the Administratio n announced a set of w age and price guide lines, designed to pu t a 7-percent lid / on annual wage increases and (essentially) a 6-to- 6 1 2 per cent lid on annual pric e incre ases. To reduce defic it financing pre ssures, the Administration emphasized its determinatio n to cut the Federal bud get defi cit to abo ut $30 billion in fiscal 1980 from the $49-billion figure reached in fiscal 1978 . These measures failed to attract suppo rt in intern ation al financial mark ets, how ever, so policymake rs adopted a stro nger stance on November 1, with a $30-billion package of dollar-propping measures and a tighter anti-inflation credit poli cy. Sho rt-term intere st rates rose mo re than three full percentage poin ts dur ing the course of the year, w ith the sharpest increase occurring after the Novembe r 1 credit tightening mov es. Treasury bill yields rose at a slow er pace because of heavy foreign pur chases. But rates on Federal funds, large CD 's and commercial pap er all ro se sharply, to levels not far below the record highs expe rienced in mid- 1974. Banks attempted to maintain their pro fit margins by raising the prim e rate for their best corporate borrowers 15 times du ring the year, to a near-reco rd 11 3!l percent - up four percentage point s over a year ago . Long-term bond rates increased gradually over much o f the year - but then accelerated in the fo urth quar ter . The much faster rise in rates o n short er maturities pro duced an inverted yield curve beyond six to nine month s, indicating more favorable investor s' expe ctations about the long-run than abou t the short-ru n inflatio n outlook . M eanwhil e, w ith hou sing activit y still booming, !l prime mortgage-loan rates rose as high as 10 3 per cent at so me banks, and in some states exceeded legal usury ceilings. Monetary policy The Federal Reserve took action dur ing 1978 to mode rate the growth of the monetary aggregates, and in addition, to stem the decline in the exchange value of the dollar. The Syste m raised the discount rate - the rate charged by Federal Reserve Banks on member-bank borrow ings in a series of steps between January and O ctober, from 6 to 8 V2 percent, and then boosted the rate to a record 2 9 V per cent o n November 1. At the same time , the Fed imposed a 2-pe rcent suppleme ntal reserve requir ement on all large domestic time depos its and on certain oth er bank sour ces o f funds. Expanding bank credit Com mercial-bank credit provid ed financial support for the expanding l.l.S. eco nomy w ith an 11-percent increase fo r the year, and the loan co mponent accoun ted for over nine-tenth s of the tot al incr ease. Business-loan activity bec ame more broa dly based than it had been earlier in the expansion, as the large mon ey-center banks (primar ily These cent ral-bank actions, plus higher mo ney-market rates, co ntributed to a late-year slowd own in the growth 5 in New York) at long last joined the region al banks in meeting cor po rate-loan demand . W ith co nsum er borrow ing pressures still heavy , banks practically matched their strong 1977 gains in both mortgage and instalment-credit lending . Banks again reduced their portfolios o f Treasury securities, but offset this somewhat by adding to their holdings of Federal agency and municip al securities. and their cost of funds, by making quick adjustments in loan rates wh enever money-market rates increased . This was particularly true in the latter part o f the year. On the other hand, bank earnings suffered from a shift from less costly sources o f funds (those subject to deposit-rate ceilings) to more expensive sources acquired at accelerating money-mark et rates. Savings deposits increased only modestly in comparison with the previous year's $18-billion increase, partly because many savers in the second half of the year transfered their funds to the new T-bill certifi cates, wh ich were not subject to rate ceilings. These certificates became a relatively costly source of fund s late in the year, w hen Treasury-bill and other mon ey-m arket rates skyro cketed . Again, as in earlier high-rat e periods, banks relied heavily for funds on large CD 's, w hich increased by $22 billion - twice the previous year' s gain. These funds became eve n more costly in November, when the 2-percent supplemental reserve requirement became effecti ve. Anot her late-year cost increase came about because of the implement ation o f the automatic-tran sfer account s, wh ich invo lved heavy start up costs in addition to the 5-percent interest expense on individual funds that fo rmerly had been held in intere st free checking account s. Increases in both demand and time depo sits provided funds fo r the rapid expansion in bank cred it. But banks o bt ained about two-fifths of the gain in the latt er categor y from large CD 's, despite the sharply higher rates they had to pay on these money-mark et instruments. Two noteworthy deposit inno vation s occurr ed following Fed eral Reserve approval- the initiation of automatic transfers from savings accounts , and the linking of the six-month time-certificate rate to the six-month Treasury-bill rate. Both o f these innovations enhanced banks' ability to retain fund s in this period o f sharply rising money rates. Bank earnings According to preliminary data, bank pro fits reached a new peak in 1978. The large increase in earning assets, heavily we ighted toward mortgage and consum er loans, boosted inco me fro m interest payments Banks generally main tained a pr ofitable spread between their return on loans 6 Western Business Tax revolt A widesprea d tax revo lt stron gly aff ected the region's political economy du ring 1978 . At the June election, California's electo rate vo ted overwhelmingly for Prop osi tion 13, a ballot measure invo lving a $7-billion redu ction in pr operty-tax receipt s - a sum amounting to almo st one fift h o f the to tal revenu es raised by all levels o f Californi a government . At the Novemb er election, tax- or spending limitation measures appeared on the ballot in five other Western states, and the measures passed in all of them except Oregon. The Western economy experienced a boom year in 1978, measured by rapi dly falling unempl oyment rate s as w ell as rapidly rising emp loy ment and income statistics (This region, w hich is served by the San Francisco Federal Reserve District, includ es all nine states w est of the Continental Divide - see map, page 14.) The pace of expansion w as much faster in this region than in the rest of the nation , followi ng a patt ern set even be fore the beginning of the pr esent cyclical expansion. Population growth stimulated economic growth, as about 600,000 new resident s bo osted the regional population to nearly 35 million in 1978. This phenomenon repre sente d the continuatio n of a long-term west w ard shift o f the natio n's popu lation - a shift which has become especially evident during the pr esent decade. Between 1970 and 1978, migrati on accounted for almo st half o f the region 's total population gain o f 4.3 million , creating doubl e-digit grow th in almost eve ry W estern state. Californ ia, the largest. was an exception in the early years o f the decade, but growth has now speeded up there also. In 1978, California added 400,000 new residents with migration accounting for three-fifths of that total- the largest inflow in over a decade. Despite Proposition 13's apparent popularity throughout the nation , the circumstances surround ing that measure we re almo st unique to Californi a. A major contributing factor wa s a high and gro w ing state-local tax burd en dur ing a period when similar burd ens w ere levelling of f in other states. A second factor w as a substantial shift in the distributio n o f prop erty -tax burdens towards home-o wn ers, at a time w hen inflation already was causing bud getary problems for many hou seholds. And a third factor wa s the emergence of a massive state-government surplus in the months preceding California's June election. Proposition 13 achieved two o f its object ives - pr operty tax reduc tion and state-surplus liquidation. However, its initial impact on publi c-expenditure growth wa s rather modest, largely because the state go vernment pro vided more than $4 billion in direct assistance to local govern ment s out of its surplus funds. In its first year of o peration, Proposition 13 is reducing the level of pub lic expenditur es 2 by roughly 2 V percent . Accord ing to some analysts, its future impact coul d be even less, because of the co ntinu ing build-up in the state gov ernment's budget surplus, the highly responsive character o f the state's revenue system to economic-growth tren ds and to inflation , and pro bably also a surprisingly strong growth in property-tax revenu es. More job s, more income Civilian employment in this nine-state area jumped about 6 percent - an unprecedent ed increase o f roughl y 900,000 new jobs - to reach a new peak of 15.3 million. Employ ment gains were substantial in practically ever y industry especially con struction , aerospace-equipment manu factur ing, trade and services . The o nly exception wa s the gov ernment sector , where employment remained flat because of tight fiscal co ntro ls at every level, typified by California's Proposition 13 slash in property-tax revenu es. Reflecting this very active job market, unemployment declined from 7.5 percent o f the civilian labor force in 1977 to about 6.7 percent in 1978 . The im prov eme nt w as evident in almo st eve ry Wes tern state . Indeed , the strong expansio n brought the rate do wn to about 6.0 percent by year-end, almost closing the w ide gap that had persisted between the regional and nation al jobless rates fo r mor e than a decade . Partial farm recovery After two so lid years o f drought and depressed livesto ck prices, W estern farmers and ranchers began to pro fit in 1978 from green pastures and brim -full reservoirs . Acco rd ing to pre liminary estimates, total farm sales exceeded the 1977 figure by almo st 5 per cent. Net farm income grew at about the same pace, since the drought's demise helped ease some exceptionally high o perating costs for a numb er of farm enterprises . Ma ssive exports helped boost the W estern farm community, as dol lar depreciation made its pro ducts exceedingly att ractiv e in w orld markets. Personal income incre ased more than 12 V2 percent to abo ut $295 billion in 1978. Mu ch o f the gain was eaten aw ay by inflation, as consumer prices rose more than 8 per cent during the year - but the result was still a solid / gain of more than 4 1 2 percent in real income . The consumer buying pace was rather uneven during much of 1978, but ev idently quickened during the Christmas sea son. New -car registration s increased for the third straight year, but the gain wa s somew hat mod est in relation to the gains of the 1976- 77 per iod. The livestock industry provided the brightest news on the agricultural front , as producers found themselves in the trou gh o f the cattle cycle, w ith redu ced supplies bu t with rapidly rising prices. Some of the cattle-price rise came w ith the compliment s o f M idwest hog producers, who 7 because of their newly-granted ability to offer savings certifica tes at rates tied to Treasury-bill rates. failed to expand output as they had originally inte nded . Thus a 4-pe rce nt decline in beef output, paralleled by virtually no growth in po rk ou tput, sent Western cattl e prices soaring 33 percent above 1977's low levels. Net income from ranching operations also benefi tted fro m the wet weather, w hich dramatically imp roved pasture and range conditions, and there by reduced the need fo r high cost feed and wa tering o perations. A massive boom in nonresidential buildi ng accompanied the contin ued strength of ho me-building , and these devel opments together placed heavy pressures on the regional lumbe r industry . Timbe r shortages meanwhile fo rced a 3 percent reduction in W estern lumber product ion for the year, and thus fo rced dom estic builders to turn increasingly to foreign suppliers to meet thei r requirements. No t surprisingly, softwood lumbe r prices climbed almost with out interruption, to practically do uble the average level reached during the 1974 recession . In the pulp- and-paper segment of the industry, producers also raised pric es sharply - partly because of strength ening dema nd, and partly because of a second-half tightening of supp ly caused by a prolonged strike at Pacific No rt hwes t mills. W estern wheat farm ers also found welcome relief from the dro ught, as their outp ut and per-acre yields rebound ed sharply from 1977 levels. Total wheat production nation wide droppe d abou t 12 perc ent, wit h farm ers elsew here cutting back on their acreage, and W estern farme rs thus sold more wheat at prices which averaged about one fo urth higher than a year be fore . Wes tern fruit growers meanwhile pro duced somewhat less, bu t earned substan tially higher prices o n the products they sent to market in 1978. (For example , grower prices fo r oranges ran abou t 32 percent above 1977 leve ls.) Cotton production fell co nsiderab ly, but in this case prices also slid, under pre ssure from the large stocks left over from the previo us year' s harvest. Busy factories Western manufacturing production expanded at a faster than-nation al pace, sparked by co nsiderable strength in durable-goods manufacturing . In partic ular, the aerospace equipment manufacturing industry recor ded its stro ngest sales gains in years, w hich spurred a 14-percent increase in industry employment ove r the course of the year. (Still, aerospace employment remained abo ut 20 percent below its Vietnam -war peak.) The main stimulus came from the w or ld airline industry , whi ch responded to the rapid Agricultural land prices in the West increased almost 10 percent, reflecting the recovery in the regio nal industry's fo rtunes. Indeed, a numb er o f facto rs were invol ved, such as the brea k in the pro longed d rought, climbing livesto ck and specialty-crop prices, population pr essures on rural land, and the general atmosphere of inflation. These pressures were most intense in Califo rnia, where farmland price s jump ed 13 percent durin g the year . Ho using- still strong The Wes tern hou sing boom co ntinued in 1978, as new starts and new building permits roughly matched the peak levels attained the year before. Through most of the year, the pace of perm it activity actu ally ran slightly ahead of 1977's peak figure of 473,000 housing units. The specula tive buyi ng pressures w hich had marred the earlier stages of the boom w ere mostly lacking, expecially in California. Even so, demand and cost pr essures pushed the medi an price of new homes to $64,900 at midyear - 22 percent above the mid- 1977 leve l. Wes tern ho me prices, w hich ro ughly paralleled nationa l prices prio r to 1975, by 1978 were 16 percent higher than home prices elsewhe re. De mand pressures remained high, partly because of the lo w level of vacancies in for -sale and rent al hou sing, and also because of the wides pread belief that buying a home repr esented the best inflation hedge. Financing problems aro se as the year w or e o n, reflecting the high cost and decreasing availability of mortgage money. However, lend ing institution s had mor e funds available than they might have expected for a tight -money period, at least partly .- 8 'c ~ .., ' " " " .. share of the Western market thus fell to 26 percent. (It had been 48 percent at the 1976 peak.) In fact, Alaska in 1978 became the nation's third-largest oil producer, being outranked only by Texas and Louisiana. growth of passenger traffic by placing large orders for both the present and the next generations of jets. In this regard, Boeing's 757 and 767 planes launched the nation's first new commercial-jet manufacturing programs in a decade. Defense and space business also increased, along with consumer demand for electronic products. Western refineries were able to absorb only about half of the North Slope's production of 1.1 million barrels/day, after allowing for supplies from other Western fields, the refineries' product mix, and their technical capability for processing high-sulphur Alaskan crude. This situation has created a debate over the best means of utilizing the Alaskan oil that is surplus to West Coast needs. Producers now ship most of this surplus oil by tanker to the Gulf and East Coasts via the Panama Canal. But more efficient alternatives are under consideration, such as pipelines that would transport oil either from Port Angeles, Washington or Long Beach, California to refineries farther East. Some industry leaders have proposed a swap arrangement with Japan- under which surplus Alaskan oil would be exported to Japan, while an equivalent amount of Japan-bound oil would be diverted to the East and Gulf Coasts - but that alternative has been criticized for running counter to the national goal of energy self-sufficiency. Western steel demand rose sharply, due to the strong pickup in non-residential-building and heavy-engineering projects as well as the continued rise in consumer-goods markets. But foreign producers increased their share of the Western market from 34 to 40 percent, despite the introduction of the "trigger price" mechanism designed to blunt just such an import drive. Regional steel producers thus benefitted only partially from the sharp increase in demand, recording a 7-percent rise in production for the year as a whole. The Northwest's aluminum industry benefitted fully from the upsurge in demand from aerospace and other indus tries. Moreover, it recovered well from its earlier supply problems, as winter rains brought an end to drought related shortages of hydro power. The regional copper industry, in contrast, continued to operate its mines and refineries far below capacity, in an effort to cope with a worldwide problem of excess supplies. Refinery shipments to Ll.S. fabricators rose only about 5 percent for the year, and remained far below the 1974 peak. However, produc ers were able to boost their price for the refined metal steadily over the course of the year, because of the umbrella provided by the devaluation of the dollar, which raised the foreign producer price in dollar terms. Slower pace in 1979? At year-end, most observers foresaw a slower pace of business activity in 1979, if only because of the pressures generated by shortages of trained manpower and usable industrial capacity throughout the regional economy. But the West once again seems likely to outpace the national economy, on the basis of the strength expected in such regional specialties as aerospace and agriculture - industries which boast attractive products that can sell well in both domestic and overseas markets. Petroleum situation The improved weather situation also helped bring about slight declines in Western production and consumption of refined petroleum products, because regional utilities were able to increase their reliance on hydro power and thus reduce their usage of fuel oil during the year. But not surprisingly, industrial and transportation demands for pe troleum rose significantly. Regional production of crude oil increased sharply for the second straight year as more Alaskan oil flowed through the pipeline, and the import Construction activity might remain stable, with the weak ening trend in the housing sector being offset by the growing strength of factory and office construction. Some sectors seem bound to weaken, especially government spending in the wake of Proposition 13 and a host of other budget-tightening measures. But overall, the Western economy appears capable of extending the expansion into a fifth consecutive year. 9 Western Banking The pace o f banki ng, like the pace of general business activity, expanded much mo re rapidly in the West than elsewhere duri ng 1978. Tota l loans and investments reached $155 billion at year-end, fo r a 17-pe rcent in crease - half again as large as the gain recorded in the rest of the nation. A $23-billion loan increase accounted for this enti re bank- credit gain, as tot al investment portfolios remained even with a year ago. Thro ughout most of the year, banks we re able to meet the recor d loan demand w ith funds generated from deposi t inflow s and maturing assets, rather th an by selling or running-off securities But late in 1978, in response to the increasing restrictivene ss of monetary po licy, banks reduced their security hold ings, or at least their holdings of Treasury securities. A massive 29-per cent increase in mortgage loans accompa nied the Western co nstruction boom, as credit availability remained greater than in ot her per iods of high intere st rates. The stro ng pace of business activity helped support a favorable enviro nment fo r hou sing, and this tren d was reinfo rced by borrowers' expectations that home prices and mortgage rates had nowhere to go but up . Lending activity was strong not onl y in single-family housing, but also in commercial real estate and (especially) construction and land-development pro jects. At year-end, mortgage loans reached $43 billion, at which point they con stituted 34 percent of total loan po rtf olios. Consumer instalment loans increased almo st as rapidly as mortgage loans, although consumers entered the year with a histo rically high ratio of instalment debt to personal inco me. Strong increases occ urred in auto financing and ho me-improvement loans, and also in check-credit and credit- card loans. Sharp loan expansion Business loans increased by a stro ng 15 per cent, despite a near-re cord prime rate , an increasingly restrictive monetary poli cy, and only moderate demand by the banks' large co rporate custo mers. (Here as elsewhere, large firms continued to rely heavily on the capital and co mmercial paper marke ts for funds.) The strength in this market again came from the small and medium-sized firms that are much more dependent on bank financing than are the large corporate borrowers. Mos t industry groups bor rowed heavily during the year, but loan growth was especially brisk in the constr uction, trade , services and durable -goods manufacturing sectors . New deposit sources Banks financed their soaring loan vo lume by generat ing abou t $17 billion in new deposits, for a 12-percent gain ov er the year. About half of the dep osit growth came fro m large time certificates (CD's), as inflow s from ot her sources lagged. This heavy reliance on CD funds became most evident in the second quarter , when many savers w ithdrew funds in search of higher yields in the open 10 market, and again in the fo urth quarter, w hen an increas ingly restrictive monetary policy affected deposit flows . Yet banks everywhere had to conte nd wi th skyroc keting increases in the cost of funds dur ing the year . Rates rose sharply on large CD's, and also on Federal fund s. Again, by year-end , rates on the new six-mo nth T-bill cert ificates rose significantly above the rates paid on consumer-ty pe time and savings depo sits, the gap widening to more than 4 per centage po ints betw een the new certificates and consumer passbook account s. Banks w ere able to count er disintermed iation - the ou t flow of funds into mon ey-mark et instruments - w hen they received Federal Reserve authorization to issue six-mo nth money-m arket certificates with rates tied to the six-month Treasury-b ill rate . These certifi cates becam e an important source of funds in the latter part o f the year - although a relatively expe nsive source because mon ey-market rates eventually rose w ell above the rates on the consumer-type deposit s that they replaced. A second maj or deposit innovation, automatic-transfer accounts, in cont rast did not repr esent a significant new source of funds. These ac counts invo lve d a shift of customers' funds fr om other types o f deposits, mainly dem and balances, into savings acco unts that are tied to checking accounts. Divergent '79 trends M ost Western bankers anticipate a fairly stron g earnings performan ce in 1979, although perh aps not quit e up to the 1978 standard. Some wa rning signs are o n the hor izon. The record lending pace has reduced liquidit y levels for some banks, so that they may adopt a less expansionary stance in the new year . Also, the uncertainties in the eco nomic outlook will for ce many institutions to put aside mor e funds fo r po tential loan losses, which would tend to curtail earnings. Large Wes tern banks also relied heavily on increased bo rrowings during the year. Banks' net Federal-funds purcha ses (bor row ings) exceed ed $700 million on a daily average basis- dou ble the year-be fore level. Also, mem ber-b ank borrow ings reached $52 million o n a daily average basis- about o ne-third higher than the 1977 figure. This repres ented the highest level of activity at the Reserve Bank's discoun t window since the tight-mo ney peri od of 1974. Business-loan demand may continue relatively stron g, espe cially if large co rpor ate bo rro w ers turn to the banks for mo re financing because of the grow ing difficulty of obtaining funds from o ther sources. O n the oth er hand, there may be some w eakening o f hou sehold borrowing, whi ch has been the mainstay of the W estern banking com munity fo r the past several years. M or tgage-loan demand should almost certainly subside, fo llowing tw o years of record housing demand and the recent jump in mor tgage-loan rates. Consumer instalment-loan demand also could w eaken, given the heavy burden of individual debt and the consumer's growing caution abo ut the business outlook. Average required reserves rose almo st $1 billion over the year, mainly becau se of the bo om-related expansio n o f dep osit activity , but also because of the late-year impos i tion of supp lemental reserve requirement s on large do mestic fun ds, including CD 's. However, reserve requirem ents were only slightly affec ted by the reducti on, and subsequent removal, of the reserve requiremen t on U.s . bank borrowings fro m their for eign br anches. In this envir onm ent, CD funds should continue to be a major source of bank resour ces. These funds are likely to remain expensive, however, partly because of the high level o f interest rates paid on such vo latile deposits, and partl y because of the supplemental reserve requ irement now imposed on them . Banks meanwh ile might avoi d serious pr oblems of disintermediation if they remain w illing and able to pay market rates for the six-mo nth T-bill certificates. In additi on to these and mo re traditional sources, banks will have a new source o f available funds the Treasury tax-and-lo an account program, wh ich perm its them to borr ow excess Treasury dep osits at a rate tied to the Federal-fund s rate. And in the last analysis, Western banks may again profit from a faster-than-national expan sion of business activity, and hence from a broader scale of lending op por tunities than their national counte rparts can expect. Record earnings The bott om line for 1978, accordi ng to early estimates, was a recor d leve l of Western bank earnings. O perating income ro se substantially over the year because of record loan volume, coupl ed wi th record or near-r ecord levels of interest rates. Many banks nation wide profited by main taining substantial spr eads between their average ret urn on assets and their average cost of funds. But Wes tern banks also benefitte d from their retail orientation , because their loan portfolios cont ained a high proportion o f high-yielding consumer and mor tgage loans, wh ile their liabilities were heavily conce nt rated in low-yielding savings deposits. 11 I I I I I I Chd"ge ( ~.) 15 r - '- I--l- --t- -i- --t_-t_.J_J The National Scene_ In Brief I 5 '''f/d/io" I The national econorny r d <, I Real GrOwt h and Inflation Real Growlh 0 J I 1970 uted to the P'oblem Ai ' e, ['Oduct,v,ty all COnt,ib _ of inflation ' eflected th O e _ 'cally, the wO"en ing ' " e", denc" spendin e cont'nu"'on of heavy Fed of ' educing mane as the ' elated difficulty e Patibl with I y Pp y g'OWth to level; cOm I 1974 1976 uced $2, 7 trillion WOrth strong expansion wa norn,c growth rate , But the ' t IClpated p nce UPSurge Farrn d's rnarred b y an unan tir i ' ISas 'dl " doll", and ;ag8in8 wO'k ers' a rap '. y d epceoatmg • 197] 0 ' mOde'''ion in the ICes In 7978 aIth aug h W'th ; ome eco . ' 1 I· I .p of goods and serv o " g:s~; ~ell 1978 ong-r un p nce stability. M i/lio", 4 2 The level of OutPUt r h fu:a~rne ~ TOldl s eat~ -I I - I _ Unemployment Rates .J. 0 last Year repre _ sented effective , p o Yrnent, rnea S ured in ter f w experienced rns °k aVaIlable reser ves of Ost-e ffect,ve ' p lant capacity Or. 'th and C W ers 'ob -rnar k et boorn, Iabo an 77 '/I" ' unprecedented ! ut Jobs d rn, IOn new 797 we re cr oVer the course of the 5- 78 expa nsion, The unern I rate COntinued to d I' , P 0Yrnent ' eClne In 7978' In d, ed expenenced workers were t e , rneasured by the low ' a a prernlUrn, household heads w rate fo r of the labor ho cornpnse the Core ,I - _. I 1970 I I - forc~, - I 197] 1974 ----=.. 1976 1978 I I I I I I JOb/~ss $ Billions Balance of PaYments Interest Rates 20 Twelfth Federal Reserve District Washington Oregon Idaho . , ..__ t:?£J'" ,, S ail Lake Cily Utah c::::::;J Hawaii \)S\:) a Arizona .. 14 Management Committee (Shown from left to right) Richard T. Griffith, Senior Vice President , Bank Operatio ns John J. Balles, President Kent O . Sims, Senior Vice President, District Dep artments John B. Willi ams, First Vice President J hn J. Carson, Senior Vice President , Corporate Staff o 15 Federal Reserve Bank of San Francisco Organization Chart February 2, 1979 Senior Vice President Di strict Depa rt ments Kent O . Sims District Departments Senior Vice President & Director of Research Mic hael W . Keran Vice President Bank & Com munit y Relations Robert C. Dietz Vice President Statistical & Data Servo Wilhelmine vo n Turk Vice President Super., Reg., & Credit Henry B. Jamison Vice President Bank Examinati ons Eugene A . Tho mas Director of Economic Analysis J oseph R. Bisignano Assl. Vice Pres. Bank Relatio ns Robert A. Johnston Asst. Vice Pres. W . Gordon Smith Examining O fficer Com mercial - SF Wayne L. Rickards Finan. Regulations O ffi cer Douglas C. Paul Examining Officer International - SF Rodney E. Reid Examining O ffi cers Merle E. Borchert Co mmercial- LA G. Ross Varoz Cornmercial-SLC Directo r Computer O peratio ns Hector M . Martin Asst . Vice Pres. & Economist John H. Beebe Research Officer Herbe rt R. Runyon Research O fficer Peter Hsieh Senior Vice President Bank O perati ons Richard T. Griffit h Bank Operations Vice President Payment Services Donald K. Carson Vice President Co mp ute r Services Kenneth A . Grant Director of Public Info rmat ion Willi am M . BtJrke Asst. Vice Pres. & Economist Hang-Sheng Cheng Director BHC Regulation Harry W. Green Vice President Custody Services W arren H. Hutchins Vice Presiden t' Claude W oessner Director of Co mputer System s William V . Ott Asst. Vice Pres. Communicatio ns Elwood E. Bernstein Systems O fficer S. Lee Flynn Asst. Vice Pres. Asst. Vice Pres. Checks Benjamin B. Gillespie Fiscal Roy A. Remedios Cash O fficer David Christerson System s O fficer Dav id Q. Ong Seattle 'S ystem Fiscal Resource Sharing Analy sis and Control Officer Gale P. Ansell 16 Assl. Vice Pricing Robert H. ( Senior Vice President Seattle Gerald R. Kelly Asst. Vice Pres. Check Collection Kenneth L. Peterson Asst. Vice Pres. Operations E. Ronald Liggett I Ma Assistant General Auditors Beverly J. Adams Bruce H. Thompson General Auditor lames F. Leyman Board of D irectors O mbu dsman Jane W . Langhorne President lo hn I. Balles First Vice Presid ent J hn B W illiams o Secretary's Office Corporate Staff Senior Vice President Secretary's Office Donald V. Ma sten Senior Vice President Corporate Staff lohn J.Carson Facilities Planning Staff Vice President Facilities Plannin g Rix M aure r. lr. Vice President & General Counsel Louis E. Reilly rector of Iniormation m M . Burke . Vice Pres. Director Facilities Planning O ren L. Christensen Assoc. General Counsel W illiam L. Cooper conomist 1H. Beebe Asst . Vice Pres. Facilities Planning Will iam K. Ginter Vice President Operations Support H. Peter Franzel Director of Corporate Personnel M ichael ). Mu rray Asst. Vice Pres. legis. Analyst Verle B. Johnston Asst. Vice Pres. BUdget & Control Ade lle Foley Branch Support Personnel Officer Connie L. Russell Accounting Officer loh n K. Davis District Security Director Geo rge P. Galloway Los Angeles Senior Vice President los Angele s Richard C. Dunn Vice President lames M . Davis Director of Operations Richard L. Rasmussen Asst. Vice Pres. Pricing R ert H. Colfelt ob Portland Asst. Vice Pres. Admin. Services Ma ynard C. Petersen Asst. Vice Pres. Admin. Services I.W. Williams, lr. Employee Relations Officer Raymond E. Kriese, lr. Vice President Portland Angelo S. Carella Asst. Vice Pres. Operations M . Timothy Carr Asst. Vice Pres. Cash Brent M. Du xbury Check Officer Sally K. Hackett Salt Lake City Asst. Vice Pres. Analysis-Control H. W illiam Pennington Asst. Vice Pres. Expenditures & Quality Control Dougl as O . Knudsen 17 Asst. Vice Pres. Fiscal Patsy L. Haynes Vice President Salt lake City A. Grant Holma n Asst. Vice Pres. Custody Control Don W . Sheets Payments Services Officer Rob ert R. Richards Branch Operations (Sho wn from left to right) H. Peter Franzel, Vice President, Operations Support A. Grant Holm an, Vice President, Salt Lake City Gerald R. Kelly, Senior Vice President, Seattle Angelo S. Carella, Vice President, Por tland Richard C. Dunn , Senior Vice President, Los Angeles 18 Western Central Bank During 1978, the Federal Reserve Bank of San Francisco provided expanded central-banking services, in the areas of checks, coin , currency, fiscal agency, and electronic funds transfers, for a regional economy which continued to grow faster than the rest of the nation . The Twelfth District, which contains five Reserve Bank offices - in San Francisco, Los Angeles, Portland , Salt Lake City and Seattle - is the largest Federal Reserve District in terms of both population and geographic size. It includes the states of Alaska, Arizona, California, Hawaii, Idaho, Nevada , Oregon, Utah and Washington, plus the territories of Guam and American Samoa - and serves 35 million people and 522 banks with a total of 6,457 banking offices . Federal Reserve check-clearing and automated clearing house services, which would be implemented after appro priate steps have been taken to alleviate the problem of declining membership. Congressional leaders plan to take up membership legisla tion early in the new session . Meanwhile, the San Francisco Reserve Bank is continuing to inform banks of the value of System membership and to respond to their needs by discovering banks' problems and helping to solve them. To this end , bank-relations personnel in 1978 provided techni cal advisory services for member banks, cost-of-member ship studies for potential members, and a series of seminars on economic and financial developments for bank and business audiences. In addition, the Reserve Bank continued to offer member banks a functional-cost analysis program, which takes advantage of the Federal Reserve's unique ability to construct regional and national peer-group comparisons from accounting data supplied by its members. The Reserve Bank's scope of operations in 1978 reflected the large size of its service area. For example, Bank staff handled about 1.4 billion paper checks, not to mention 2.0 billion coins and 1.0 billion pieces of currency. At the same time, the Bank continued to extend its electronic-payments capability, through such means as automated clearing houses, Government direct-deposit programs, and the Federal Reserve wire-transfer network. District member banks transferred $7.9 trillion throughout the country over the Fed Wire network. The staff continued to work on a five-year automation program, with an eye toward further internal efficiencies as well as improved services for commercial banks and the general public. Supervisory responsibilities Membership developments Declining membership became a problem for the San Francisco Reserve Bank, and for the Federal Reserve System generally. In this District , six state-chartered banks became members, and nine banks went off the member ship rolls, mostly because of mergers with other banks. The System nationwide experienced a net loss of more than 50 member banks during the year. As these numbers suggest, it has become increasingly difficult to maintain membership with the existing system of reserve requirements . The Federal Reserve submitted a package of legislative proposals to Congress in July, which was designed to bring about greater competitive equality among financial institu tions by reducing the net cost of System membership. In particular, the Fed proposed to pay interest on required reserve balances held by member banks at Federal Re serve Banks. (Member banks, unlike nonmember banks, at present earn no return on their required reserves.) The Fed also asked Congress to impose universal reserve require ments on transactions balances held by all financial institu tions - such as so-called NOW accounts as well as demand depos its - as a means of equalizing competition among all depository institutions with third-party payment powers. In return, nonmember institutions would gain access to Federal Reserve clearing services. Finally, in November, the System released a preliminary schedule of prices for I 19 In the area of supervision and regulation , the Reserve Bank prepared to take on the new responsibilities which were conferred by the International Banking Act of 1978. The legislation extended Federal control over the branches and agencies of foreign banks operating in this country, and over foreign-bank controlled commercial-lending compan ies that are engaged in banking activities . The act empow ered the Federal Reserve to impose mandatory reserve requirements on Federally-chartered branches and agen cies of fore ign banks - and on State-chartered branches and agencies whose parent banks hold $1 billion or more in worldwide assets. The branches holding reserves would gain access to Federal Reserve services. Also in the international area, the Reserve Bank made a statistical early-warning system an integral part of its bank-examina tion procedures, as a means of identifying potential defaults or rescheduling of external debt in countries where District banks have substantial financial assets. The Reserve Bank's staff completed the development of a new bank-rating system for describing and communicating the results of bank examinations to the Federal Reserve Board of Governors. The previous rating system included only capital adequacy, asset quality and management in its composite rating . The new system has added earnings and liquidity, in order to provide a better measure of the condition of the bank under examination . With minor modifications, some version of the new bank-rating system has been adopted by each of the Federal bank-regulatory authorities. The Reserve Bank also continued to operate a computerized financial-monitoring system, which provides for continuous review of financial developments between on-site examinations in institutions under its supervision. I l The examination staff completed annual on-site inspections of selected domestic bank holding companies and their nonbank subsidiaries. Every effort was made in each case to schedule the Federal Reserve's inspection of the holding company concurrent with the examination of a subsidiary bank or banks. This policy minimizes examination costs for related institutions undergoing examination, and provides a useful division of labor among regulatory agencies in cases where the Federal Reserve is not the primary regulator of the subsidiary bank . The Computer Services Group moved into the second phase of a five-year automation plan, installing essential hardware and software components in accordance with the Bank's basic strategy of centralized on-line processing. Moreover, 1978 saw the beginning of a number of major system-development efforts, which should greatly increase the Bank's level of automation into the 1980's. These efforts, among others, encompassed the Treasury tax-and loan system, the savings-bond issuing system, the publ ica tions mailing list, and the securities-transfer facility. The consumer-affairs staff conducted examinations at all state-member banks, and also at many of their branches, as part of a System-wide program designed to achieve broad-based compliance w ith consumer-protection laws and regulations. In addition, the staff offered all member banks the services of specially trained examiners for on-site educational and advisory work in this field. The Reserve Bank received about 500 individual consumer complaints against commercial banks, and processed more than 100 such compla ints which were related to institutions for which it is the primary supervisor. This workload is likely to increase substantially in 1979 as the Federal bank regula tory agencies assume new responsibilities under the Com munity Reinvestment Act. Congress passed this legislation as a means of encouraging banks and thrift institutions to meet the credit needs of all credit-worthy borrowers in their communities . Payments activities In check-processing activities, Bank staff handled about 1.4 billion paper checks during the year - a substantial 6-percent increase. This District cont inued to lead the System in the cost effectiveness of check processing. In addition, this Bank significantly improved the quality of operations, reducing internal errors and delays in processing. In one major move, the Bank implemented the Treasury mandated government-check truncation program . ('Trun cation- involves shipping magnetic tapes and microfilm copies of checks, instead of the original paper checks in bulk , to the Treasury computer-operations center.) This was a massive undertaking, since this District processes the largest volume of government checks in the System-1 34 million in 1978. Planning for the future In electronic payments activities, District member banks settled $7.9 trillion through the Federal Reserve's wire transfer system - a sharp 25-percent increase over 1977. In addition, the San Francisco District continued to lead the rest of the country as the largest processor of electronic automated-clearinghouse items. This facility replaces checks and permits automatic payroll deposits as well as bill paying. In a major step forward , this Bank and other Reserve Banks participated in the development of a nationwide network which links up some 9,400 banks and 1,500 thrift institutions that are currently members of automated clearinghouse (ACH) associations, along with some 6,000 customer corporations . The 35 ACH's now in operation - one private and the rest Federal Reserve facilities - consist of computers wh ich clear and sort pay ments instructions recorded on magnetic tapes. The new system requires no new facilities, but instead makes intensified use of existing Federal Reserve computers and wires . In a key development, the Reserve Bank completed plans for a new San Francisco headquarters building, to be built on a site near the foot of the city 's Market Street. The Bank's present headquarters building, constructed in the early 1920's, is inadequate for meeting the requirements of present-day banking operations. The new 12-story, 653,000-square foot building is designed to meet the District's needs into the 21st century. The conceptual design phase of the project was virtually completed by year-end, and groundbreaking is scheduled for 1979, with completion around early 1982. During 1978, the Bank restructured responsibilities within its San Francisco Office, primarily by forming a Bank Operations Division under Senior Vice President Griffith. The new division encompasses three functions - custody , payments and computer services. This organizational align ment complements the recent formation of District com mittees for each major operating activity, with representation from each office . Senior officers in San Francisco who have accountability for these major activi ties provide District-level coordination . The senior o fficers of the Bank Operations Division also have day-to-day responsibilities at the San Francisco office. Consequently, the Bank now has a central focus of accountability for each major District operat ion. Despite the increase in the use of checks and electronic transfers, the Reserve Bank continued to handle massive amounts of coin and currency, receiving and counting 2.0 billion coins and 1.0 billion pieces of currency during the year. The Bank instituted several major efficiencies in the cash activity during the year. Under one new program , commercial banks deposit excess fit currency in sealed 20 plastic bags, so that the currency can then be paid w ithout the need fo r Reserve Bank ver ification and sorting . Unde r a second program, the Mint now delive rs large shipments o f coin directly to or dering commercial banks; this makes it unnecessary fo r the Reserve Bank to participate in the actual physical shipments, and in many cases significantly shortens the transpor tation routes. The Bank also imple mented a cash-management pro gram, w hich pro vides for transferring excess fit currency of particular denomina tions, or excess amo unts of unverified currency, from offices with surpluses to offices w ith shortages. These measures permit maximum use of currency-sorting resources on a District-w ide basis, and also help reduce backlogs of unverified curre ncy at all offices . ciencies in the processing of food coupons. Also, the Bank imp lemented the new Treasury-mandated tax-and-Ioan investment program, whereby the Treasury earns interest by investing its operating cash balances, whi le paying fees for certain services which it formerly received free from financial institutions. The Bank was also designated the lead bank, on a jo int com pute r resource-sharing pro ject with the Kansas City and St. Louis Districts, to develop a majo r new system to handle the increasing volume of govern ment-security purchases, sales, transfers and account hold ings. As for the bottom line, the San Francisco Reserve Bank continued to lead the Federal Reserve System in the cost effectiveness of operati ons, with an aggregate unit cost 15 percent below the System average. Productivity (outp ut per worker-hour) in these operational activities has in creased 57 percent since 1974, following the Bank's development of a major program of pr oduct ivity improve ment. And despite substantial increases in w orkload, the Bank's staff over the past decade has increased only 3 percent. Fiscal activities In its role as fiscal agent fo r the U.s. government, the Reserve Bank cont inued to handle substantial amounts of paper - in the fo rm o f savings bonds , marketable Treasury securities, and food stamps - wh ile achieving new eff icien cies through com puter handling of securities. During the year, the Bank intro duced a prog ram which , through statistical-sampling tech niques, permi tted substantial effi SUMMARY OF OPERATIONS Number (thousands) Value (millions) Currrency and Coin Currency received and counted Coin received and counted s 9,707 263 1 140 ·166 1 '171U48 12.9 ' 94 .. 560,461 7 U89 6,836 5,9 11 cl.) , 1 12,073 , -\ N/A '/)51 2,228 1,069,843 . . . ~ ;B ) , 6 g 4 952 ,60 1 1,996 ,005 Collections Check COllections Commercial checks . , Government checksH Return items .. , . Noncash Collections 452.40 3 68 'i% . , . 5.64') . - . Hl .) , ~ ~ ) IS 04 , 'If" 1,246,573 133,595 17,943 240 Discounts and A dvances To tal discoun ts and advances Numb er banks accommod ated . . Fiscal Agency Savings Bonds & Savings Notes Other Trea sury Issues Other f iscal . . Currency verified and destroyed Food stamps received and processed 9 :;0 \.22 -) . . ) I _ '1" , 2,176 929 355 4 ~- ..''7 -.I b";';1 914* 60· 28,42 7 330 2~h . )h ~' 343,992 263,684 .2 Q')') 2. l,tJ ,, ) jin 3,009 3,084 21,155 ):;4 ': h l) Electronic Funds Transfer Wi re transfers Automat ed clearinghouse Government depo sits . . * ** h 2 18.1)8'-1 . \ . ............. . ,., . ,. '" Actual figures Including postal mon ey o rde rs 21 ,; 7,87 1,412 N/ A N/ A I I I I I I I I I The Regional Scene_ I I In Brief West , 1 1976 1978 I I I The Pace o f banking, Hke the pace of gene"l busi ness act>v,ty, expanded much mO'e 'apldly In the creased 75 Perce t d . We" than elsewhe'e dUtlng 1978. 8uslness loans In Loan Growth Reserve Bank Operations . . or, esplte a near-record prime 'ate, an 'nc'ea"ngly 'e"tlcl/ve monetacy poHcy and only mOdecate demand by the banks' lacge c';,po 'ate CUstome" . But fa, the second st"lght Yeac the household secto, accOUnted fa, the majo, pa;t of the ove"l1 loan Inuease, as both mongage and consume, loans Inueased by one-founh o'mo'e. The Fedecal Rese've Bank of San F"ne/sco met the needs of a g'oWlng W eCOn_ estem Omy, W'th ,ts 35 million people, by P'ovld 'ng an expanded amOUnt of Rese've Bank se'v'ces dU'lng 197B. Fa, example the Bank's staff handled 1.4 billion pape, checks, 2.0 b"Hon Coins and 1.0 billion p'eces o f CUttency, along With 3.0 million w'te t"nsfe,s of funds. In volume, check cOllect'ons tOtalled $639 bll/lon, and mem be'-bank t" nsfe" of funds ave, the Fed Wire network tOtalled $7.9 trillion. Directors San Francisco The Federal Reserve carries out its central-banking func tions through a nationwide network of 12 Federal Reserve Banks and their 25 branches, under the policy guidance, coordination and general supervision of the Board of Governors in Washington, D.C. The Head Office of the Federal Reserve Bank of San Francisco has a nine-member Board of D irectors. Each of the Bank's other offices at Los Angeles , Portland, Salt Lake City and Seattle has a seven member board . Chairman of the Board and Federal Reserve Agent Joseph F. Alibrandi President and Chief Executive Officer Whittaker Corporation Los Angeles, California Federal Reserve directors bring management expertise to the task of overseeing Reserve Bank operations. They also provide first-hand information on key economic develop ments in various areas of the District, complementing the Bank's internal research efforts. In addition, Board mem bers give advice on the general direction of monetary policy, especially with regard to the Bank's discount rate. The Head Office Board has specific responsibility for initiating changes in the discount rate , subje ct to rev iew and approval by the Board of Governors. Frederick G. Larkin, Jr. Chairman of the Executive Committee Security Pacific National Bank Los Angeles, California Cornell C. Maier, Deputy Chairman President and Chief Executive Officer Kaiser Aluminum & Chemical Corp. Oakland, California Ole R. Mettler President and Chairman of the Board Farmers & Merchants Bank of Central California Lod i. California Dorothy Wright Nelson Dean and Professor of Law University of Southern California Law Center Los Angeles, California Clair L. Peck, lnr . Chairman of the Board C. L. Peck Contractor Los Angeles , California Malcolm T. Stamper President The Boeing Company Seattle, Washington J. R. Vaughan Chairman, President and Chief E xecutive Officer Knudsen Corporat ion Los Angeles , California Robert A . Young Chairman of the Board and President Northwest National Bank Vancouver, Washington Federal Advisory Council Chauncey E. Schmidt Chairman, President and Chief Executive Officer The Bank of California, N A San Francisco, California 24 Alibrandi Maier M ett ler Larkin Peck Vaughan Nelson Stamper Young 25 Federal Ad visory Council Schmid t Los Angeles Chairman of the Board Caroline Leonett i Ahmanson Chairman of the Board Caroline Leonetti Ltd. Ho llyw ood, California Fern Jellison General M anager Social Services Dep artm ent City of Los Angeles Los Angeles, Califo rnia Ahm anson J ames D . McMahon President Santa Clarita Nationa l Bank Newhall, California Harvey J. Mitchell President First National Bank of San Diego County Esco ndido, California Jellison Joseph J. Pinola Chairman and Chief Executive Officer Western Banco rporation Los Angeles, California M cM ahon Harvey A. Procto r Chairman of th e Board Southern Califo rnia Gas Co mpany Los Angeles, California Mitchell Pinola Proctor Togo W . Tanaka President Gramercy Enterprises Los Ange les, California Tanaka 26 Portland Chairman of the Board Loran L. Stewart Dire ctor Bohemia, Inc. Eugene, Oregon Me rle G. Bryan President Forest Grove National Bank Forest Grove, Oregon Stew art Jack W . Gustavel President and Chief Executive Officer The First National Bank of North Idaho Coeur d 'Alene , Idaho J ean Mater Partner and General Manager Ma ter Engineering Corvallis, Oregon Phillip W . Schneider Northwest Regional Executive National Wi ldlife Federation Portland, Oregon Bryan Gustav e! Kenneth Smith General Manager The Confederated Tribes of Warm Springs Warm Springs, O regon Robert F. Wallace Chairman of the Board First National Bank of Oregon Portland, Oregon Schneide r Smith 27 Wallace Salt Lake City Chairman of the Board Wendell I. Ashton Publisher Deseret News Publishing Company Salt Lake City , Utah Robert E. Bryans Chairman o f the Board and Chief Executive Officer Walker Bank & Trust Company Salt Lake City , Ut ah Rob ert A. Erkins Geothermal Agri / Aquaculturist White Arrow Ranch Bliss, Idaho Ashton David P. Gardner President Un ivers ity o f Utah Salt Lake City, Utah Mary S. Knox Chairman o f the Bo ard Idaho State Bank Glenns Ferry, Idaho Bryans Erkins Fred H. Stringham President Valley Bank and Trust Company South Salt Lake City , Utah j . L. Ter teling President The Ter teling Company , Inc. Boise, Idaho Gardner Knox Stringham Terteling 28 Seatt le Chairman of the Board Lloyd E. Cooney President and General Manager KIRO-Radio & Television Seatt le, Washington Merle Ad lum Vice President Seafarers Internatio nal Union of North America AFL-C10 Seattle, Washington C. M . Berry President Seafirst Corporation and Seattle-F irst National Bank Seattle, Washi ngton Cooney Douglas S. Gam ble President and Chief Executive Officer Pacific Gamble Robinson Company Seattle, Washi ngton Donald L. Mellish Chairman of the Board National Bank o f Alaska Anchor age, Alaska Adlum Berry Gamble Mellish Parks Smith Virginia L. Parks Vice President for Finance and Business Seatt le University Seatt le, W ashington Rufus C. Smith Chairman of the Board The Fir st National Bank of Enumclaw Enumclaw , Wash ington 29 COMPARATIVE STATEMENT OF ACCOUNT (Thousands of Dollars) December 31, 1978 Assets Go ld certificate acco unt . Special D rawi ng Rights certificate account Fede ral Reserv e not es o f o ther Feder al Reserv e Banks O ther cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . '!, 1.2gll.lJ64 14<J.OOO . . . Lo ans to Member Banks: Secured by United States Go ve rn ment and Agency obl igatio ns Other eligible paper O ther paper . () ltl,140 . -+,450 o . . 0:; " 1.299,982 152,000 0 3U 12 214,500 38,100 0 2.J ,()OO . Feder al Age ncy obligatio ns s '1) 1,046,7 45 ) 47" 18' (, ,., 51'.LJb '1 I If 6.5r 5,589,142 7,272,340 1,652,506 ;, 13 304,689 $14,513,988 $15,8 13,333 Unite d States Go vernment secur ities Bil~ . No tes Bond s . . Total United States Government securities Total loan s and securities . . Cash item s in proc ess of co llections Bank p rem ises Operating equipm ent /,1..1.38'1.026 . q,166 . Other assets: Denomin ated in foreign currencies All ot her 2,0 31,377 9.698 8,555 1644 b4' . ::' -'f36 224,700 1,507 ,133 2.51>7 $ l,515,b'J 2 Total assets s S 14.()4;· ,44U . $2 1,078 ,090 Liabilities Federal Reserve note s Deposits: M emb er bank - reserve acco unts . . . . . . . . . . . . . . . . United States Treasurer-general acco un t . . . . . . . . . For eign " Other deposit s 1(, ':J2 . . . . . " To tal deposits . Deferred availability cash items Ot her liabilities . .1) :;0 l17 f 7 3t -) ~ 'oh <:" ~ I ... /',.2 -1» 12,132 ,792 7,10 2,59 2 594,391 28,378 64,451 (,) s 7,789,8 12 o )h5 S-O'lY 559,03 5 291,977 ~5b,244 $20,773,616 ,..4,59,q 1445% 152,237 152,237 j,19.04:'4-\O $21,078,090 0 . . To tal liabilities 1,664 ) )1 ~- '11l Capital accounts Cap ital paid in Surp lus . . Total liabilities and capital account s Co ntingent liability on accept ances purchased fo r for eign co rrespondents 30 . EARNINGS AND EXPENSES (Thousands o f Do llars) December 31, 1978 Current earnings Discount s and advances . . . . United States Gove rnm ent securities Foreign currencies , .,.,,.,..,.,.,.... All ot her . . 'f,Jj '1IF , I~, ':~ .' ':1 -"J $ 3,895 1,09 1,753 270 53 $1,095,971 Total current earnings Current expens es To tal current expenses . Less reimb ursement fo r certain fiscal agency and o ther expenses S h 1 Bb :, Net expenses S; ., 2 s 66,460 6,044 s 60,416 t( ) ) i 1 ')(:,fl Profit and loss $ 1,035,555 Current net earnings .. Additions to current earnings: Pro fit on sales of United States Go vernm ent securities (net) Pro fits on foreign exchange transactio ns All ot her .. , ' s s Total addit ions Deductions fro m current net earnings: Loss on fo reign exchange transaction s (net) . Loss on sales o f United States Go vernmen t securities (net) All oth er ~, )f. -' ~i 70,795 17,262 239 s 88,296 Ilj) " ..'7,ClO Net additio ns (+ ) ded uctions (-) . Assessments fo r expenditur es of Board o f Gov erno rs . Net earnings before payments to Unite d States Treasur y Dividends paid . . Paymen ts to Uni ted States Treasury (int erest on Federal Reserv e no tes) -24:;(,') - S-S 1-\21 'lL:; H ·11'l ... Transferred to surp lus Surplus J anuary 1 , . , Surplus December 31 t) , " .2 )-~ 1)), ' ) r) ~ .·;4 31 )t.;H 685 s l' iJil Total deductions 0 0 685 s s - 87,6 11 - 7,488 940,45 6 8,881 923,936 7,639 144,598 152,237 San Francisco Branch P.O . Box 7702 , San Francisco, California 94120 Los Angeles Branch P.O . Box 2077, Termi nal Annex , Los Ange les, Califo rnia 9005 1 Portland Branch p.o. Box 3436, Portland , O regon 97208 Salt Lake City Branch P.O. Box 30780, Salt Lake City, Utah 84125 Seattle Branch P.O. Bo x 3567, Terminal Annex, Seattle, Was hington 98124 Produ ced by W illiam M. Burke, D irector of Public Information, and Karen B. Rusk, Manager, Publication s and Graphics; Graph ics designed by William Rosenthal, Graphi c Artist; Federal Reserve Bank of San Francisco. 32