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Federal Reserve Bank of San Francisco
A,nnual Report 1980



Table of Contents


From the Boardroom
National Scene
Western Business
Western Fi nance
Western Central Bank







FEB 20 1 81

John J. Balles

Caroline Leonetti Ahmanson
Deputy Chai rman

Cornell C. Maier
Cha irman

The year just past was one of the most
difficult and most challenging that the
Federal Reserve System has experi­
enced since its founding two-thirds of
a century ago. The 1980 environment
was d ifficult because the nation suf­
fered severe ups-and-downs in busi­
nessactivity during the year, along with
a continuation of the worst peacetime
inflation in its history. Yet 1980 also
provided hope for the future, because
Congress in March passed new legisla­
tion designed to create greater competi­
tion in financial markets and to provide
the Federal Reserve with stronger
weapons for its continuing struggle
against inflation.
The national economy produced $2.6
trillion worth of goods and services in
1980-roughly the same amount, in
real terms, as during 1979, despite the
very sharp decline in business activity
in the spring months of the year. The
overall stabi Iity of real output was dou­
bly remarkable, in view of the serious
problems affecting some of the nation 's
basic industries, such as steel, autos,
and home construction. Despite these
problems, some areas of the country
showed modest growth in activity dur­
ing 1980-especially the massive nine­
state area served by the Federal Reserve
Bank of San Francisco. This area
accounted for one-sixth of the national
output, and again grew faster than the
rest of the nation, as it has throughout
the enti re past decade.
The Federal Reserve System encoun­
tered difficu Ities in its struggle against
severe inflation, as prices increased
9 percent according to the broad mea­
sure of GI'JP price change-and in­
creased considerably faster according
to the more widely reported consumer­
price index. This situation reflected the
Federal Reserve's problem of being
"the only game in town" in the absence
of parallel tightening actions from gov­
ernment fiscal policy. Following an
operating technique adopted in Octo­
ber 1979, the Fed tried to limit money
growth during 1980 by controlling the
quantity of bank reserves rather than
by tightly pegging the cost of bank

reserves. Money growth fluctuated
substantially during the year, in a vola­
tile atmosphere characterized by con­
tinued inflation and by severe swings in
business activity and interest rates.
Nonetheless, the Systemwas successful
by year-end in bringing standard mon­
ey-growth measures close to the targets
announced early in the year.
A new financial era opened in March,
when the President signed into law the
Depository Institutions Deregulation
and Monetary Control Actof 1980. This
pathbreaking piece of legislation,
among other things , will promote great­
er equity and improved monetary con­
trol by extend ing reserve requ irements
to all depository institutions with trans­
action (chec k-type) accounts and non­
personal time deposits. In addition, it
will promote greater efficiency in
financial markets, by providing access
to Federal Reserve services, at explicit
prices, for all depository institutions
subject to reserve requirements.
Implementation of the Monetary Con­
trol Act meant a massive increase in
workload for the Federal Reserve Bank
of San Francisco. Today, our institution
serves not only its original basic constit­
uency of 147 member banks, but also
several thousand other banks and thrift
institutions throughout the West. In
1980, many Bank departments became
involved in carrying out the provisions
of the new legislation, under the super­
vision of a senior-management group
called the MCA Policy Committee.
Bank personnel designed systems to
handle the new pricing and billing
functions, developed computer pro­
grams to perform these new functions
and to process reports from a sharply
expanded constituency, developed
plans for broader access to credit facil ­
ities, restructured reserve accounts, and
created staffing plans to meet all these
new operating burdens.
Management benefited greatly during
1980 from the broad-based experience
and judgment of the Bank's directors at
Head Office and four branches. The
directors provided guidance on major


From the
management decisions and planning
goals, especially in regard to the im­
plementation of the MCA legislation. In
addition , they supplied key information
on economic and financial conditions
as support to the Federal Reserve's for­
mulation of monetary policy. Today, 37
public-spirited men and women serve
asdirectors, representing a great variety
of economic interests and non-profit
organizations from every area of the
West. And in the future, we hope to
obtain useful guidance on implemen­
tation of the MCA program from an
advisory group drawn from our ex­
panded constituency.
We are grateful to all these individuals,
and also to those who completed terms
as directors during 1980 . We owe a
great debt of gratitude to these former
directors : Chairman Loran L. Stewart
(Director, Bohemia lnc.) and Kenneth
Smith (General Manager, Confederated
Tribes of Warm Springs) at our Portland
office; Robert E. Bryans (Chairman of
the Board, Walker Bank and Trust Co .)
and Mary S. Knox (Chairman of the
Board, Idaho State Bank) at our Salt
Lake City office; and Chairman Lloyd E.
Cooney (President and General Mana­
ger, KIRO-Radio and TV) and Rufus C.
Smith (Chairman of the Board, The First
National Bank of Enumclaw) at our Se­
attle office. Finally, we wish to express
our appreciation to our officers and
staff, whose dedication to the efficiency
of Bank operations in 1980 enabled us
to expand and improve our services to
the financial community and to the
general public.
Cornell C. Maier
Chairman of the Board
Caroline Leonetti Ahmanson
Deputy Chairman
John J. Balles
February 1, 1981



The new decade began badly for the
national economy. The economy pro­
du ced $2.6 trillion worth of goods and
servi ces in 1980, as gross national
produ ct (adjusted for inf lation) roughly
matched the precedin g year's total. But
that seemi ng stability masked severe
gy ratio ns in business activ ity over the
course of the year. The first quarter w as
marked by a specu lative upsurge in
co mmod ity prices ; the second qu arter
wa s marked by a near-record qu arterly
decline in real output, and that w as
followed by a modest recovery in the
second half of the year. Throughout it
all, rapid inflation and wildl y flu ctu at­
ing interest rates undermined the
strength of the econom y.

Real Growth and Inflation

Change (%)

1r.== = = = = = :::::::;,
Nominal GNP

M any anal ysts referred to 1980 as a
recession year, but many industries
show ed few signs of recession - and
the same was true of certain sectio ns of
the country, especiall y the Sunbelt
states of the South and West. The re­
verse was true elsewhere , however,
especially in the Snowbelt states of the
Northeast and Central region s. Indeed,
so me observers used the term " depres­
sio n" to describe the pi ight of autos,
steel, hou sing, agriculture, and other
key secto rs of the national economy.
But tho se w eaknesses were largely off ­
set by an upsurge in activ ity in the ener­
gy indu stry, not to mention defense
manufacturing and offi ce construction.

Sluggish Demand
Consumer spending, whi ch accounts
for two-thirds of total GNP, remained
flat overall (in real terms), but buyers
redu ced spending sharply in some
areas because of wariness about future
income prospects. Households record ­
ed less than a one-percent gain in real
di sposable income-the weakest per­
form ance of the past half-de cade. Also,
mad e cautious by rising prices and fears
of future inflatio n, they boo sted their
savi ngs rate a half-percentage-po int
higher than in the preceding year, to 5.7
percent of income. Another sign of cau­


tion was a reduction in credit usage;
during the second qu arter in particular,
consumers responded to Federal Re­
serve selective credit restraint s by cut­
ting back on all type sof con sumer cred­
it, in the sharpest suc h redu ction on
Big-ticket items, especially autos, felt
the full impact of th is cautious buying
attitude. Domestic moto r-vehicle sales
plummeted 25 percent in 1980 to
about 8.7 million units-the lowest
level in almost two decades. That sales
decl ine reflected aII the factor s noted
above as well as others peculi ar to the
industry -su ch asthe high cost of autos
and gasolin e, plu s a continued con­
sumer preference for small foreign
model s. Resident ial-hou sing activ ity
also declined sharply as builders started
work on onl y 1.3 mill ion new homes­
down 25 percent fo r the year and not
much more than half the 1978 level.
Business fixed inv estment fell about 3
percent (in real term s) from the record
1979 level. This weak performance
could have been expected in view of al l
the negative factor s affecting co rpo rate
decision makers, such as the sluggish
performan ce of sales and co rporate
earning s, not to mention the record
costs of corporate bo rrowing. Business
firms also reduced their invento ries
somewhat , espec iall y after midyear,
but their earlier cautious inventory­
purchase attitud es made it unnecessary
for them to reduce stoc ks drastically, as
they had to do during the 19 75 reces­
sion. In the government sector , real
spending remained relativel y flat (fo r
the th ird straight year) at the state-and­
local level, but continued to increase at
the Federal level under the spur of a
growing defense bu ild-u p.

The foreign trade sector represented by
far the strongest element in the GNP
statistics, however, as exporters record­
ed a J Ovpercent jump in business (in
real terms). The nation's current ac­
count moved close to balance during
the year , on the basis of this strong
export performance and a continued
rise in income from U.s. overseas
investments. The exchange value of the
dollar surged early in the year, and
again after midyear, reflecting the
strengthen ing of the payments position
as well as the attractiveness of high
interest rates to foreign investors.
Weak Output and Employment
Industrial production declined almost 4
percent for the year, but the fortunes of
individual industries varied significant­
ly. Production of consumer durable
goods dropped 12% percent, headed
by the near-collapse of auto manu­
facturing, whereas production of con­
sumer nondurable goods remained
stable for the year as a whole. Business­
equipment output increased slightly,
while defense-equipment output rose
4 % percent and headed even higher at
year-end . In contrast, farm-equipment
production dropped 15 percent, in re­
sponse to a sharp drop in demand from
the nation's hard-pressed farmers. A se­
vere drought, the Russian grain embar­
go-and above all , a one-third increase
in production expenses over a two-year
period -pushed the farm sector deeply
into the red. As a result, net farm in­
come (in real terms) dropped roughly
30 percent for the year .
Employment actually increased slightly
in 1980, as a second-half gain of almost
a million jobs offset a steep early-year
decline. These figures reflected a ten­
dency-evident throughout the last
several years-for industries to expand

by adding labor rather than capital ,
because of such factors as a sharp in­
crease in investment costs relative to
wages. But the combination of heavy
staffing and sluggish output spelled
trouble for productivity, as output per
hour actually dropped for the third
straight year. (With labor compensation
rising sharply, unit labor costs increas­
ed again at near double-digit levels,
thus putti ng heavy pressure on prices. )
Still, these developments helped lim it
the rise in the unemployed share of the
labor force ; the jobless rate averaged
7.1 percent for the year, but this was less
than generally expected. Meanwhile,
more than 58 percent of the adult popu­
lation held jobs during 1980-a figure
exceeded only during the 1978-79
peak of the boom .
Price Shocks
The national and international econo­
mies were severely affected during
1980 by the effects of the second " o il
shock" -the 1979-80 increase of al­
most 150 percent in the average price
of OPEC oil. Like the previous shock of
the 1973-74 period, the recent price
hikes acted as a giant worldwide sales
tax, raising prices and draining off pur­
chasing power that would otherwise
have been available for purchases
of other goods and services . Soaring
OPEC prices helped boost costs
throughout the u.s. economy and
discouraged business investment, con­
tributing to the productivity slowdown
noted above.
The oil shock's impact tapered off in the
second half of the year, but it left con­
sumers with energy bills almost twoth i rds higher than they were just two
years ago. As that shock waned, an­
other shock arose because of poor
growing conditions in this country and
abroad, which sent food prices soaring
in the second half of the year. The con­
tinued upsurge in labor costs through­
out industry, and above all, the pres­


Change in Produ ction


12 1 ~"'
-=:J:::== 1 ::.\:==~ I

o1 j::::=t~;IIJ:='.='~




sures on monetary poli cy generated by
yet another massive Federal deficit ($60
b illi on in fiscal 1980)-added to the
vario us shoc ks to create severe infl a­
tion ary pressu res throughout the year.
Prices increased about 9 percent for the
year, acco rd ing to the G N P " deflato r,"
the broadest measure of price change.
The increase in inflation w as several
percentage points high er wh en mea­
sured by the more widely reported con­
sumer-price index, but that increase
w as overstated because of the CPI's
treatment of hom e-purchase and mort ­
gage-interest costs (w hic h are not di­
rectl y inc luded in the GNP deflator). In
any event, the 1980 pri ce perfo rmance
w as the worst since the inflationary up­
surge of the mid-1970' s. And for the
first tim e since that dism al period , 1980
witnessed a small decline in the aver­
age ind iv id ual's well-being, as mea­
sured by the yardstic k of real d isposable
per capita income.

Consumer Price Change





Policy Problems
The Federal Reserve encountered d iffi­
cu lties in its struggle again st the severe
infl ation , reflecting the Fed' s problem
of being "the only game in town " in the
absence of parallel tightenin g actio ns
from government fiscal poli cy. Follow­
ing a change in operati ng techn iqu es
adopt ed in O ctob er 1979, the Fed tried
to limit money growth during 1980 by
co ntrolling the quantity of bank re­
serves rather than by tightl y pegging the
cost of bank reserves(the Federal-funds
rate). Market participants had troubl e
adj usting to this new operating environ­
ment , however, which implied a broad­
er range of interest-rate fluctu ation s
acco rd ing to changes in business and
credit co nd itio ns. Indeed, interest rates
fo llowed a roll er-coaster course, rising
to hi storic highs during the speculative
boom of early 1980 , falling sharply in
the spring period, and then rising to
new peak levels in the late fall months.


The Federal Reserve's policy actio ns
made headli nes on several occasio ns
during the year. In mid-March , amidst
fears of run aw ay infl ation and a pos­
sible liqu idity crisis, the Fed (at the
Ad ministratio n's request) imp osed a
cred it-restraint progr am to curb money
and credi t grow th. This progr am in­
cluded a 9-percent Iimit on each bank's
loan expa nsion, a 3-percentage-point
discount rate surcharge on large banks
whi ch borr owed frequently at the Fed's
d iscount w indow , and a 2-per centage­
point increase in marginal reserve
requ irem ents on large CD ' s and oth er
" managed liabil ities" of large banks­
plu s a 15-percent special depo sit on
increases in certain types of co nsumer
loans. The Fed terminated the credit­
restraint pro gram around midyear as
busin ess activity weakened. However,
the Fed then foll owed more traditional
techniqu es of mo netary restraint after a
summ er-period upsurge in mon ey
growt h. It acted by restricting the avail­
abi lity of bank reserves throu gh its
op en-m arket operatio ns, by raising its
discou nt-r ate again to a record 13 per­
cent , and by reim posing a surcharge on
frequent d iscount-window borrowing.
The Fed w as onl y moderately success­
ful in curbing money grow th in the face
of sharp changes in infl ation expecta­
tion s and wide fluctuations in credit
demands. The growth rate of the nar­
row M -1A aggregate (currency plu s
bank demand deposits) by year-end
was within the Fed' s announced target
range of 3'I2-to-6 percent growth. But
the growth in the bro ader aggregates,
M-l Band M- 2, reached or slightly ex­
ceeded the upper bound s of their re­
spective target ranges, reflecting the
rapid rise of certain interest-sensiti ve
liabilities included in the aggregates.
M-l B includes M-1 A plus other check­
able depo sits (prima ri Iy the so-cal led
ATS and NOW acounts), and M-2
includes M-1 B plu s sma ll time and
savings accounts , mone y-m arket mu­
tual-fund shares, and certain other

Volatile Credit Markets
Total fun ds raised in 1980 ' s fina ncia l
markets fell below the previous year's
tot al, acco rding to prelimi nary esti­
mates, because of the record cost of
cre dit and a recession-induced decline
in overa ll cred it de ma nd. Nonethe less,
the pub lic sector's snare of the total
increa sed substantially during the year.
The Federal debt grew at least twice as
fast as in 1979 , as inf lation and reces­
sio n pressures boosted Federal spend­
ing and forced the Treasury to step up
the pace of its fun d- raising efforts. State
and local govern me nts w ere also more
active in deb t markets, espec iall y
through incr eased sales of tax-exempt
mo rtgage revenue bond s. Federall y­
spo nsored agency debt, by cont rast,
grew mor e slowly than in 19 79.
In the private secto r, co rpora te busi­
nesses raised rou ghly the same amo u nt
offund s as in 1979, primarily in the
long-t erm end o f the mark et. In fact,
co rporate lo ng-term de bt grew by a rec­
ord amo unt in 1980-more than half
again as much as in 1979 -despite
widespread fears abo ut the " d isappear­
ance" of the bo nd market. New cash
offerings of cor po rate equiti es also
grew rapid ly d ur ing the year. In co n­
trast, the mortgage and co nsume r-deb t
markets showed co nside rable wea k­
ness, reflecting the co llapse of consum ­
er hou sing and auto dem and , aswe ll as
the imp act of the cred it-restrai nt pro­
gram and the dry ing up of savings in­
flows at mortgage-lendin g institu tio ns.

Fin anc ial grow th patterns reflected not
onl y the wide swin gs in business activ­
ity, but also the wid e swings in interest
rates w hic h led to new record highs at
the spri ng and fall peaks. The yield
cu rve traced by instruments of gradual­
ly inc reasing maturity remained invert­
ed for much of the year-a typical in­
fl ation phenomenon -as short-term
rates rose above lon g-term rates during
the spri ng and fall periods. The prim e
business-loa n rate rose from 15"\4 per­
ce nt in J
anuary to 20 percen t in Ma rch,
fell to 11 percent in August, and then
rose again to 2 1V2 in Decembe r. Simi­
larly, corporate Aaa-rated bond rates
rose from 11 Vz percent in Ja nuary to 14
percent in Ma rch, fell to 11 percent in
lu ne. and rose again to over 14 percent
in December. Corporate-borrowing
pattern s shifted stro ngly in response to
these sharp fluctu ation s. Businesses re­
lied heavil y on short-term bo rrowings
during the several epi sodes of sharply
rising rates, but they issued massive
amounts of long-term debt w hen rates
fell in the spring month s, in an effort to
" lock in " thei r cost offundsand reduce
their rel iance on short-term fi nancing.
Mortgage bor row ing foll ow ed a similar
stop-and-go pattern, as rates rose to
a record 18 percent in the spri ng,
dro pped to 12 percent in the late sum­
mer, and then approac hed the earlier
peak around year-end .

Sluggish Bank Credit
Bank c redi t increased only about 9 per­
cent in 1980-far below the grow th
of the 1978-79 peri od -and muc h of
that growth was co ncentrated in new
securi ties investment rather than new
loans. The loan slowdown largely re­
flected a massive runo ff of consumer
loans-down 5 percent for the year ­
as cons ume rs avo ided taking on new


Growth of Money Supply




19 79


Interest Rates




debt even after the midyear termination
of the credit-restraint program. Busi­
ness loans, in contrast, grew at a rela­
tively healthy 11-percent pace over the
year, despite a decline in this category
during the spring recession period. Bus­
iness loans expanded rapidly in the fall,
as many banks offered financing to
firms that couldn't find funds in the
corporate-bond market -and addition­
ally, offered sub-prime loan rates to
many firms in an attempt to compete
with the commercial-paper market.
Banks' real-estate loans increased
almost 8 percent during the year-and
in fact increased most rapidly in those
several crunch periods when many
savi ngs-and-Ioan associations ran out
of funds to lend on home mortgages.





Funds for financing this bank-credit ex­
pansion were costly to come by, be­
cause of the continuing shift of funds
from "core" deposits (demand and
passbook-savings deposits) to more ex­
pensive sources acquired at market­
determined interest rates.The most rap­
id (15V2 percent) growth occurred in
small-denomination time deposits,
which included the popular 6-month
and 30-month money-market certifi­
cates. Banks also relied heavily on
large-denomination ($100,000 and
over) time deposits, especially in those
several tight-money periods when they
actively sought lendable funds.


Stable Bank Earnings
Bank earnings in 1980 exceeded the
1979 peak, according to preliminary
evidence, despite the impact of record
interest rates on both sides of banks'
balance sheets. Wholesale (commer­
cially oriented) banks experienced a
large increase in operating income be­
cause, with their substantial floating­
rate loan base, prime-rate increases
raised the return on a sizable portion of
all their assets. But by the same token,
they experienced dramatic increases
in the cost of funds, because of their
heavy reliance on short-term, interest­
sensitive liabilities. Retail (consumer
oriented) banks experienced almost the
reverse situation. Because their assets
were heavily concentrated in fixed-rate
mortgage and consumer loans, they
failed to receive higher returns on the
bu Ik of thei r po rtfo Iios when rates
increased. But because their deposits
were heavily concentrated in fixed-rate
"core" deposits, they generally experi­
enced smaller increases in interest
costs-except for those cases where
funds shifted out of such deposits into
certificates bearing market-determined
interest rates.
On balance, increases in banks' operat­
ing income generally outpaced in­
creases in thei r cost offu nds. StiII, re­
sults varied widely for individual banks
because of their different responses to
1980's unsettled credit-market condi­
tions. The net interest spread -the d if­
ference between the rate of return on
assets and the rate needed to cover the
cost of funds--narrowed severely for
many banks during the early-year
crunch, and again during the similar
period in late fall. Nonetheless, the
banking industry generally coped very
well with 1980's highly volatile credit

Th e Western economy experienced a
medi ocre year in 1980, suffering first a
sharp (but brief) recession and then a
falteri ng recove ry tow ard year-end .
(This region , the area served by the San
Franc isco Federal Reserve Dist rict, in­
cl udes all nine states w est of the Con­
tine ntal D ivide-see map, page 23.)
Some industries mi ssed all the suffer­
ing , but others-especial ly hou sing­
related indu stries-felt the full im pact
of all the negative forces operating on
the nation al eco no my. And at year-end,
inflatio n-b loated in terest rates prom­
ised furth er problem s for at least the
ear ly part of the new year.
Still , business activi ty in these Western
states remained somewh at stronger
than in the " Snow belt" states of the
No rtheast. M uch of this relative
strength stem med from co nti nued
heavy in- m igration from other parts of
the country and other parts of the
w o rld . Accordin g to 1980 Census data,
the West gaine d 23 percent in popul a­
tion over the past decade -mo re than
tw ice the gai n record ed elsew here. The
regio n' s 37.7 million peopl e - wh ether
they arrive d by car, pl ane, o r stork ­
represent a stro ng underpinn ing of
de mand in the 1980's as in the "
1970' s.
Those peo p le also mean add itio nal
po litica l pow er, because the reappor­
tion ment req ui red by the 198 0 Census
w ill mean tw o new Con gressional seats
for Califo rnia, and on e new seat each
fo r W ashi ngto n, Oregon, Arizona,
N evada and Ut ah.

Modest Gains
Civi lian em ploy me nt in this nin e-state
area rose almost 1 % percent in 1980
- an increase of rou ghl y 200,000 jobs
- to reach about 16.2 m illion (annual­
average basis). That job expansion ,
how ever, rep resented o nly a fraction of
the gai ns reco rded du ring the 1976-79
boo m . But in terms of jo bs as well as
populati on , the We st co ntinued to out­
pace the rest of the nation , as it has
do ne since the early 1970's. (In this
recessio n-and-recovery year, civ iIian
emp loyme nt elsew here in the nation
barely matched the 1979 average).
Empl oyment gains still were modest

th rough out region al industries; even in
stro nger indu stries, suc h as aerospace,
the jo b exp ansion w as co nsiderably
w eaker than in earlier years.
Reflecting th is spotty jo b perform ance,
regional unemployment rates in­
creased considera bly during 1980, al­
though a sharper incr ease elsewhere
raised the natio nal rate above the re­
gio nal figur e for the fir st time in years.
Califo rnia's jo bless rate, for examp le,
rose fro m 6.2 to 6.8 percent between
1979 and 1980, wh ereas the national
rate jumped from 5.8 to 7.1 percent (on
average) du ring the year. For more than
a decade, California's jo blessrate had
hovere d one or tw o percentage points
abo ve the national rate, because of
heavy in-m igration (w hich bolstered
the size of the labor force) and prob ­
lem s wi th key regiona l industries. That
situa tio n c hanged by the end of the
'70's as the state increasingly outp er­
forme d the nationa l eco nomy. Indeed,
throu ghout 1980, the Cali forni a job less
rate lagged far below the 10-percent
fig ure reached in the 1975 recession.
Person al incom e in the West in creased
11 percent in 1980, to about $385 bi l­
lion . But hou seholds lost ground in real
terms, because of a sharp accelera tio n
in co nsumer pri ces. The co nsumer­
price index increased abo ut 13V2 per­
cent at the national level, but by several
percentage points mo re in Califo rnia
because of the greater und erl yi ng hou s­
ing demand in that area. In both cases,
the incre ases were overstated because
of the overweighti ng of hou sing costs in
the price index -but they rem ain ed in
dou ble d igits even after adjustmen t for
that facto r.
Retail sales, in real terms, co nsequen tly
remained flat (or worse) throughout the
region, especially in autos and housing­
related goods. Co nsumer cred it-card
buying, wh ich had been held in check
by the credit-restraint program during
the second quarter, rebounded after
midyear but then softened again during
the fall month s. And in Decemb er,
many retailers resorted to pre-Christmas
sales to attract scarce custom ers and to



Change in Emplo yment
Percen t



2 It
":::I::::::Ij,==::.. ,,::\r

-2 L ­





avoid paying high interest rates on un­
wanted inventory.
Western governmental agenc ies also
had to pull in their belts, because of a
recession-caused slowdown in tax rev­
enues and the impact o f the various
tax-and- spendin g lim itation s ado pted
by regional voters ove r the past several
years. For exampl e, California' s state
government had eased the fiscal
squeeze on other units by using up
budget surpluses of $3.7 bill ion during
the 1978-80 period , but it now faces an
empty larder as it enters 1981, which
w ill make futur e tax inc reases and/o r
service cutbacks almost inevi table in
that state. Al aska, in contrast, w ith its
state own ership of o il lands, parceled
out some of its unexpected w ealth by
repealing state incom e taxes for the
1979-84 period and decl aring a cash
dividend for all Al aska residents except
new arrivals .
Industrial Performance

Some Western indu stries, espec ially
aerospace-equipment manu facturing,
recorded sales and employ ment gains
during 1980, although most of the
strength was co ncentrated in the earl y
part of the year. O rders for co mmercial
aerospace produ cts slowed during the
second half because of the impact of
the national recession . Orders for
commercial jet transport s fell off sharp­
ly, reflecti ng the decl ine in passenger
traffic and the soari ng fuel costs which
affected the wo rld ' s airli nes. Civ ilian
orders for electro nic equi pment also
slowed as business firm s and pri vate
hou sehold s spent less on co mputers,
communication equi pme nt and elec­
tronic games.
Defense and space business remained
strong th roughout the year, however, as
Western firm s received a grow ing share
of the Federal government's expand ing
military and space outlays. O ngoing
programs receiving more fundin g in­
cluded the cruise-missile program,
w hich moved from the development to
the produ cti on stage du ring the year.
Controversy meanw hile erupted over
the Pentagon' s selectio n of Utah and

Nevada as probable sites for the im­
mense shelter-and- roadw ay system
needed for the deployment of the M X
mi ssile.
The region al steel industry suffered a
year of decl ine. Two major region al
produ cers began to clo se down high­
cost produ ct ion and fabri cating facili­
ti es, leadin g to a 20-percent decl ine in
raw producti on for the year. Foreign
produ cers, benefiting from thi s shut­
down, thu s increased their share of the
W estern market from 34 to 43 percent.
But the size of the market stiII dec!ined,
because of a slow down in indu strial
bu ild ing, residential co nstruction, and
hou sing-related markets. In contrast,
the North west alum inum indu stry suf­
fered from supp ly probl ems w hic h
made it d ifficult to keep pace wi th
heavy demand . Aerospace-related de­
mand for aluminum remained relative­
ly strong, but production suffered from
the Northwest's prolonged dry spell,
wh ich forced recu rri ng cutbacks in
power supplies from Federal hydro­
electric faciIiti es.
The Western copper industry experi­
enced the ill effects not onl y of the re­
cession but also of a summer-long
strike . Early in the year, produ cers ben­
efited from the speculativ e buying fever
that sent co pper prices-along with
go ld and silver prices-soarin g upw ard
on the New York and London commod­
ity excha nges. Refined-copper pri ces
jumped a spectacular 40 percent in
early January, to a near-record $1.40 a
pound, but by year-end fell below the
origi nal level as the hou sing and auto
slumps dr ied up demand for the metal.
The Western sil ver-mining indu stry also
experienced the unsettling effects of a
speculative bubble and ensuing co l­
lapse in pri ces. The average produ cer
pri ce qu adrupled in 1979 and then al­
most doubl ed again in early 1980, to
reach a record $48 an ounce-but then
fell precip itou sly, and after consider­
able fluctuatio ns, reached about $15
at year-end. Still, the pri ce upsurge
spurred a flur ry of exploratio n and
deve lopment w ork at a numb er of.mi n­
ing locations, especially the century­

o ld diggings in the Coeur d'Alene dis­
trict of Idaho.
Energy Developments

Regional petrol eum co nsumption de­
c lined during 1980, partly because of
the recession, but also because of the
pr ice upsurge that foll owed in the wa ke
of the Irani an revolution. Western util ­
iti es and indu strial plants reduced their
demand for fuel o il, taking advantage
of the increased availab ility of c1 ean­
burning natural gas. But gasoline and
diesel-fuel consumpti on fell even more
sharply as higher pump prices persuad­
ed drivers to reduce their consumption
per vehicle. Still, Western crude-oil
pro ductio n increased sharply for the
fourth straig ht year, reflec ting the late­
1979 boost in A laskan pipelin e capac­
ity (and flowthrough) from 1.2 to 1.5
million barrels per day. The import
share of the region al market continued
dropping to 20 percent - from 48 per­
cent at the 1976 peak-as Western re­
fineries substituted mor e and more
Alaskan oil for imp ort s.
The continuing program to decontrol
we llhead pri ces enco uraged the high­
est level of drill ing activity since the
mid-1 950's. In Califo rnia, with its con­
centration of heavy-gravity petrol eum ,
the remov al of heavy-oil price contro ls
triggered a num ber of " tertiary" recov­
ery projects to extract oil remaining in
old wells after co nventional methods.
Higher prices also spurred a flurry of
activity in new areas suc h as the Over­
thrust Belt, a 2,300 -mi le ribb on of tor­
tured geology extendi ng alo ng the
Rocky Mountains from Canada to Mex­
ico . Thus far, abo ut one billi on barrels
of oil and 10 trill ion cu bic feet of gas
have been di scovered in that area, and
some experts believe that it co ntains
even more energy w ealth than Alaska's
Prudhoe Bay.

Synthetic fuels appeared closer to com­
mercial development, partly because of
soaring pri ces of conventional fuels,
and also because of the government's
authorization of $88 billion in loan
guarantees and subsid ies over the
1980-95 period to spur synfuel com­
mercialization . The first large-scale
production may come from the huge
oil-shale deposits of the Green River
formation in Colorado, Utah and Wy­
oming-oil depos its which , wh ile im­
mensel y difficult to extract, may almost
mat ch the enti re world 's proven oil
reserves. Me anwhile, several pipel ines
in the planning stage moved closer to
real ization during 1980. The Canadian
government approv ed the construct ion
of a pipeline system to bring Al askan
North Slope gas across Canada to the
Northwest states, while the U.S.
government approved a pipeline to
transport Al askan oi I between the Puget
Sound and Minnesota.
Construction Scene

An office-build ing boom represented
the strongest element in the 1980 con­
struction picture , as Los Angele s, Seat­
tle, San Francisco and other regional
centers reported a burst of activity in
this sector. Historically low vacan cy
rates, increased off ice-bu ild ing inve st­
ment values, and inflation expectations
all cont ributed to the boom, whi ch w as
nationa l and not ju st regional in scope.
In an attempt to keep the boom goin g in
the face of record high interest rates,
many institutional lenders became de­
velopers themselves by taking owner­
ship positions in joint-venture projects.
In contrast, the Western housin g mar­
ket, which had already weakened in
1979, almost coll apsed in 1980. Hous­
ing starts in the Western census region
dropped to about 280,000 units in
1980, as against 460 ,000 units in 1979,
because of severe finan cin g problems
in the spring and again in the late-fall
months . On the other hand, powerful
economic and demographic factors
continued to stimul ate housing de­
mand -and these factors suggest the
probabi Iity of a strong recovery when­
ever finan cin g problems can be over ­

com e. Many household s find housing
investment attractive because of rising
inflation expectations coupled with
the favorable tax treatment of housing.
Moreover, the West's strong eco­
nomi c-growth prospects sti mulate in­
migration and famil y form ation , further
amplifying demand. Despite fin ancing
problem s, therefore, many areas of the
West have continued to exper ience
larger price increases than the 8-to- 10
percent increases experi enced nation­
w ide. Financing con straint s also have
been less stringent in the We st, with the
devel opment of "creative finan cing"
schemes by many mortg age-lending
institutions. But in the end, their efforts
in 1980 were severely handi capped by
soaring mortgage rates and sharpl y re­
duced saving flows.

Housing Starts

M illions


The nationwide housing slump took a
severe toll on the Western lumber in­
dustry, forcing a 17-percent cut in pro­
duction and heavy layoffs on the heels
of more mod erate decl ines in the 1978­
79 period . The cutback w asaggravated
by decl ine s in other important lumber
market s, including nonr esidential con­
struction . Softwood-lumber prices thus
fell 23 percent below their fall-1979
peak by the following spring, and re­
covered onl y partwa y by year-end. The
indu stry also suffered from the Mount
St. Hel ens eruption, whi ch downed
about one billion board -feet of timber,
of which about half may not be salvage­
able. The pu Ip-and-paper segment of
the industry, in contrast, recorded
modest gain s in sales and employment
until markets began to w eaken late in
the year.
Farm Developments

Western farm ers and ranchers, lik etheir
urban cousins, were hard-pressed to
keep up with inflation in 1980. Accord­
ing to prel im inary report s, net farm in­
come w eakened substantially during
the year, as soaring produ ction costs
outpa ced an 11-percent increase in
farm-m arketing receipts. Pricesfor farm
produ cts generally lagged, because of
large harvests and recession-weakened










consumer demand, although the West­
ern indu stry benefited from drought­
caused shortage s el sewhere in the
country. The expo rt trade remained
strong, however, because of heavy for­
eign demand for the We st's wheat , cot­
ton, and specialty crops.
Harvests throughout the region gener­
ally were on the high side. Grape pro­
duction approached record levels, de­
spite a harvest-time strike , and c itrus
growers recorded bumper cro ps whi ch
sharply depressed oran ge pri ces. Sugar­
beet growers benefited from stro ng
worldwide dem and - w hich sharpl y
increased pri ces, thu s offsetti ng the
poor profits record ed in the several
preceding years. Potato prices doubled
over year-befo re level s at the height of
the summ er shortage caused by the
Eastern drou ght. Northwest cro ps (ex­
cept for ch errie s) generally benefited
from favorable grow ing condi tions, and
this helped offset losses from the Mount
St. Helens eruption - w hic h in any case
were far less than ori ginall y reported .
Cattlemen began to move onto the up­
side of the cattle cycl e. Early in the year,
many ranchers continued to reduce
their herds, thus puttin g downward
pressure on beef prices . But as the year
advanced, they began to hold cattle off
the market and expand their herds,
and beef pri ces rose co rrespo nd ingly.
Dairymen meanwhil e report ed a fairl y
profitable year, because of grow ing
demand for dairy produ cts.

While the West benefited from d rought
problems elsewhe re, it co ntinued to
make long-range plan s to overcome its
own long-term w ater sho rtages, espe­
cially through Cal iforn ia's ado ptio n of a
$5-bi IIion water-development pack­
age. The centerpiece of the package
was a planned peripheral canal to co n­
nect the Sacramento River d irectly with
the 444-mile-long California aqueduc t
that carries Northern Cal iforn ia water
to the farms and cities of semi- arid
Southern California. The legislation
also authorized major dam and other
water-development facilit ies that are
designed to meet Southern California's
needs through the remai nder of thi s
Somber Outlook
On balance, 1980 turn ed out to be a
mediocre year for the Western econ­
omy, and 1981 cou Id be mor e of the
same. Western hou sehold s, lik e their
national counterparts, have tightened
their belts under the spur of infl ation
and a tight policy response, and this
could mean weakness in consumer
markets for at least the early part of the
year. Also, Western metal s indu stries
are likely to continue sufferin g from
sluggish demand in both nation al and
international markets. And increasingly
expensive energy could again spell


trouble for the West's key touri st in­
du stry and other industr ies as wel l.
Still, the West seems certain to outpace
the rest of the U.S. economy in 1981 , as
it has in other recent years. This region ,
because of its resource base, will con­
tinue to play the dominant role in the
nation's search for a solution to its en­
ergy problems. Similarly, becau se of
the presence here of a major aerospace
indu stry, it w ill continue to play the
domin ant role in the nation's search fo r
a stronger defen se posture. O verseas
demand for the region 's farm produ cts
and high-technology produ cts, espe­
ci ally in the expand ing Pacifi c Basin
countries, sho uld pro vide further un­
derpinn ing for the regional eco nomy.

Western bank sexperienced a moderate
expansion in their loans and invest­
ments during 1980 . Despite substantial
buffeting by recession and inflation
forces, the relat ive strength of the Wes­
tern economy provid ed banks with
amp le (but expensive) fund s and ready
lending opportuniti es.
Western bank s generated ample funds
to meet loan dem and through much of
the year, but had to pay record high
market rates to do so. With those funds,
they increased out standing bank credit
by nearly $14 bi IIio n - an 8-percent
gai n -and loan s accounted for $13 bil ­
lion of the increase. Business-loan de­
mand was relat ivel y stro ng during
1980, although it w as also very erratic.
Real-estate loans also expanded
through mo st of the year, despite record
mortgage rates dur ing the spring
months and again at year-end. In con­
trast, consumer loans w eakened even
prior to the impos ition of the credit­
restraint pro gram , and never recovered
from thei r sharp spring run-off.
Commerci al bank s nationwide faced
extremel y vol atile market condition s
during most of 1980 , and Western
banks were no except ion. Interest rates
reached record levels in the spring, and
exceeded those levels in December, so
that banks had troubl e maintaining
normal spreads between the ir average
return on assets and their average co st
of funds. Dem and for bank loan svaried
with the sharp flu ctu ations in the econ­
omy , along with the shifti ng develop­
ments in the bond market and the
commercial-paper market. When these
markets weaken ed, banks became the
primary source of funds for many cor­
porate borrowers.

Lending Fluctuations

Business-loan activity flu ctu ated wide­
ly, but for the year as a whole, Western
ban ks added nearly $6 bill ion (a 14­
percent increase) in business loans to
the ir portfolios. During the winter, and
again late in the year, many large firm s
sharp ly increased their bank bo rrowing
after postponing lon g-term bond issues
in the face of record bond rates. In those
periods also, many large firms that nor­
mally rely on the commercial-paper
market for short-term funds increased
their bank borrowings as the spread
narrowed between the prim e rate and
co mme rc ial-paper rate, and as banks
became more aggressive about making
sub-prime loans. In co ntrast, business­
loan demand slackened abruptly dur ­
ing the second quarter, unde r the im­
pact of the early-spring upsurge in the
pr im e rate, the special credit-restraint
pro gram, and the late-spring resur­
gence of the bond and commerc ial­
paper m arkets.
Mining and petroleum firm s were
heavy borrowers during the year, re­
flecting the regional and nation al em­
phasis on energy exploration and de­
velopment. Lending to constru ction
firms w eakened, not surpris ingly, be­
cause of the sharp decline in hou sing
and other construction acti vity. But the
wholesale and retail trades also were
relative ly light borrowers during 1980,
because of the second-qu arter sales
decline and their year-long effort s to
bring inventories under contro l.
Banks' mortgage lending conti nued to
expand , however, as other institutions
dropped out of the market because of
lack of fund s. In fact, bank real-estate
loans increased by nearly $8 bill ion (15
percent) and once again became the
fastest growing loan component. (Sti ll,
that increase fell well below the strong
gai ns of the 1977- 79 period.) Mortgage
lend ing slowed down during the sec­
ond quarter, in response to record 18­
percent mortgage rates, but activity
increased again as funds became avail­
able at lower rates in the summer and
early-fall months.




Western Bank loans


30r== = = = = = ::::1

Western consumers , in contrast, actual­
ly paid down their bank consumer-loan
debt by nearly $1 billion during the
year. Like their counterparts elsewhere,
Westerners tightened thei r belts be­
cause of recession and inflation fears,
record borrowing costs, and (in the
spring period) direct credit restraints.
Auto and home-improvement financ­
ing felt the brunt of these cutbacks .

Available (But Expensive) Funds
Western banks found ample funds to
finance their credit expansion . Depos­
its rose by nearly $16 billion, just under
1979's record increase. However, the
deposit mix shifted away from low-cost
"core" deposits and towards more
expensive instruments paying market­
determined rates. Non-deposit sources
of funds-also relatively expensive­
provided an additional $2 billion in
new funds, which was significantly less
than in other recent years.
Large-denomination time deposits
($100,000 and over) increased nearly
$8 billion. But consumer-type time de­
posits also became an important source
offunds-with a $6-billion inflow from
six-month money-market certificates
alone-which was necessary because
savings deposits provided no net in­
crease in funds over 1979 levels. In
addition, savings deposit flows became
extremely volatile, rising and falling in
response to the sharp movements in the
differential between the 5%-percent
ceiling rate on passbook savings and
the much higher rates paid on alternate
savings instruments (money -market
certificates, Treasury bills, and mutual­
fund shares).

Rising Earnings
Earnings of Western banks apparently
rose modestly in 1980, according to
preliminary data, although maintaining
earnings growth and profitability was
difficult in such a volatile environment.
Sharp rate fluctuations, narrowed
spreads, and differences in (wholesale
or retail) lending orientation affected
earnings in diverse ways. Western
banks, with their heavy retail orienta­
tion , apparently lagged behind the
earnings increases posted by their
money-center counterparts. Still, most
regional banks weathered the year's in­
stability without difficulty, and entered
1981 in relatively good shape. In this,
they differed from many thrift institu­
tions which were more heavily involv­
ed with the weakened housing industry.
Banks' operating income expanded
because of the moderate expansion in
bank credit-especially floating-rate
business loans-and the record level of
rates in effect during much of the year.
But many retail-oriented banks found
themselves holding relatively large
po rtfo Iios of fixed-rate loans, either
long-term mortgages or intermediate­
term consumer loans. Their interest
spreads narrowed -and their profits
dec Iined -as the returns on such assets
lagged in the face of soaring costs of
funds .
Interestexpense surged for both deposit
and nondeposit sources as banks paid
record market rates to generate new
funds. This meant increased reliance on
expensive variable-rate consumer de­
posits and large-denomination time
deposits. The increase in interest costs
reflected not only the record rates paid
on these funds, but also the continuing
shift by consumers from low-cost core
deposits (demand and savings deposits)
to variable-rate certificates.


Change and Competition
The new year opens a new era in West­
ern banking and finance , in the wake of
the legislative changes described in the
next section . The nationwide authori­
zation of interest-bearing NOW ac­
counts has made it possible for thrift
institutions to become direct competi­
tors for consumers' transaction (check­
ing-type) deposits. With broadened
lending powers, thrifts also have the
opportunity to compete with commer­
cial banks in the credit-card and con­
sumer-loan areas as well. All of these
competitive factors can dampen bank­
earning growth in coming years.
Western banks enter 1981 with a sig­
nificant locational advantage, since
their domestic operations are concen­
trated in one of the strongest regions of
the country . With any substantial drop
in interest rates,they would also benefit
from improved margins on their mort­
gage and consumer-loan portfolios.
Still, the cost offunds may remain
high-and earnings depressed­
because of continued fluctuations in
interest rates, increased reiiance on var­
iable-rate deposits, and competition
from other financial institutions.

Management Committee
(Shown from left to right)
Kent O. Sims, Senior Vice President, District Departments
John B. Williams, First Vice President
John J. Balles, President
John L Carson , Senior Vice President, Corporate Staff


Federal Reserve Bank of San Francisco

Organization Chart

February 1, 1981

District Departments

Vice President
Business & Community Relations

Vice President

Statis tical & Data Services


\Vilhelmine von Turk

Credit & Consume r Affairs
'IV Gordon Smith

Examining Officer

Commer cial-San Francisco
Wa -ne l. Rickards

Domestic Reports Officer
ianet L Oliver

Research Offi cer

International Report s Office r;

Resear ch Of ficer

Peter Hsieh

Sara Garrison

Herbert R. Runyon

Computer Services
Vice Pres ident

Computer Systems

Vice President
Computer Operations

S. lee Flynn


Hector ,I",\. Martin


Moneta ryC


Systems Officer
Applications Systems

Operations Suppa

Lorraine \'Yal

Marina Mann


Salt lake City

Vice President
Satt Lake City


:\ . Grant Holman

Asst. Vice Pres.

Analysis & Co ntrol Officer

Gerald R. Dalling


Asst. Vic,

Custod y Control
Don W. Sheets

Custody (
D,an C. Gu

General Auditors
Bruce H. Thompson
Brian Mavrogeorge

General Auditor

la ne W. La ngho rne

Corporate Staff

Secretary's Office
Senior Vice President
Secretary's Office
Donald V. Masten

Facilities Planning

District Security

Vice President
Facilities Planning
O ren L. Chris tensen

Asst. Vice Pres.
Corporate Personnel
Steve n F. Whitmore

Asst. Vice Pres .
Facilities Planning
William K. Ginter

Personnel Officer
P.A. Tarbutton



Los Angeles


Monet.a'1' Control Project Team

David J.Chrtsterson

Admin . Services Officer
Charles L. Huffstetler

Employee Relations Officer

Barbara L. Gahney


Vice President
Angelo S. Ca rella


Asst. Vice Pres.
Check Collection
Kenneth L. Pete~n

Asst. Vice Pres.
Analysis & Control
Gale P. Ansell


Branch Operations
(Show n from left to right)
H. Peter Franzel, Vice President, Operation s
Angelo S. Carella, Vice President, Portland
Gerald R. Kelly, Senior Vice President, Seattle
Richard C. Dunn, Senior Vice President, Los Angeles
A. Grant Holman, Vice President, Salt Lake City


During 1980, the op eration s of the
Fede ral Reserve Bank of San Francisco
began to chan ge dramatically, in re­
sponse to several historic fin anci al and
legislati ve developments. At the same
time, the Reserve Bank co ntinued to
prov ide central-bank services-in the
area of c hec ks, coi n, curren cy, fiscal
agency, and electronic fund transfers­
for a region al eco no my whi ch again
grew at a faster pace than the rest of the
nation . The Twelfth D istrict, wh ic h is
served by five Reserve Bank offices (San
Franci sco, Los An geles, Portland , Salt
Lake C ity and Seattle) isthe largest Fed­
era l Reserve Di strict in terms of both
geographic size and industrial activ ity.
It includes the states of Alask a, Ar izona,
Ca li fo rn ia, Hawaii, Idaho, Nevada,
Oregon , Utah and W ashingto n, plu s
the territories of Guam and Amer ican
Sa moa, wi th a total popul atio n of 37.7
m ill ion peopl e.
The 1980 combin ation of high inflatio n
and high interest rates created an ex­
panded w o rkload fo r many of the
Ban k's operatin g departments, not to
ment ion an increased dem and for pol­
icy analyses by the Bank's research
eco no mis ts. The fiscal department, for
o ne, came und er heavy pressure at
tim es fro m large crow ds of indi vidual
inv estor s who w anted to take advan­
tage of the record-hi gh interest rates
avai lable o n gove rnment securities.
Thr oughout the spri ng month s, the
Bank's staff implem ented the Special
Cred it Restraint program that the Fed­
eral Reserve had un veiled on M arch 14
as part o f the gove rnment-wide dri ve to
cur b spec u lative in flatio nary pressures.
The Bank 's statistical-services depart­
ment, for exampl e, thereafter became
heavil y involved in the impl ementation
of reporting procedures fo r nonbank
co nsume r lend ers, w ho w ere subject to
a spec ia l deposit requirement und er the
credit-restraint program.

Creation of MCA
A ll of these developments were ove r­
shado we d by the major operation al
changes generated by the Depository
Institution s Deregul ation and M onetary
Co ntro l Ac t (MCA), w hic h was signed

int o law by the President on M arch 31.
The path- breakin g M onetary Co ntrol
Act was Co ngress' answer to a numb er
of pressures w hich had di storted the
nation's fin anc ial struc ture in recent
decades- such as w idespread fin an­
cia l inn ovation s, shifti ng competitive
patterns, severe inflati on ary pressures,
and a related upsurge in interest rates.
Throu gh the M CA, Co ngress prom oted
greater competitio n in fi nanci al mar­
kets, pri mari Iy by prov id ing fo r the
phase-out of deposit interest-rate ceil ­
ings and a broadenin g of asset and
payment powers of banks and thrift in­
stitutio ns. Congress also prom oted
greater equ ity and improved monetary
co ntro l by extend ing reserve require­
ments (fo llow ing a phase-in period ) to
all depository instituti on s wi th trans­
action (check-type) acco unts and
non-personal time deposits. This step
helped to solve the probl em of decl in­
ing Federal Reserve mem bership, by
reduc ing the cost of reserve require­
ments fo r memb er banks and imposing
similar reserve requirement s on all in­
sured depository institution s. More­
ove r, Congress prom oted greater effi­
cie ncy in financ ial markets, by provid ­
ing access to Federal Reserve services,
at explic it prices, for all depository
institutions subject to reserve
requi rements.

Implementation of MCA
To implement the MCA, whi ch is per­
haps the most important piece of fin an­
cia/ legislatio n since the passageof the
Federal Reserve Act in 191 3, the San
Francisco Reserve Bank established an
M CA Policy Committee. Thi s commit­
tee is respon sible for rev iewin g plan s
and proposals, and for making the de­
cisio ns requ ired to keep the implemen
tatio n moving forw ard smoothly and on
schedu Ie. Even prior to passage of the
act, the Bank formed a Pric ing and
Access Project Team, with the respon ­
sibility for examini ng the potential im ­
pact of pend ing legislative pro posals.
The Project Team later too k on the
added respon sibility of coo rd inating
implementation of the act's provi sion s
on a Di strict-wide basis.


Growth of Payment Services
Change (%)



o t.===~==~
19 78


Man y Bank depart ments became in­
vo lved in carrying out the provision s of
the new legislation dur ing the course of
the year. They designed systems to
handle the new pricing and bill ing
functions, developed computer pro­
grams to perform these new fun cti on s
and to process reports from a sharpl y
expanded constituen cy, developed
pl ans for broader access to cred it facil ­
ities, restructu red reserve acco unts, and
created staffing plans to meet all these
new oper ating bu rdens. In add itio n, a
price-administration grou p took over
responsibility for analysis and report ing
of data related to charges for Federal
Reserve services.

Growth of Cash Services


20 r.=:;=;:::::====:- ,
Paid into






To facilitate understanding of the MCA
and its implementing regulation s, the
Bank co nducted an extensive two­
phase orientation effort fo r its new
co nstituents. The first phase of the pro­
gram included 35 general-info rmatio n
"outreach" meetings held in 25 major
ci ties throughout the Di strict. In add i­
tion , 54 detailed tech nical semi nars
w ere held in 10 Di strict cities, cove ri ng
such subjects as reportin g, mai nten­
ance of reserves, and pass-throu gh
requirements. In support of thi s face­
to- face contact, the Bank established
M CA Information Desks at each offi ce
to receive and direct inquiries from new
co nsti tuents to persons prepared to
handl e their specific questi o ns.
Implementation Schedule

The Federal Reserve revised its
implementat ion plans several times
during the course of the year in re­
spo nse to comments solic ited from the
fi nanc ial industry and the publ ic.
However, considerable progress wa s
ev ident by year-end. The San Franci sco
Reserve Bank, instead of serving o nly
147 member banks, soon will be deal­
ing wi th several thousand banks and
th rift institutions. Institutions w ith $15
mi lli o n o r more in total deposit s began
report ing reserves on a w eekly basis in
No vemb er 1980 , and smaller institu­
tions ($2 milli on to $ 15 million in de­
posits) began report ing qu arterly in
January 1981. A number of very small
insti tutio ns with deposits of lessthan $2

m illion (pri marily credi t un ion s) will be
exempt from reporting and reserves­
posting requirements unt il M ay 1981.
Non-member institutions w ill phase-in
their new reserve requirements over an
eight-year period , wh ile present mem­
ber banks will phase-down to low er
levels of requi rements over a fou r-year
period .
Pricing and access to various Fed ser­
vices are bein g phased- in over a year­
lon g period, rather than being in­
troduced all at on ce, to facili tate an
order ly transition to the requ irementsof
the legislation . Pricin g will begin early
in 1981 for wire transfer and net settle­
ment services. Sometime after midyear,
charges wi II be levied for check clea r­
ing and collection , and for automa ted
clearinghouse services, although cer­
tain limited facilities w ill be avai lable to
new co nstituentsat the beginning of the
year. Pricin g w ill begin in late 1981 for
pur chase and sale of securities, safe­
keepin g and transfer of securi ties, and
non cash co llec tion services, and pric­
ing will begin early in 198 2 fo r co in­
and currency-transport ation services.
In the credit area, a Federal Reserve task
force has developed procedur es fo r
administering the di scount w ind ow in
an environment characterize d by a
much larger number of account rela­
tionships and d ifferent types of finan­
cia l institutions. In o rde r to manage
thi s situatio n effective ly, the Reserve
Bank has made arrangements for off­
premi ses custody of vi rtually all of the
col lateral that its new constituents will
post with the Reserve Bank.ln add ition,
the Bank has centralized the ad minis­
tration of loans extended by all five of­
fices in its San Francisco headqu arters
off ice.
Supervisory Developments

In the supervisory area, bank examina ­
tions and bank holding-company in­
specti ons during 1980 co nfirmed the
generally health y co nd itio n of the insti­
tuti ons supervised by this Reserve
Bank. During the year, the Genera l
Accounting Office (GAO) co nd ucted a
review of procedures used to mo nito r

commercial-ban k compli ance w ith the
Treasury Department's record keepi ng
and reporting regulation s. Thi s review,
part of a broad GAO evalu ation of
the effectiveness of Federal bank­
regulatory agencies, has invol ved field
work in San Francisco and thr ee oth er
Federal Reserve Distri cts.
Superv iso ry personnel imp leme nted
several initiatives designed to im prove
effic iency and strengthen exami natio n
procedur es. These included hosting
tw o co nferences o n the subjec t of in­
ternation al exami natio ns. O ne co nfer­
ence concerned the exami ner's rol e in
evaluati ng " cou ntry risk" -the debt­
management prob lems of indivi d ual
countries- and the second invol ved
d iscussions with oth er Federal and state
regulatory agencies co nce rni ng the
Uniform Report of Exam ination devel­
oped by the Federal Financi allnstitu­
tions Examination Coun cil. Bank staff
also improved the exami natio n cover­
age of EdgeAct corpo ration s (firms
involved in internati on al trade and fi­
nance) by establi shing worki ng rel a­
tion ships w ith the internal-aud it team s
sent to review Edge co rpora tio ns by
their parent firms located outside th is
D istrict. In the trust area, Bank staff
co nduc ted a joi nt exami nation wi th
perso nnel of the Securities and Ex­
change Commi ssion (SEC), to co m pare
operating proc edu res of deposito ry
tru st institutions with standar ds defin ed
by the SEC.
The consumer-affairs staff co nduc ted
examinations at all state-m em ber
banks, and also at about o ne-fifth of
their branches, in lin e with an expand ­
ed System-wide program designed to
achieve broad-ba sed co m plia nce w ith
consumer-protectio n laws and regula­
tion s. The Reserve Bank received
num erou s ind iv idual co nsume r co m­
plaint s against co m merc ial banks, but
non e of the co mp lai nts requi red the
Bank to reso rt to its enforcemen t pow­
ers to co mpel remed ial actio n. In addi ­
tion , the staff received several tho usand
requests for inform ation from the gen­
eral public, many of them in respo nse
to a series of Bank-produ ced publ ic­

servi ce announcements on co nsume r
regulations, which were show n on
a number of television station s in the

Computer Developments
The Bank continued to impl ement a
lon g-range automation plan dur ing
1980 . Th is plan calls for District-wide
standa rd izatio n of processing for most
o peratio ns, and the centralization of
some activ ities. Under the pl an, all five
offi ces are tied together via a mod ern
co m puter network co ntrolled from the
San Francisco data center. In 1980, the
staff in stalled a standard acco unti ng
system in al l branches, in a major step
toward standardizin g Di strict systems.
To acco mmodate the increasing level
of auto matio n over the next several
years, computer personnel install ed a
new computer in the San Franci sco
data center, and made plansto upgrade
co m puters in Los An geles and Seattle
durin g the first part of 1981 . This up­
gradi ng was doubl y necessary because
of the heavy workload created by
impl ement ation of the new M CA
program s.
D ata-processing and fiscal personnel
co ntinued w ork on the automa tion of a
Treasury-securities inventory and trans­
fer system (called SHA RE). Sa n Fran­
cisco is the lead di strict on thi s project,
whi ch on completion in 1981 wi ll pro­
vide a standardized on-line database
serv ic ing 13 offices in the Kansas City,
St. Louis and San Francisco distr icts.

Payments Services
In 1980, as in earlier years, electronic ­
payments systemscontinued to expand
rapid ly. While check- processing activ­
ity increased onl y on e percent, w ire
fund s-transfer vo lume ju mped 27 per­
cen t, as Di strict memb er banks sent
several trillion doll ars throu gh the Fed­
eral Reserve's wi re-transfer system
during the year. Moreover, a sharp 27­
percent gain in vo lume occ urred at
auto mated cl earinghouses (ACHs),
whi ch move funds by electronica lly­
transmitted payment instructio ns that
take the place of paper checks. To
accom modate rapid volume growt h

and improve operational control s, the
Bank consolidated its wire-transfer
fun ction in San Francisco dur ing the
year. ACH personnel meanwh ile in­
stalied new software to provid e for an
automated reconcilement system as a
means of redu cin g op erational errors.
In check-processing activ ity, Bank staff
handl ed 1.5 billion paper checks dur­
ing the year - a significa nt deceleration
from earlie r growt h patterns. How ever,
d rastic changes in deposit schedules
shortened check-processing ti mesand
increased pressure on equipme nt and
staff resources. The Bank began to de­
velop a major automation proj ect in the
low-speed processing functi on ­
whi ch handles nonmachin able depos­
its and checks rejected for poor encod­
in g, mutilation, improper size, etc. - to
replace labor-intensive procedur es.
Redu ction of float (checks credi ted
prior to receiv ing paym ent) received
high priori ty durin g the year, especia lly
in view of the requirement to price float
under the Monetary Co ntro l Act.

Cash, Fiscal Activities
Despite the incr ease in check usage
and the rapidl y acceleratin g growt h in
electro nic payments, the Reserve Bank
co ntinued to handle substantia l
amounts of coin and curr ency in 1980.
Altogether, it paid 4.9 billion co ins and
1.6 bi IIion pieces of currency into ci rcu­
lation during the year. Effici ency in the
cash function improved with the instal­
lation of more high-speed currency ­
sorting machines, of wh ich six are now
in o peratio n at various Di strict loca­
tio ns. Each mach ine has an o ptimum
feed rate of 1,200 notes a mi nute, and is
capab le both of detecting co unterfeits
and of destroyin g, o n lin e, those notes
w hich do not meet fitn essstandards. To
improve produ ct ion capabi li ties aswell
as the qu al ity of curre ncy in ci rculation,
the Sa n Franci sco and Los Angeles of­
fices both started second-shift process­
ing o n the new equipment dur ing the
In its role as fiscal agent for the
Government, the Reserve Bank


handl ed substantial amoun ts of pub lic ­
debt instrum ent s in th e form of savings
bonds, marketabl e Treasury securi ties
and food stamps. A ct ivity in ma rketa ble
securities increased 52 percent in vo l­
u me, reflecti ng stron g investor interest
in the record-h igh rates offe red o n suc h
issues. Moreover, volume rose because
of an increase in th e redem pti on of sav­
ings bonds, whi ch paid a considerab ly
lower rate of interest th an ma rketab le
secu ri ties. During thi s same pe riod , the
Treasury D ep artment recalled all Series
Eand H savi ngs-bo nd stock for repl ace­
ment w ith Series EE and HH bo nds .
Thi s process, w h ic h involved recon ­
cileme nt wi th over 8,800 issui ng
agents, was a major effort spanning the
entire ye ar.

tom ated systems. The summe r decline
in interest rates pro vid ed time to reac t
to the rapidly changing secu rit ies m ar­
ket. As rates again surged upward in
late fall, the Bank was better po siti oned
to cope with significant in cr eases in
vo lume.

Improved Productivity
Throu ghout the year, the Bank 's ma n­
ageme nt struc k an appropriate balance
between cost-effec tive ness of opera­
tion s and qu al ity of o utpu t. The San
Franc isco Reserve Bank rated second in
the System in cost effective ness, wi th
aggregate unit costs 7 percent be low
the Syste m aver age. Produ cti vity (out­
put pe r w o rker hour) in these ope ra­
ti on al acti v ities has in creased 74 per­
ce nt in the past six yea rs, thu s hel ping to
offset the sharply rising costs of salaries,
m aterial and equipment. M eanwh ile,
as a result of a quality-improvem ent
p rog ram initiated three year s ago, the
Bank ranked among the System leaders

The se development s ca used seve re
processing backlogs during th e fi rst half
of the year. The backl ogs w ere ove r­
co me by midyear with add itiona l
trained staff and enhan cem ent s to au-

in q ua lity of performance, as measured
by redu ctions in errors and pro cessing
times on various operational tasks.
Lastly, as a means of assurin g th e ef­
fec tive ness of future operati on s, the
Bank began construction of a 12-sto ry
653,OOO-sq uare-foot headqu arters
bui ld ing o n San Franci sco 's M arket
Street. Th e present headqu arters bu ild ­
ing was bu ilt in the 1920's and is small
and inefficient fro m the standpoin t o f
1980-styl e bank ing o pe rations ; indeed ,
wi th recent increases in workloa d, the
bank's headqu arters opera tions now
are spread over five separate bui ldings .
G ro und breaking ceremonies for the
new bu i ldi ng were held in M arch 1980,
and in ea rly 1981 , the steel framewor k
began to rise. The new faciliti es are
sched u led for occupancy in late 1982,
ready to assist the Bank in providing a
growing number of central-banking
serv ices to its ex pa nded constituen cy of
Western fin anci al institutions.

Summary of Operations

Volume (thousands)


Custody Services
Cash Services


1,407 ,894

1.556 ,278




446,71 7



1,358 ,985

99 ,096




4 1,298






C urrency paid into ci rcula tio n
Coin paid into ci rc ula tion




Fiscal Agency Services
Savings Bonds orig inal issues
Saving s Bond s redemptions processed

Othe r Treasury orig inal issues

Foo d coupons p rocesse d

Payments Mechanism Services
Check Processing Services
Commercial c hecks p rocessed

Government check s p rocessed

Return ite ms processed

Electronic Funds Transfer Services
Wire tra nsfers processed

Au tomated clearinghouse tran sa c tions processed

Discounts and Advances
T al d iscounts a nd advances*

Number o f financ ial institutions a c c ommodat ed *

Noncash Collections Services
*Numb e r (not in thousands)






The Federal Reserve carries out its
cent ral-ba nk ing functions throu gh a
nationwid e networ k of 12 FederaI Re­
serve Bank s and the ir 25 branch es,
under th e pol icy gu id anc e, co ordi n­
ation and general supervisi on of the
Board of Gov ern o rs in Wa shin gton,
D.C. The Head Office of the Federal
Reserve Bank of San Franci sco has a
nine-member Board of Di rectors.
Ea ch o f the Bank 's other off ices at Los
A ngeles, Portland , Salt Lake Ci ty and
Seattle has a seven-member bo ard .
Federal Reserve directors brin g man­
agement expert ise to the task of over­
seeing Reserve Bank operatio ns. They
aIso pro vid e fi rst-hand in format ion on
ke y econom ic developments in vari­
ous areas of the District, comp le­
menting th e Bank's internal research
efforts. In addi t io n, Board members
give advi ce on the general direction
of monetary pol icy, especiall y with
regard to th e Bank 's dis count rate. The
Head Office Board has specific re­
spon sib ility for i niti at ing changes in
the discount rate, subject to revi ew
and approval by the Board of

Head Office
Chairman of the Board and
Federal Reserve Agent

Co rnell C. Ma ie r
Cha irm an, President and Ch ief
Execu tive Officer
Kai ser Aluminum & Chem ical Cor p.
Oa kl and , Ca lifor n ia

O le R. Mettler
Presid ent & Chairman of the Board
Farm ers & M erch ant s Bank
of Ce ntral Ca li fo rn ia
Lod i, Ca liforn ia
C lai r L. Peck, lnr,
Cha i rm an of the Boa rd
C. L. Peck Contrac to r
Lo s A ngel es, Californ ia

Deputy Chairman
Ca ro line Leon etti A hma nson
Cha irma n of the Board
Carol i ne Leo nett i Ltd.
Holl yw o od , Califo rnia

M alc olm 1. Stamper
T he Boeing Co m pany
Seatt le, Washin gton

Al an C. Furth
Preside nt
Southern Pac ifi c Co mpa ny
San Fran c isco, Ca lifo rn ia

J.R. Vaughan
Senio r M ember
Rich ard s, W atson , Dr eyfu ss & Gershon
Los A nge les, Califo rnia

Frederick G . Larkin , Jr.
Ch air man o f the Executive Co m m ittee
Secur ity Pacific Nation al Bank
Lo s An gel es, Californ ia

Rob ert A. You ng
Cha irm an of the Boa rd and President
N orthwest Nati on al Bank
Vancouver, W ashington
Federal Advisory Council
Chaun cey E. Schm id t

Chai rman of the Board , President

and Chief Executi ve O fficer
T he Bank of Cal ifo rn ia, N .A.
San Franci sco, Cal ifo rn ia










Federal Advisory Council



Los Angeles
Chairman of the Board
Harve y A. Procto r

Chairman o f the Board
Southern Cali forni a Gas Compan y
Los Ange les, Cali forn ia

Fred W. Andrew
Superio r Farming Company
Bakersfield, California

James D. McMahon
Santa Cl arita Nat ion al Bank
Valencia, Califo rn ia

Bram Go ldsmith
Chairman of the Board
City National Bank
Beverly Hills, California

Harvey J. Mitchell
First Nat iona l Bank of San Diego Count y
Escondido, Cali fornia

Lo la M cAlpin-Grant
Assistant Dean
Loyo la Law School
Los Angeles, Californ ia

Togo W. Tanaka
Gramercy Enterprises
LosAnge les, California


Chairman of the Board
John C. Ha mpt o n
Chairma n of the Board and President
W ill ami na Lum ber Company
Portl and, O rego n

Merle G . Bryan
Forest Grove N atio nal Bank
Forest Gr ove, O rego n

W illi am S. Nai to
Vi ce Presiden t
Norcrest C hi na Co mpany
Portl and, O rego n

Jack W. Gu stavel
Presid ent and Chief Execu tive Officer
Th e Fir st N ati on al Bank of North Idaho
Co eur d 'Al en e, Idah o

Phillip W. Sc hneide r
Fo rmer Nort hw est Regio nal Executi ve
N ation al W ild life Federatio n
Port land , Oregon

Jean M ater
V ice President
M ater Engineering, Ltd.
Corvall is, O rego n

Rob ert F. Wa llace
Chairma n of the Board and President
First Nati ona l Bank of Oregon
Portl and, O rego n


Salt Lake City
Chairman of the Board
Wendell J. Ashton
Publ isher
Deseret News
Salt Lake Ci ty, U tah

Spencer F. Eccle s
Preside nt and Chi ef Operati ng O fficer
First Security Co rpo ratio n
Salt Lake Ci ty, Ut ah

A lbert C. G ianol i
President and Chairman o f the Board
First Nation al Bank o f Ely
Ely, Nevada

Robert A. Erkins
Geoth ermal Agri/ Aqu acultu rist
W hite Arrow Ranch
Bliss, Idaho

Fred H. Stringham
Val ley Bank and Trust Company
South Salt Lake, Utah

David P. Gard ner
Presid ent
University of Utah
Salt Lake Ci ty, Utah

J. L. Tertel ing
The Tertelin g Comp any, Inc.
Bo ise, Idaho

) E:




Chairman of the Board
George H . We yerhaeuser
President and Chi ef Executive Offi cer
Weyerhaeuser Co mpany
Tacoma, Washington

Me rle Ad lum
Puget Sound D istrict Council,
M aritime Trades Dept . AFL-C1 0
Seattle, W ashingto n

Dougl as S. Gamb le
President and Chief Execut ive Office r
Paci fic Gambl e Ro binson Company
Seattle, Washingto n

Lonnie G . Bai ley
Execut ive Vice President
and Chief Operating Officer
Farmers and M erchants Bank of Rockford
O pport unity, Wa shington

Do nald L. Me llis h
Chai rman of the Board
National Bank of Alaska
Anchorage, Al aska

C. M . Berry
Seafirst Cor po ration and
Seattle-Fi rst N ati onal Bank
Seattle, W ashin gto n

Virginia L. Parks
Vice President for Finance and Treasu rer
Seattle Un iversity
Seattle, Washi ngto n




f :',


I '




Comparative Statement of Account
(Thousandsof Dolla rs)
Dec emb er 31,

21 1,000

S 1,253,000


55.02 5




2,29 1,565



11.1 05

11 ,127




21 ,264,862






6,129,76 1



21 ,685,599




Gold c ertific a te account
Sp ec ia l Draw ing Rights certificate a c count
Fed eral Reserve noteso f other Fed eral Reserve Banks
O ther cash










Loans to Member Banks:

Sec ured by United States Government & Agency obl igations "
Other eligible p a p er , .. ,
, .,
, .. ",
Other paper . . ,





, , . , , , , , , . , . .

Fed e ra l Agency ob lig at ions . , . , , , . . ,

United States Government securities:





Total United States Government securities . .

Total loans and securities , . . . " " "", ...

Cash items in process of co llection

Bank prem ises
, . . , . . . . ,

Op era ting equ ipment , . , . ". , ..

Other a ssets:

Denominated in foreig n c urrenc ies
A ll o ther



Total assets

Fed era l Reserve notes


T l Member bank-reserve accounts
United Sta tes Treasu rer-general account
Other deposits





Total deposits

,. ,

Deferred availability cash item s . . " . '

Other liabi lities ... , , . . , . , .. , . . . , , . ,

Total liabilities

Capital Accounts
Capital paid in
Total liabilities and capital accounts
Contingent liability on acceptances p urchased for foreig n correspond ents




Earnings and Expenses
(Thousa nds of Do lla rs)
December 31 ,

Current Earnings
Disco unts and adva nc es . ,
United States Government sec urities
Fore ig n c urrencies
All other






" ,



,. ,. ,.. ,. ,




Total current earnings


12,9 77
1,664 ,860


Current Expenses















Tota l c urrent expenses
Less reimbursement for c erta in fiscal agency and other expenses









- 20,626

- 12,583




' , .. ,

Net expenses

Profit and Loss
Curre nt net earnings
Additi ons to c urrent earning s
Profit o n sa les of United States Governme nt sec urities (net) " , . . " . ,
Prof its or. foreign exchange transactions
A ll other

Total additions


, .. , . , .. ,


,. ,







Net addition s ( +) deductions (-)
Assessme nts for exp end itures of Board of Governors
Net earn ings before payments to United States Treasury
Divid ends paid
reasury (interest on Fede ral Reserve notes)
Payments to United States T
T sferred to surp lus
Surplus Janua ry 1 . . ,
Surplus December 31




Deducti on s from current net earnings
Loss on fore ig n exch a nge transa ctions (net)
, , .. ,
Loss on sales of United States Government secu rities (net)
A ll o ther

Total deductions






'" ,.,








"" ,


,. ,



San Francisco Office
P.O. Box 7702, San Francisco, California 94120
Los Angeles Branch
P.O. Box 2077, Terminal Annex, Los Angeles, California 90051
Portland Branch
P.O. Box 3436, Portland, Oregon 97208
Salt Lake City Branch
P.O. Box 30780, Salt Lake City, Utah 84130
Seattle Branch
P.O. Box 3567, Terminal Annex, Seattle, Washington 98124
This report was prepared by the staff of the Federal Reserve Bank of San Francisco:
produced by William Burke and Karen Rusk; graphics designed by William
Rosenthal; copy written by William Burke, Barbara Bennett, Gary Zimmerman,
Yvonne Levy, Robert Jacobson, and Randall Pozdena,


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