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From the Boardroom
National Scene
Western Business
Western Finance
Western Central Bank







feciemi «e5~rve


~ ~Qti





Alan C. Furth
Deputy Chairman (1982)

John J. Balles

Caroline Leonetti Ahmanson
Chairman (1982)

Cornell C. Maier
Chairman (1981)

The nation and its central bank exper ienced a generally
disappointing year in 1981. Desp ite high hopes , the
national and regional economies suffered a sharp reces­
sion in the latt er part of the year, concentrated in housing
and other basic industries. But more favorably, the Federal
Reserve 's discip lined monetary policy began to payoff in
terms of a significant deceleration of inflation. On the oper­
ations side , the Federal Reserve continued to implement
the historic 1980 financial legislation which sharply
expanded the number of depository institutions eligible to
utilize the Fed 's central-banking services.

however, the Reserve Bank implemented week ly-report­
ing requ irements in November 1980 for 996 depository
institutions, primarily those with $15 million or more in tota l
deposits, and it implemented quarterly-report ing require­
ments in January 1981 for 782 smaller institutions. A
number of operating departments began implementing
open access and pricing for financial services on a
phased-in basis dur ing 1981. Ove r the long run, revenues
derived from providing these financial services are ex­
pected to cover all Federal Reserve costs in providing
them , including an amount to reflect private-sector costs
(such as taxes) not incurred by the central bank .

The national economy produced $2.9 trillion of goods and
services in 1981, as gross national product (adjusted for
inflation) increased about two percent for the year. Annual
averages, however, disguised a strong downtrend in gen­
eral business activity attributable to peak levels of interest
rates and to the lingering effects of the 1979-80 oil-price
shock. Production cutbacks and layoffs also became wide­
spread throughout the massive nine-state district served
by the Federal Reserve Bank of San Francisco, which
normally accounts for one-s ixth of the national output.

Management benefited greatly during 1981 from the
broad-based experience and judgment of the Bank 's direc­
tors at Head Office and four branches . The directors
provided guidance on major management decisions and
planning goals , especially in regard to the implementation
of the MCA legislation. In addition , they supplied key infor­
mation on economic and financial conditions as support to
the Federal Reserve 's formulation of monetary policy.
Today, 37 public-sp irited men and women serve as direc­
tors , representing a great variety of econom ic interests and
non-profit organizations from every area of the West. And
beginning in 1981, the Reserve Bank has begun to obtain
useful guidance on MCA implementation from an advisory
group of 12 individuals representing a broad range of
regional commercial banks and thrift institutions.

In con trast, the price situat ion improved considerably.
Consumer prices , as measured in the GNP accounts, rose
8 percent over the course of the year, compared with
1O-percent increases in each of the two preceding years .
T he Federal Reserve made headway against inflation
despite a number of problems created by an unfold ing era
of financial deregulation and innovation, and created also
by the Federal government's "crowding out " of other
borrowers in financial markets. The narrow measure of the
money supply-currency plus transaction (check-type)
accounts-decelerated sharply in 1981, following modest
declines in each of the two preced ing years . The Federal
Reserve 's increased success in slowing money-supply
growth reflected its greater experience with new operating
procedures adopted in October 1979. (At that time , the Fed
announced that it would no longer attempt to stabil ize
interest rates regardless of total demands for money and
credit-and instead embarked on a multi-year program of
slowing the rate of monetary growth to a non-inflationary
pace.) But with borrowing demands-especially Federal
deficit-financing demands-remaining relatively heavy in
the face of a tightening monetary policy, interest rates
rema ined very high by historical standards.

We are grateful to all of these individuals, and also to those
who completed terms as directors dur ing 1981. We owe an
immense debt to Cornell C. Maier (Chairman , President
and CEO of Kaiser Aluminum and Chemical Corporation) ,
who showed great gifts of leadership and motivation
during his term as Chairman of our Board of Directors . Our
heartfelt thanks also go to several other individuals who
completed terms of service : Malcolm T. Stamper (Presi­
dent, The Boeing Company) at our San Francisco office ;
Harvey A. Proctor (Chairman of the Board, Southern Cali­
fornia Gas Company) , and Harvey J. Mitchell (President,
First National Bank of San Diego County) at Los Angeles;
Merle G. Bryan (President, Forest Grove National Bank),
Jean Mater (Vice President , Mater Engineering Ltd.), and
Robert F. Wallace (Chairman of the Board and President,
First National Bank of Oregon) at Portland ; David P.
Gardner (President, Univers ity of Utah) at Salt Lake City ;
C.M . Be rry (President, Seafirst Corporation), and Douglas
S. Gamble (President and CEO , Pacific Gamble Robinson
Company), at Seattle; and Chauncey E. Schmidt (Chair­
man of the Board , President, and CEO , The Bank of Cali­
fornia), as this District's representative on the Federal
Advisory Council. Finally, we wish to express our apprecia­
tion to our officers and staff , whose dedication and skill
enabled us in 1981 to expand and improve our services
to the financial commun ity and to the general public .

The Federal Reserve Bank of San Francisco operated in a
new competitive env ironment dur ing 1981, largely in
response to the passage of the Depository Institutions
Deregu lation and Monetary Cont rol Act of 1980 (MCA).
Under this legislation, Congress promoted greater equity
and improved monetary control by extend ing reserve
requirements to all depository institutions with transaction
accounts or nonpersonal time deposits. In add ition, Con­
gress promoted greater efficiency in financial markets by
providing access to Federal Reserve services, at explicit
prices , for those institutions with reservable depos its.

Caroline Leonetti Ahmanson
Chairman of the Board

In earlier years, the San Francisco Reserve Bank dealt
with only 147 member banks . After MCA 's passage ,


John J. Balles
February 1, 1982

The national economy produced $2 .9 trillion of goods and
services in 1981, as gross national product (adjusted for
inflation) increased about two percent for the year. Those
annual averages, however, disguised a strong late-year
downtrend in general business activity and severe weak­
ness in several basic industries , attributable to peak levels
of interest rates and to the lingering effects of the 1979-80
oil-price shock . Final sales (GNP less inventory change)
rose very sharply during the winter quarter, but declined
almost steadily thereafter as the economy shifted from
high to low gear. On the other hand , the black cloud con ­
tained a defin ite silver lining in the shape of a long-awaited
slowdown in inflation, caused largely by a prolonged
deceleration in money-supply growth.

Widespread Decline
In 1981, as in 1980, some of the nation's key industries­
homebuilding, auto manufacturing , and agr iculture­
suffered sharp declines in output and profitability as
interest and energy costs soared . More importantly, the
downturn by year-end spread to many feeder industries­
such as steel , mach ine tools , and farm equipment-and
through them into the national economy as a whole. The
capacity-utilization rate in manufacturing thus decl ined to
only 73 percent in the late-fall months .

Most observers , however, expected an upturn by mid­
1982-given the completion of the present inventory
liquidation , the late-1981 declining trend in interest rates,
and the stimulus from the 1981-82 package of individual
and business tax cuts. Recent developments thus served
an important purpose in setting the stage for lower infla­
tion , lower interest rates , and a stable business environ­
ment in the years ahead .

Business-cycle analysts dated the onset of the new
recession at July 1981, hard on the heels of the January­
July 1980 recession . But this type of recession dat ing may
be out of place today. The economy has shown little , if any,
growth throughout the past three years in the wake of the
second oil-price shock-the 1979-80 increase of almost
150 percent in the average price of OPEC oil. Like the
previous shock of the 1973-74 period, this price hike acted
as a giant worldwide sales tax , raising prices and draining
off purchasing power that would otherwise have been
available for purchases of other goods and services.
OPEC prices weakened after early 1981, but the earlier
shock continued to boost costs and to disrupt energy­
consuming industries , thereby contributing to the overall
weak performance of the national economy.

Change (% )

Consumer spending , which accounts for about two-thirds
of total GNP, increased about 2'12 percent (in real terms) for
the year as a whole, but only because of an early­
1981 upsurge in purchases. Households recorded a
two-percent gain in real disposable income- a relat ively
weak gain in historical terms. For the second straight
year, consumers took on little new debt, as the ratio
of consumer-installment credit to personal income fell
sharply from the mid-1979 peak. Still , the decline in the
ratio may represent the unwindinq of inflation pressures,
which had stimulated consumers to assume heavy debt
burdens in earlier years . Real (inflation-adjusted) interest
rates meanwhile rose to the highest levels in a generation ,
boosting financing costs and persuading households to
postpone big-ticket purchases.

Real Growth and Inflation
New car sales, at nine million units , fell far below the
11-million-plus pace of the boom years of the late 1970s.
For domestic producers, sales for the past two years were
the worst in the past two decades, reflecting a sharp
upsurge in product costs . The average price of a new
Detroit model-$9,000-was 28 percent higher than
two years ago , and financing and fuel costs were up
considerably more. Meanwhile, spending on residential
construction dropped five percent for the year, on the
heels of an even sharper drop in the 1980 housing market.
Housing starts averaged just 1.0 million units for the
year-the lowest in the past quarter-century-and the
pace slowed even more in the latter part of the year. The
fortunes of the homebu ilding industry were paralleled by
the severe losses of the mortgage-financing industry,
which became squeezed between sharp increases in
their cost of funds and relatively low earnings on their
portfolios of older mortgages.





L . . . - _ . A - _........_...L.._

19 75
19 77
•	 Inflation'
• Real Growth

_ L _ _......._

......._ - - I 

19 79


'Consump tion sector


Sectoral Shifts
Much of the late-1981 recession weakness reflected
bU~ iness firms ' efforts to clear their storerooms of goods
which consumers refused to buy, and which led to a
substantial buildup of inventories during the spring and
summer months . Meanwhile, real corporate investment in
new pl~nt and equipment rose 2V2 percent for the year­
offsetting most of the 1980 decline. Corporate cash flow
benefited from faster depreciation schedules voted by
Congress. Stili , business fixed- investment spend ing
lagged because of an overhang of idle capacity, with
factory-utilization rates at the lowest levels of the past


Productivity .. . Unemployment




Federal-government inflation-adjusted spending in­
~reased 3 percent-only a fraction of the previous year's
Increase-despite the beginning of a boom in defense
~pending . Real increases in defense expenditures and
Interest payments were largely offset by a squeeze on
non-defense purchases and on grants to state and local
governments. State-local spending meanwhile dropped by
one percent-the first decline in the past generation .
Revenues of those governments slowed because of the
general economic slowdown , and the situation was
aggravated by the cutbacks of Federa l grants, which
usually exceed one-fifth of total state-local receipts.

19 77
• Unemployment Rate
• Prod uc tivity Change


Job and Price Developments
Employment in the U.S. economy increased slightly
on average for the year, despite the late-year recession
which involved a loss of almost two million jobs after
mid-summer. With output falling at an even faster pace , the
productivity of the national economy also weakened after
showing early-year strength. Reflecting these develop­
ments , unemployment accounted for 7.6 percent of the
civilian labor force for 1981 as a whole , but the rate jumped
during the fall months to 8.9 percent in December-close
to the highest point of the past generation . Still, 58 percent
of the adult population held jobs in 1981, which is more
than at any other time prior to the boom of the late 1970s.

The fore ign-trade sector, which accounted for three-f ifths
of the GNP increase of the 1979-80 period, turned into a
definite minus in 1981. Net exports fell 13 percent
offsetting part of the large increase of the preced i~g year.
The export sector was hurt by an appreciation in the value
of the dollar and by a slump in overseas business activity.
The value of exports remained flat for a year-and-a-half,
as a sharp decline in industrial-goods exports offset
~he grow1h in earnings from farm exports and foreign
Investments. Meanwhile, spurred by cheaper costs and
the more expensive dollar, foreign-merchandise imports
took over a record 16V2-percentshare of the U.S. market.
But imported oil, after the sharp 1979-80 price shock ,
proved to ~e a bright spot in the weak 1981 foreign-trade
picture . With both volume and prices lower, foreign oil cost
$10 billion a year less than at the early-1980 peak.

In sharp contrast , the price situat ion improved consider­
ably during the year. Consumer prices , as measured in the
GNP accounts , increased about eight percent, as opposed
to 1O-percentincreases in each of the two preceding years .
Also, a seven-percent rise in producer prices compared
strikingly with the almost 12-percent increase of 1980. And
an actual decline in prices of industrial materials led to
expectations of a broader deceleration of finished-goods
prices in the period ahead.
Fiscal Policy Problems
Fiscal policymakers adopted a number of tax cuts in
mid-summer in an attempt to reduce the excessive tax
burden on productivity and economic grow1h. The tax
program was built around a 25-percent cut in personal­
Income tax rates over the 1981-83 period, plus faster
deprec iation write-offs for business firms. Since these cuts
represented primarily a belated adjustment of rates to past
inflation, the income tax cut will simply offset seven years
of "bracket creep" by bringing 1984 taxes back into line
with what the tax system yielded in 1977 in real terms .

The nat ion 's ~gricultural sector remained under heavy
pre~sure dunng 1.981 . Cash receipts , although improving,
again lagged behind sharply rising production costs. Net
farm income, in real terms, thus remained at only one-half
of the 1979 peak for the second year in a row. And weak­
ening income led farmers to reduce their purchases from
the farm-equipment industry, whose output dropped nine
percent for the year.


measure-primarily currency plus all depos itory insti­
tutions ' deposits (except large time certificates) and
money-market fund shares-increased about 9 112 percent
for the second straight year. This was above the top of the
Fed's target range, and reflected the booming growth of
high-yielding money-market funds.

Consumer Price Change
C hange (%)


The Federal Reserve 's increased success in slowing M 1
money-supply growth reflected its greater experience with
new operating procedures adopted in October 1979. At
that time , the Fed announced that it would no longer peg
the cost of bank reserves (the Federal-funds rate) and
would instead target the level of reserves in the banking
system -basically for the purpose of slowing the rate of
monetary growth to a non-inflationary pace. Cons istent
with this policy, the Fed took action on several occas ions
during 1981 to steer money growth towards the targets
announced in February. During the spring months , as
money growth began to surge, the Fed sharply restricted
the supply of available reserves and meanwhile raised
both the discount rate (to 14 percent) and the surcharge on
frequent borrowings by large banks (to four percent).
Faced with the opposite problem of slow growth in the late
summer and fall months , the Fed increased the supply of
reserves-and in addition , it lowered the discount rate in
two steps (to 12 percent ), and reduced and finally elim­
inated the surcharge on frequent borrowings. At year-end ,
however, the Fed again faced the difficult problem of
dealing with another upsurge in money growth .





19 77

19 79


Energ y
A ll Other Item s

Faster business write-offs similarly will offset the rnis­
measurement of depreciation caused by inflat ion, which
raised the effective corporate-tax rate very sharply in the
late 1970s.

Ch an ge (%)

Growth of Money Supply


The Administration and Congress also adopted a number
of major spend ing reductions , in tandem with the tax
cuts , in an effort to stem the flow of red ink and reverse a
50-year trend in the growth of the Federal government.
Nonetheless , large Federal deficits continued to under­
mine financial markets and the overall economy, as
the deficit increased to $58 billion for fiscal 1981 and
threatened to rise to a record of perhaps $80 billion or more
in fiscal 1982.


Monetary Policy Stance
The Federal Reserve made headway against inflation
during 1981 despite all the problems created by an
unfolding era of financial deregulation and innovation­
and also by the Federal government's "crowding out " of
other borrowers in financial markets. The narrow measure
of the money supply-currency plus transa ction (check­
type) accounts-decelerated sharply in 1981 follow ing
modest declines in each of the preceding two years . (This
monetary aggregate, known as M1-B in 1981, henceforth
will be known simply as M1.) The narrow money supply
rose more than seven percent in 1979 and 1980 , but
by only five percent in 1981-and indeed , by less than
three percent (below the bottom of the Fed 's target range)
after adjustment for shifts of savings into check-like
NOW accounts . However, the broader M2 money-supply





• M-1 B
• M-1 B Ad justed





Shifting Credit Markets
With borrowing demands relatively heavy in the face of a
tightening monetary policy, interest rates remained in the
stratosphere despite declines in the spring and again in the
late-fall months. The yield curve traced by instruments of
gradually increasing maturity remained inverted , with
short-term rates holding above long-term rates for much of
the year. The prime business-loan rate started the year at
21112 percent, and after retreating , climbed again to a 20112­
percent secondary peak in the late summer months,
before dropping to 153/ 4 percent in December. In contrast,
corporate Aaa bond rates declined during the fall months,
but at December's 14-percent average level were some­
what higher than at the beginning of the year. Real
(inflation-adjusted) interest rates soared to record heights
in this atmosphere , because of investors' fears of resur­
gent inflation and the effects of high Federal deficits.

Interest Rates

Perce nt



To finance its massive revenue shortfall, the Treasury
stepped up the pace of its fund-raising efforts. Federally ­
sponsored agencies likewise increased their borrowing
activities compared with 1980. The Federal Home
Loan Bank System, in particular, actively sought funds
to support its lending program to a savings-and- Ioan in­
dustry that was battered by poor earnings and outflows
of funds throughout the year. Total Federally-related
financing demands thus rose from $83 billion in 1980 to
$97 billion during 1981. State and local governments, by
contrast, became moderately less active in credit markets.
Many municipal borrowers could not issue new debt be­
cause prevailing high interest rates frequently exceeded
statutory interest-rate ceilings on their borrowings.
Also , local governments sharply curtailed their sales of
mortgage-revenue bonds because of new legal restric­
tions on the sale of such instruments.



0' ,

n '

, ,

, ,









Corporate Bonds
Trea sury Bills
Bank Prime Rate

Corporate borrowers resorted to the credit markets more
frequently in 1981 than in 1980, concentrating most of their
increased borrowing in the shorter end of the market
despite the persistently inverted shape of the yield curve.
Firms relied heavily on commercial-bank loans and
commercial-paper issues for the short-term working
capital that , because of poor earnings growth , could not be
generated internally at an adequate pace. Businesses
generally postponed long-term bond offerings and stock
sales during the year, hoping that overall credit demands
would ease and bring down the level of interest rates . The
new-issues pace rose significantly, however, during the
several periods of declining rates in the late spring and late
fall months.


Mixed Bank Earnings
The banking industry turned in a mixed prof its perfor­
mance for the year, accord ing to preliminary indications,
with earnings just about matching the preceding year's
level. The continued shift of core deposits to higher-cost
categor ies substan tially raised banks ' average cos ts of
funds. At the same time , stiff price competition on the
lending side made it difficult for banks to recoup these cost
increases, and thereby caused a weakening of net interest
margins and profits . Earnings performance var ied con­
siderably, however, depending on the sens itivity of each
bank's portfolio to increases in the cost of funds and
changes in interest rates . Many wholesale (commercially­
oriented) banks avoided deterioration of interest marg ins
by keeping the maturities of both assets and liabilities
short. In contrast, many retail (consumer-oriented) banks
suffered because of a mismatching of maturities, with the
rise in their cost of funds generally outpacing increases in
their return on assets . With a heavy concentration of
longer-term fixed-rate mortgage and consumer loans ,
retail banks failed to receive higher returns when interest
rates remained high, as they did throughout most of the
year. Their profits became further squeezed as their core
depos its shifted to expensive money-market and small­
saver certificates , thus boost ing costs in line with mar ket
interest rates.

Households stepped up their overall borrowing pace ,
at least in contrast to 1980, when the spring period 's
cred it-control program caused a sharp reduct ion in
consumer-cred it balances. Indeed , short-term consumer
debt grew an estimated 10 times faster than in the preced­
ing year, although the overall ga in was small in historica l
terms . In contrast, home-mortgage debt grew at a slower
pace , as households reduced their purchases of new
homes in response to mortgage rates which exceeded 17
percent at the summer peak .
Gain in Bank Credit
Commercial-bank credit increased by eight percent­
about the same as in 1980's sluggish atmosphere­
although loan portfolios increased at a somewhat more
rapid pace than securities-investment portfolios. Business
loans , in particular, grew at a fairly healthy (13 percent)
pace during the year. But in view of the intense competition
from non-bank institutions, banks apparently paid dearly in
many cases for the business-loan expansion-either by
cutting profit margins or by taking on somewhat riskier
loans . Banks also increased their real-estate loans almost
nine percent over the year, somewhat paradoxically in view
of the sharp dec line in homebuilding activity. But much of
the real-estate lending was concentrated in commercial
real-estate loans-or else in home-equity loans , which
households found to be a more attractive financing source
for durable-goods purchases than installment cred it. Much
of the real-estate lending activity thus could be classified
as consumer cred it, which would explain the small (three­
percent) increase in consumer borrowing activity at banks
dur ing the year.

In general, high interest rates rema ined a problem for
the banking industry as we ll as for its customers dur ing
1981. Banks tried to cope with this env ironment by cu r­
tailing their long-term fixed-rate lending and by limiting
their exposure to changes in interest rates . They made
substant ial progress in this regard , although the continuing
shift of deposit funds to high-cost categories took its toll
over the year. Nevertheless, the late-fall easing of interest
rates-temporary as it may have been-brightened
year-end earnings prospects for many banks and other
depository institutions.

Banks faced intense competition for funds to finance
1981's credit expansion, in view of the attractiveness to
depositors of money-market mutual funds and thrift­
institution NOW accounts . And banks found depos it
growth very costly, since most of the growth occurred
in deposit categories that paid market-related rates
of interest-money-market certificates, small-saver cer­
tificates , and large-denomination (over $100,000) certifi­
cates of deposit. Over the year, higher-yielding deposit
categories rose from 45 percent to more than 55 percent
of small time and savings deposits, reflecting shifts of
funds into these categories from core depos its (passbook
savings and checking accounts) . Furthermore, even
transaction deposits became more expens ive for banks as
depositors sh ifted their funds from the traditional
zero- interest checking accounts to NOW accounts paying
5%-percent interest.


Personal income rose about 11V2 percent , to $435 billion
for the year. This was slightly better than the gain else­
where -yet somewhat below the region's 13-percent gain
in 1980. Still, real incomes increased slightly, because the
consumer-price index rose about 11 percent instead of at
the soaring 16-percent pace recorded the previous year.
(The improvement in the inflation picture may have been
overstated , because of the way the volatile housing
component skewed the consumer-price index, but some
improvement nonetheless was evident. ) Retail sales ran
almost 10 percent ahead of the previous year's pace
through the early fall months , thus outrunning the 1980
increase, but still failing to keep up with the pace of in­
flation . Moreover, the year-to-year gain in sales then
narrowed toward year-end. Most merchants experienced
a disappointing holiday season -as evidenced by the
number of pre-Christmas clearance sales-and a growing
squeeze on retail profit margins.

The Western economy experienced another mediocre
year in 1981, as late-year business activity weakened
everywhere-from farms to factories to construction sites
and government agencies. (This region, the area served
by the Twelfth Federal Reserve District, includes all nine
states west of the Continental Divide-see map, page 24.)
Activity in this nine-state region had been spotty in the
early quarters of 1981, but in the fall months , production
cutbacks and layoffs became widespread throughout
manufacturing , construction and other goods-producing
industries. Farmers and ranchers suffered a second
straight year of declining net income as a result of weak­
ening commodity prices and rising production costs . Res­
idential construction and home sales meanwhile remained
severely depressed , despite a late-year downturn in
mortgage-loan rates .
Migration into this region provided some support to the
regional economy-although less than during the boom of
the late 1970s -and total population increased moder­
ately to more than 38 million. Declining job prospects and
(in California) soaring home prices reduced the inflow of
migrants from other states. But unsettled political and
economic conditions overseas stimulated a heavy inflow of
migrants from Latin America and Asia , and as a result,
more new Californians apparently came from other
countries than from the rest of the U.S.

Western governmental agencies also had to pull in their
belts , partly because of a recession-caused slowdown in
tax revenues, but for a variety of other reasons as well.
Federal-government actions reduced state-local revenues
through cutbacks in grants and automatic linking of
Federal and state-local tax structures . In addition , these
jur isdictions cont inued to feel the effects of the tax-and­
spending limitations adopted by regional voters over the
past several years . California's state government, after
using its massive surpluses to ease the fiscal squeeze on
other units for the past several years, now found itself with
the prospect of a $766-million revenue gap in fiscal 1982.

Labor-Market Weakness
As a reflection of the late-1981 slump , regional employ­
ment increased only about one percent , on an annual­
average basis, to about 16.4 million for the year. The
increase in jobs was only about half as great as the 1980
increase , and only a fraction of the gains recorded during
the boom of the late 1970s. And for a change , employment
increased no faster in the West than in the rest of the
nation. The only signif icant gains occurred in trade and
services ; indeed, those two industries accounted for prac­
tically all of the region 's 400,000 employment increase of
the past two years. Job prospects turned bleak in a number
of manufacturing industries as the year advanced, while
construction employment continued to decline on the
heels of the 1980 slump . With state-local government
finances weakening , job levels remained practically flat in
the government sector for the fourth straight year, following
several decades of steady growth.

Cha nge (%)

Change in Employment




Unemployment soared throughout the West, as employ­
ment practically stagnated and as more and more job
seekers poured into the regional labor force. For example,
California's jobless rate practically matched the national
jobless figure, which averaged 7.6 percent of the labor
force for 1981 as a whole . Over the course of the year,
unemployment rates rose several percentage points in
most Western states. Indeed, in the Pacific Northwest,
jobless rates reached double-digit levels during the fall
months because of the impact of the nationwide housing
slump on the region 's forest-products industry.

- 2





Other US

19 77



20-percent decline in 1980-when regional producers
closed a number of high-cost facilities-so that industry
output remained well below the 1979 peak . The North­
west's aluminum industry reopened some facilities shut
down during a 1980 power shortage , but it eventually
found itself with excess inventories because of the nation­
wide homebu ilding slump and com mercia l-aircraft cut ­
backs. In this situation, the industry suffered a sharp profits
squeeze , reflecting its inabil ity to raise prices sufficiently to
compensate for soaring energy and other costs .

Governmental units in the Northwest also faced difficult
condit ions , strapped as they were by depressed conditions
in the key forest -products industry. And one agency, the
Washington Public Power Supp ly System , suffered cata­
stroph ic losses when it was forced to shut down two
partially completed nuclear-power plants .

Industrial Performance
In the industrial sector, the key aerospace-equ ipment
industry reduced its wor kforce about three percent over
the course of the year because of a slowdown in orders for
commercial products . Orders for commercial jet transports
fell off sharply, reflecting the impact of declining passenger
traffic and rising fuel costs on the earnings of the world 's
airlines . (As one consequence of this slowdown in orders ,
Lockheed announced plans to phase-out production of
the wide -bodied L-1011 jet transport .) Civilian orders for
electronic equipment also slowed as the national reces­
sion caused households and businesses to cut spend­
ing for such items as computers and communication
equipment. Increased foreign competition added to the
problems of California semiconductor firms . resulting in
extended late-year plant shutdowns to work off excess
inventory. In contrast, defense and space business in­
creased sharply, as Congress substantially increased
spend ing on such programs .

The regional copper industry recovered somewhat from its
1980 stri ke, yet activ ity remained well below the 1979 peak
due to weakness in demand from the auto , housing and
appliance industries . With foreign and domestic demand
weakening, refined metal prices moved steadily lower over
the course of the year, forcing producers to close some
mines and smelters for an extended period during the
holiday season . The silver-mining industry also experi ­
enced a steady downtrend in prices , as decelerating infla­
tion and high interest rates reduced speculative demand
for the metal. The average producer price moved from
almost $15 per ounce early in the year to less than $9 an
ounce by year-end , far below the $40 peak reached in
ear ly 1980 . Caught between declining prices and rising
costs, a major silver / lead/zinc producer thus closed its
mines and smelters at Kellogg (Idaho) late in the year,
idling about 2,100 workers.

Western steel product ion rose about seven percent during
the year, as the strong pace of nonresidential-bu ilding
activity (especially an off ice-building boom ) helped
stimulate regional steel consumpt ion . Western producers
also managed to capture a larger share of the regional
market , reducing the fore ign-import share from 43 to 41
percent. The production gain followed on the heels of a

Energy Developments
Regional petroleum consumption declined again during
1981, partly because of the recession , but also because of
conservation measures induced by an Administration de­
cision to accelerate decontrol of domestic crude-oi l prices .
Western utilities and industrial plants reduced thei r de­
mand for fuel oil, taking advantage of ample supplies of
clean-burning natural gas-which because of price con­
trols were also available at lower cost. Meanwhile, on the
supply side , higher prices spurred a modest increase in
regional crude production , on the heels of the sharp output
gains of the 1976-80 period . The import share of the re­
gional market continued dropping to 15 percent - from 48
percent at the 1976 peak-as Western refineries substi­
tuted more and more locally-produced oil for imports.


Higher wellhead prices brought about a reversal of the
long-term downtrend in California production, by triggering
a number of "tertiary" recovery projects to extract oil re­
maining in old wells. But Alaska also provided the site of
several promising developments-especially the Kuparuk
field, a major North Slope field adjacent to the Prudhoe
Bay deposit. Initially brought on stream with an output
of 80,000 barrels/day, the field is scheduled to reach a
production rate of 250,000 barrels/day by the mid-1980s,
with the oil being transported through the Trans-Alaska
pipeline. In addition, the pipeline designed to bring Alaskan
North Slope gas southeast through Canada to the "lower
48" states also moved closer to realization, when Pres­
ident Reagan signed legislation waiving certain U.S.
regulations that had been inhibiting private financing of
the project.

Change (%)

Housing Starts




The emerging export market for Western coal heightened
interest in the further development of the West's huge coal
resources, not only in long-established Utah fields but in
largely-untapped Alaska fields as well. Exports of Western
coal surged over the 1979-81 period as overseas utilities
and industrial firms sought lower-cost substitutes for
OPEC oil. The growing overseas market for steam coal
also triggered a wave of expansions of port facilities to
handle huge coal-carrying ships.


L . . - _....._


Construction Scene
A continued office-building boom represented the only
strong element in the 1981 construction picture, as Los
Angeles, Seattle, San Francisco and other regional
centers reported heavy activity in this sector. Historically
low vacancy rates, increased office-building investment
values, and inflation expectations all contributed to the
boom, which was national and not just regional in scope. In
an attempt to keep the boom going in the face of record
interest rates, many institutional lenders became devel­
opers themselves by taking ownership positions in joint­
venture projects. A note of caution entered the picture
in late fall, however, as vacancy rates began to rise
under the pressure of recession and massive additions
to office space.





....._ & . . _ _ & . . _____



Other US

The nationwide housing depression meant a deepening of
the protracted slump in the Western lumber industry. With
the cutback in housing-related orders, and with declines in
orders from the nonresidential-construction industry and
the export trade, production fell to the lowest level of the
past three decades. Softwood-lumber prices on average
just about matched the 1980 average figure, partly reflect­
ing the impact of a strike at British Columbia mills in the
early part of the year-but the price trend was clearly
downward, with prices at year-end off about 10 percent
from late-1980 levels. The pulp-paper segment of the
industry recorded modest gains in sales and employment
during the first half of 1981, but it too later weakened under
the impact of the national recession.

The three-year-old housing slump deepened further in
1981, with a 21-percent drop in building activity. Indeed,
housing starts in the Western census region dropped to
243,000 units-the lowest for any year in the past genera­
tion. (At that level, starts were 56 percent below the 1978
average, compared with a 41-percent decline for the rest
of the nation.) Home prices apparently fell in real
terms, because of falling demand and the many "creative
financing" schemes that builders and homeowners had to
use to sell their properties. Most homes for sale remained
out of the average family's reach, however, because of
earlier price hikes and the early-1981 upsurge in mortgage
interest rates, which exceeded 17 percent at the peak.
During the year, the median-priced new home in California
approached $108,000-about 50 percent higher than the
median price elsewhere. At mid-1981 mortgage rates,
a purchaser would have needed more than a $45,000
annual income to qualify for a mortgage loan on this
average-priced California home.

Squeeze on Farm Incomes
The comb ination of falling commodity prices and rising
production costs meant a severe squeeze on the incomes
of Western farmers and ranchers . Cash farm rece ipts
increased eight percent, to about a $24 -billion annual rate ,
for the first three quarters of the year. Yet bountiful supplies
plus relatively weak export demand depressed prices for a
wide range of products. Production costs rose sharply­
especially for credit , with record interest rates being paid
on grow ing amounts of farm debt. As a consequence , net
cash income apparently weakened for the year, and this
in turn meant a downtrend in sales for farm-equipment
dealers and other suppliers.

Western cattle producers had a poor year, as their costs
continued to rise wh ile their prices declined under the
impact of plentiful cattle supplies and weakening demand.
Beef-cattle prices fell for the second straight year, and
by late 1981 were about 14 percent below late-1979
quotations . Prices strengthened somewhat dur ing the
summer months, but then weakened again in the face of
reduced consumer budgets and increased supplies of red
meat and poultry. In response, cattlemen reduced their
feedlot inventories in the fall months to the lowest levels
of the past 15 years , and counted on slower marketings of
fed cattle-and lower feed-grain prices-to restore their
profit marg ins.

Wheat prices reached the lowest levels of the past three
years, on the heels of another record crop . Future
prospects appeared stronger, however, because of a
projected rise in foreign and domestic demand, and hence
a reduction in crop carryover. Wheat exports reached
record levels , reflecting heavy demand from Russian ,
Chinese and Indian markets. In contrast to wheat, export
demands for other products suffered because of the
strengthening of the U.S. dollar. This led to rising
inventories and lower farm prices for cotton , nuts and other
crops heavily reliant on overseas sales. A special compl i­
cat ing factor in the crop picture was the medfly (Mediter­
ranean fru it fly). California's $14-b illion agricultural
industry appeared threatened for a time by the medf ly's
infestation , but major commercial-crop growing areas
remained safe from the insect's depredations. Still, the
state incurred heavy expenses from the spraying of
infected areas , and lost some sales in U.S. and foreign
markets because of restrictions on California products.

Prospects for 1982
On balance, the 1981 performance of the Western
economy was better than 1980's mediocre performance in
one significant respect-higher real incomes-but worse
in terms of the major employment and production indexes.
After an unpromising start , 1982 should turn in a more
respectable record . The new year begins with continued
growth in defense spend ing, energy explorat ion and
commercial building . Residential builders and their sup­
plying industries seem likely to start on the recovery path ,
partly because of a three-year backlog of pent-up demand,
but mostly because of an expected turnaround in mort­
gage financing-marked by rising inflows of funds into
lend ing institutions, lower mortgage and construction-loan
rates , and hence signif icant declines in the monthly
payments of new homebuyers . Farm and nonfarm pro­
ducers also should experience a better year as inventories
get pared down to more reasonable levels . And Western
consumers , like the ir counterparts elsewhere, should
benefit from growing real incomes because of the package
of tax stimuli now in place and (above all) because of the
nation 's cont inued progress aga inst inflation .



banks' consumer deposits, and stimulated household and
busi ness relian ce on cash-management techniques to
max imize returns . Retail-oriented banks thus suffered
severe pressure on margins and earnings; as their funds
shifted into more expensive deposit categories, they could
no longer rely as heavily as in the past on low-cost core
deposits to fund fixed-rate mortgage and consumer loans.

Western depository institutions faced a difficult year in
1981 as they tried to deal with an environment of widely
fluctuating interest rates, sharp compet ition for funds , and
softness in the regional economy. Relative performances
varied widely, primarily depending on each institution 's
degree of retail or wholesale orientation . While most banks
expanded in terms of asset size, bank earnings overall
apparently fell below the 1980 record because of substan­
tial reductions in net interest margins , especially on retail
operations. The regional thrift industry meanwhile experi­
enced the worst earnings year since World War II, with
many S&Ls reporting negative spreads because of
the squeeze between high-cost funds and low-yielding
mortgage portfolios .

Western banks added $8 billion in consumer certificates
with yields tied to Treasury-auction rates-six-month
money-market certificates, thirty-month small savers cer­
tificates , and the new (tax-exempt) all-savers certificates .
Much of this increase came at the expense of relatively
inexpensive savings deposits, which declined by $5 billion ,
rather than from outside the banking system. Over the
year, the proportion of consumer time-and-savings de­
posits paying market-related interest rates rose from 50
percent to almost 60 percent.

Despite the near-record cost of funds , Western banks
generally outpaced their national counterparts. Out­
standing bank credit-loans and security investments­
exceeded $200 billion for domestic operations, up $18
billion for the year. The 10-percent increase in bank credit,
well above 1980's seven-percent increase, reflected gains
in both business and consumer lending, in contrast to a
weakened real-estate category. Holdings of U.S. Treasury
and state-local government securities increased by less
than $1 billion over the year.

Western banks experienced a slight decline in transaction
deposits, so that they now represent less than one-quarter
of banks' total deposits. This development, however,
masked a major increase in banks ' cost of funds and a
deposit shift associated with the introduction of NOW
accounts and heavy promotion of interest -bearing check­
ing accounts . Overall , a $7-billion gain in NOW accounts
just offset an equivalent decline in bank demand balances .

Lending: Credit Available
Western banks expanded their commercial and industrial
loans by 12 percent, to $52 billion , during 1981. Demand
increased partly because of corporate needs for working
capital and inventory financing, but also because of factors
such as the high cost of long-term debt financing. Com­
mercial and industrial lending was strongest in the heavy
industries-petroleum , rubber, chemicals and mining­
although for widely divergent reasons . The oil industry
needed funds largely for expansion purposes, whereas
other industries took down bank loans to finance bloated
inventories in the face of depressed markets.

Western banks thus had to rely heavily on "purchased
money" for their 1981 credit expansion, with large­
denomination time deposits alone accounting for nearly
$14 billion. Much of that increase did not represent new
money, however, but rather a recycling of bank funds
through another intermediary, money -market mutual
Change (%)

Western Bank Loans


Bank mortgage lending increased 13 percent, to $67
billion , but largely because of the growth of relatively high­
return, short-term home-equity loans . With the past
decade's rapid escalation of Western housing prices,
many homeowners took advantage of the increased equity
in their homes and property to finance other purchases .
Consumer loans meanwhile rose by three percent, to $33
billion, completing the recovery from the sharp mid-1980
decline brought about by that period 's credit-control
program. The increase was even more significant when
viewed against the backdrop of record consumer loan
rates , softness in retail sales (especially autos), and the
impact in several states of low usury-ceiling rates. And
statistically, the increased popularity of home-equity loans
for consumer purposes also tended to reduce consumer­
loan figures.


Expensive Funding
Domestic deposits of Twelfth District banks rose 10
percent to $202 billion by year-end , and those deposits
came at significantly higher costs . Higher interest rates
intensified competition from other financial institutions for

-5 ......- & . - - - - - . . & . . . - . . & - - . . . & . . -......-





Mort ga ge





funds. These institutions captured a significant portion of
banks' and thrifts' low-cost core deposits during the year ,
and relent those funds at market rates to institutions
issuing large CD's.

aggressive promotion. And the much-heralded all-savers
certificates, introduced in October, reached no more than
$5 to $6 billion, with relatively little of that growth repre­
senting new (non-S&L) funds .

Earnings Picture
Squeezed by high interest rates, stiff competition from
thrifts and money-market funds , and increasing depen­
dence on expensive sources of funds , Western banks
generally experienced trouble boosting their earnings in
1981. For some , even a large loan expansion could not
offset the narrowing of spreads caused by the sharp in­
crease in borrowing costs. Yet for others, a fourth-quarter
widening of marg ins on business loans made it possible to
improve earnings for the year.

Nonetheless, Western S&Ls proved resourceful in finding
ways to retain funds that might otherwise have left the
industry. Retail repurchase agreements (repos), originally
offered as part of the all-savers promotion, eventually
became a significant source of funds for the industry.
These instruments , although not insured , are essentially
secured borrowings, and thus proved capable of attracting
$2 to $3 billion in funds by the end of the year.
S&Ls had trouble financing their operations in view of the
continued outflow of deposits from traditional passbook
and certificate accounts, with their statutory interest-rate
ceilings . Associations borrowed heavily from the Federal
Home Loan Banks of San Francisco and Seattle at rates
frequently in excess of 15-16 percent. Furthermore , S&L
deposit costs became more expensive in 1981, as persis­
tently high interest rates aggravated the continuing shift of
funds from low-cost deposits to such instruments as the
six-month money-market certificate and the 30-month
small-savers certificate. Indeed, over the year, deposits
bearing market-related interest rates rose from 64 percent
to 72 percent of S&L savings capital.

Operating income and interest income rose sharply in
1981 as a result of the increase in earning assets and
the impact of high interest rates on income from floating ­
rate and short-term loans and securities. Still, operating
expenses increased even more dramatically. In particular,
a heavy emphasis on retail lending left many banks with
a low proportion of interest-rate-sensitive assets relative
to interest-sensitive liabilities. Thus, returns on fixed­
rate , long-term mortgages and intermediate-term con­
sumer loans rose much more slowly than , or even fell
below, the cost of funding these assets with variable-rate
consumer deposits .

Squeezed by seemingly ever-rising costs of funds and
much lower-yielding mortgage portfolios, many Western
S&Ls thus reported negative net interest spreads for the
year. Net worth, as a result, declined from its December
1980 level , although a substantial cushion remained. The
overall result was the worst earnings year for the industry
since World War II.

The sharp climb in interest expense reflected the high cost
of funds, of course . But it also reflected the massive shifts
into expensive sources of funds , including 1) the move­
ment of funds from non-interest-bearing checking ac­
counts into 5V4-percent NOW and ATS accounts , 2) the
replacement of passbook-savings deposits and maturing
fixed-rate consumer certificates with more costly variable­
rate certificates, and 3) the increased reliance on expen­
sive CDs and other short-term managed liabilities. The
shift was most detr imental for those banks that had bene ­
fitted in earlier years from a well-developed retail deposit
base of inexpensive checking and passbook-savings
deposits and fixed -rate consumer certificates.

Future Scene
Western banks and other depository institutions face
continued uncertainty as they enter 1982. The present
recess ion portends some easing in loan demand , as both
businesses and consumers retrench . Falling interest rates
could provide institutions with some relief from the pres­
sure on interest margins, but the legislated phase-out of
interest-rate ceilings and continued financial innovations
could work in the other direction . To counter the increased
interest-rate risk associated with the shift to a variable-rate
consumer-deposit base, banks and thrifts may introduce
and promote more variable- and floating-rate mortgage
and consumer-loan products in 1982.

S&L Problems
Western savings-and-Ioan associations found even less to
cheer about than banks in 1981's recession atmosphere.
High home prices and persistently high interest rates
sharply curtailed demand for new-home financing .
According to preliminary estimates, mortgage closings
totalled only $14 .8 billion -well below even 1980's modest
total. Moreover, much of that lending was secured by
second mortgages, generally for purposes other than
home purchases.

Banks will face cont inued stiff competition for consumers'
savings from money funds and thrifts , and will also meet
competition in the commercial-lending area from foreign
lenders facing weakening overseas markets . In the
consumer-lending field, competition may increase as
S&Ls gain more exper ience and become more act ive in
granting installment credit. Finally, depository inst itutions
generally can count on growing inroads from a wide range
of non-bank financial institutions as they begin the year.

High interest rates also affected S&L deposits, as
money-market funds, in part icular, attracted funds from
low-yielding S&L passbook and certificate accounts. And
thrifts obtained less help than anticipated from two new
types of accounts-NOW's and all-savers certificates.
Check-like NOW accounts', introduced regionally at the
beginning of the year, grew to only $2 billion despite very


Management Committee
(Shown from left to right , standing)
Richard T. Griffith , Executive Vice President , District Operat ions
Kenneth A. Grant , Senior Vice President , Computer Services
Kent O. Sims , Executive Vice President, Distr ict Departments
John J. Carson , Sen ior Vice President, Corporate Staff
John J. Balles , President
John B. Will iams , First Vice President



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Federal Reserve Bank of San Francisco
Organization Chart
February 1, 1982





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Branch Operations
(Shown from left to right , standing)
David J. Christerson , Vice President, Operations
Richard 1. Griffith , Executive Vice President , District Operatio ns
H. Peter Franzel, Vice President, District Operat ions Administration
Angelo S, Carella. Vice President , Portland
Richard C. Dunn, Senior Vice President , Los Angeles
Gerald R. Kelly, Senior Vice President, Seattle
A. Grant Holman, Vice President, Salt Lake City


organized a Pricing and Access Project Team with the
responsibil ity of coordinating implementation of the Act 's
provisions on a district-wide basis . In June 1981, the Bank
organized a new Financial Services Department for offer­
ing and pricing the various financial services provided by
the Reserve Bank to financial institutions. The new depart­
ment is responsible for price admin istration, customer rela­
tions, and the planning and development of additional Fed
services. In addition , the Bank in 1981 established an MCA
Advisory Group , consist ing of twelve senior executives
from all types of depos itory institutions , to provide a
two-way channel between the Bank and the financial
community regarding implementation of MCA programs
and policies . This group met six times during the year with
Bank officials.

The Federal Reserve Bank of San Francisco operated in a
new competitive environment during 1981, largely in
response to the passage of the Depository Institutions
Deregulation and Monetary Control Act of 1980 (MCA).
Under this legislation , Congress promoted greater equity
and improved monetary control by applying Federal Re­
serve reserve requirements to all depository institutions
with transaction (check-type) accounts or nonpersonal
time deposits. In addition , Congress promoted greater
efficiency in financial markets by providing access to
Federal Reserve services , at explic it prices , for those
institutions now subject to reserve requirements.
During the year, the Reserve Bank provided financial
services-in the area of checks , coin, currency, fiscal
agency, and electronic fund transfers-for a large regional
economy troubled by severe problems of recession and
inflation. The Twelfth District , which is served by five
Reserve Bank offices (San Francisco, Los Angeles , Port­
land, Salt Lake City and Seattle) is the largest Federal
Reserve district in terms of population, geographic size
and industrial activity. It includes the states of Alaska,
Ar izona , California, Hawaii, Idaho , Nevada , Oregon , Utah
and Wash ington, with a total population of more than 38
million people .

Activity at the discount window increased sharply during
1981, largely as a result of the Monetary Control Act. Under
MCA, all depository institutions having reservable transac­
tion accounts or nonpersonal time deposits are entitled to
the same borrowing privileges as member banks. Nearly
250 nonmember institut ions established relationships with
the Twelfth District's discount window during the year, and
39 of those institutions (along with 65 member banks)
exercised their borrowing privileges. While most of the
borrowers used the discount window for short-term pur­
poses , 15 member and nonmember institutions borrowed
to meet their seasonal or other longer-term liqu idity needs .

Implementation of MCA
As a result of the enactment of MCA , the Reserve Bank 's
data-collection workload expanded significantly. Previ­
ously, the Bank collected deposit data on a weekly basis
from only 147 member banks , but in November 1980 it
implemented weekly reporting requirements for 996 insti­
tut ions (primarily those with $15 million or more in total
deposits), and in January 1981, implemented quarterly
reporting requirements for 783 smaller institutions (primar­
ily those with $2 million to $15 million in deposits) . Of the
total, about 350 institutions currently are maintaining
reserve accounts directly with the Reserve Bank. Several
times during the year, the Fed's Board of Governors
deferred reporting and reserve-maintenance require­
ments for nonmember depository institutions (mostly
credit unions) with under $2 million in depos its. Congress
is now giving consideration to a permanent exemption for
these smaller institutions.

In September, the Reserve Bank centralized the District's
discount-window admin istration at its San Francisco head­
quarters office . The Bank made the change to improve the
efficiency of its credit function, and also to separate the
personnel responsible for approving extensions of Federal
Reserve credit from personnel responsible for the sales of
priced Fed services.

Computer Developments
The Bank's Computer Services Group became closely
involved in implementing MCA programs during 1981. In
addition , it completed an automated securities-handling
system (SHARE) and completed the second phase of a
financial-statistics system (MIPE) . The group also contin­
ued to work on an automated-billing system to accommo­
date the pricing of securities and cash transportation, and
developed an automated management-reporting system
to assist the Financial Services Department in analyzing
prices , services , and product performance.

A number of operating departments began implementing
open access and pricing for financ ial services on a
phased-in basis during 1981. Implementation of pricing
began for wire-transfer and net settlement serv ices in
January, for check and automated clearinghouse services
in August , for securities handling in October, and for cash­
transportation services in January 1982. Over the long
run , revenues derived from providing these financial
services are expected to cover all Federal Reserve costs
in providing them, including an amount to reflect private­
sector costs (such as taxes and capital costs) not incurred
by the Federal Reserve.

Culminating three years of cooperative developmental
efforts, the Reserve Bank successfully implemented the
SHARE securities-handl ing automation system at all five
District offices . In addition , the Bank assisted the Kansas
City, St. Louis, and Dallas Reserve Banks with the ir
implementations of the system. The SHARE project, with
San Francisco as the lead bank, represents a major coop­
erative effort involving software development.
In another major effort, the Bank successfully imple­
mented the MIPE financial-statistics system, which
represents a highly advanced statistical data-reporting

In early 1980, the Reserve Bank establ ished an MCA
Policy Committee with responsibility for supervising
implementation of the new legislation . The committee then


In its first several months under check pricing, the Reserve
Bank experienced a six-percent decline in check-process­
ing volume. At the same time, it witnessed a dramatic
surge in the handling of "fine sort" deposits-that is, in
handling pre-sorted bundles containing up to 250 checks
payable at a single check-processing endpoint. Nation­
wide, the Federal Reserve lost an average of about eight
percent of its total check volume to the private sector,
which is in line with projections made before the com­
mencement of pricing. In the preceding three years, in
contrast, the Federal Reserve experienced check-pro­
cessing growth of six to seven percent annually. Pricing
probably was the major reason for the overall decline in
volume, but other factors also contributed-such as an
increase in overnight availability of check exchange
among some of the nation's major commercial banks via
chartered air-carrier. The Fed also provides overnight
consolidated shipments among most of its 48 nationwide
processing centers, but check-availability times can
stretch to two days where more remote points are involved.

application. A number of current reports were converted to
the MIPE system during the year.
The Federal Reserve continued work on upgrading its
electronic-communications network in a project known as
FRCS-80 (Federal Reserve Communications System for
the '80s). The new system will be a general-purpose
data-communications network, satisfying the Federal
Reserve's internal-communications requirement for pro­
viding services to the financial community, the Treasury,
and other government agencies. The system will improve
the reliability and capacity of the Federal Reserve's
communications operation, reduce the total cost of
communications through a more efficient use of circuits,
and increase the security of data moving within the Federal
Reserve System. The computer powerof FRCS-80 will be
distributed among Federal Reserve offices, instead of
revolving around a computerized hub as does the current
Fed Wire.

Payments Services
All payments departments became actively involved in the
implementation of open access and pricing during 1981.
As noted above, pricing schedules were phased-in at var­
ious times during the year. The Federal Reserve now plans
to review and adjust fees for those priced services on the
1982 anniversary dates of the implementation of pricing.

Electronic-payments activity expanded rapidly, as the
Federal government and private financial institutions
continued to emphasize electronic transfers for making
payments. Automated clearinghouse (ACH) volume in­
creased 35 percent over year-earlier levels. The use of
electronic datalink transmissions to replace courier
deliveries of tapes and reports expanded rapidly, from five
sites at mid-year to 15 sites at year-end. The Reserve
Bank strongly encouraged the use of electronic delivery
and presentment of ACH images via datalink as a means
of improving the quality of services, reducing manual
operations, and encouraging greater use of ACH facilities.
The Fed used long-run costs as a price basis for ACH
operations. With electronic payments encouraged in this
fashion, the System believes that the public will benefit in
terms of efficiency and improved collection time.

In pricing what were formerly "free" services, the Bank
placed heavy emphasis on quality and cost control in all
departments. The Check Department developed new
audio-visual training programs in the critical input­
processing and set-up functions. Moreover, all Bank
offices established quality-assurance units to develop,
implement, and monitor internal quality controls within the
payments functions.

Change (%)

Cash, Fiscal Activities
Despite all the activity in check and electronic payments,
the Reserve Bank continued to handle substantial
amounts of coin and currency in 1981. Altogether, it paid
4.6 billion coins and 1.7 billion pieces of currency into
circulation during the year. Efficiency in the cash function
improved with the installation of high-speed currency
sorting machines, of which eight are now in operation at
various District locations. Each machine has an optimum
feed rate of 1,200 notes a minute, and is capable both of
detecting counterfeits and of destroying on-line those
notes which do not meet minimum fitness standards.
These high-speed units also deliver a consistent quality of
fit currency, which is needed to meet the requirements of
the financial industry as it continues to expand its use of
automated teller machines.

Growth of Payment Services









Wire Transfers



Automated Clearinghouse
Commercial Checks

In its role as fiscal agent for the U.S. Government, the
Reserve Bank handled substantial amounts of public-debt
instruments in the form of savings bonds and marketable
Treasury securities. Activity in marketable securities
increased five percent in volume, reflecting continuing
investor interest in the record high rates offered on such


Change (%)

Supervisory Developments
In the supervisory area , the bank examinations and bank
holding-company inspections conducted during 1981
confirmed the generally healthy condition of the institutions
supervised by this Reserve Bank . However, exam iners
found many evidences of the effects of inflation-such as
reduced liquidity, marginally lower capital ratios , pressure
on earnings, and (in some instances) lesser asset quality.
The Bank kept examination costs in line by adopting new
policies regarding frequency of examinations. One new
policy permits the use of an 18-month instead of a
12-month cycle of exam inations for sound and well­
managed state member banks . Similarly, the Reserve
Bank entered into an agreement with the California State
Banking Department, whereby each agency will examine
well-managed state member banks in alternating years .
The Bank continued to coordinate its holding-company
examinations with the examinations of subsidiary banks
made by other regulatory agencies, in line with the policy
developed by the Federal Financial Institutions Examina­
tion Council, the coordinating body for Federal regulatory
agencies. The policy promotes efficiency by pooling the
knowledge and skills of different regulators when conduct­
ing examinations of the larger bank holding-company
organizations. The applications staff handled a w?rkload
wh ich doubled in size , largely because of the desire of
District financial institut ions to position themselves for
anticipated legislation that could reduce existing limita­
tions on geographic operations and types of services
offered. Notable among the applications processed was
Midland Bank Ltd.'s request for approval to acquire a con­
trolling interest in Crocker National Corp .-the largest and
most complex application ever submitted under the Bank
Holding Company Act.

Growth of Cash Services


Paid into
Circ ulation





• Coi n
• Cu rrenc y




'C hange In mint shipme nts

issues. But as a result of the installation in 1980 of an
automated Treasury-bill processing system, the District's
Fiscal Department was able to respond effectively to the
heavy workload associated with Treasury-bill purchases.
The Los Angeles office, which handles all savings-bond
operations for the District, installed a minicomputer-based
software system to improve the efficiency as well as the
quality of customer services in this area. And as noted
previously, the Reserve Bank completed development of
the SHARE resource-sharing project, wh ich automates
safekeeping and transfer of book-entry and definitive
securities in fiscal activities.

In discharging its respons ibilities, the Bank's staff
examined more than 100 international offices -such as
agencies of foreign banks , overseas offices of U.S. bank­
ing organizations, and Edge Act corporations (firms
involved in international trade and finance). Edge opera­
tions continued to increase substantially during the year, in
line with earlier legislation which permitted banking organ i­
zations to consolidate the ir Edge operations into nation­
wide branch networks. There are now six head offices of
Edge corporations in the District with 26 branches nation­
wide , reflecting the convers ion of indiVidually-capitalized
corporations into branches of larger entities, as well as the
establishment of new branches in cities not previously
served . Conversely, most of the individually-capitalized
corporations previously operating here converted to
branches of other out-of-district entities, while eight new
Edge branches opened for business in the District. Foreign
agencies, Edge corporations , and banks conducting inter­
nat ional business meanwhile established 50 International
Banking Facilities (IBFs) , as a result of legislation and
regulations designed to encourage offshore activities to
remain within domestic jurisdictions.

The Bank continued efforts to curb the cost of trans­
portation activity-which is the District's third largest
expense item, after personnel costs and new-currency
costs. Rising fuel prices continued to boost costs of air
transportation for the inter-district check-delivery system,
but costs rose at a much slower pace than heretofore .
Airline-industry deregulation and the air traffic-controllers'
strike led to a declining number of scheduled commercial
flights , but the District's contracted commercial-frei~ht
forwarder displayed a high level of performance dunng the
year. This permitted the Bank to reduce transportation­
related float (checks credited prior to receiving payment)
for those cash letters delivered to other Reserve Banks
throughout the System. In early 1981 , the Bank redesigned
its intra-district check-delivery network into a single ser­
vice contract with all offices utilizing one carrier. This
streamlined system affords greater management control
and cost efficiency in comparison to the previous system,
which utilized a half-dozen different carriers.

The consumer-affairs staff conducted examinations at all
state member banks and also at about one-fifth of their


branches, in line with a Federal Reserve program
designed to achieve broad-based compliance with
consumer-protection laws and regulations. The staff
processed almost 1,000 individual complaints against
commercial banks during 1981-about 35 percent more
than in 1980-but none of the complaints required the
Bank to resort to its enforcement powers to compel re­
medial action . In its educational role, the consumer-affairs
staff published a consumer-education booklet designed to
assist potential borrowers looking for a loan , as well as
creditors who want to improve the ir customers' under­
standing of credit transactions. In addition, the unit
co-hosted several seminars with Board of Governors
staffers, to explain key material from the Truth in Lending
Simplification and Reform Act both to lending-institution
personnel and to examiners from other Federal agencies .

Bank rated second in the System in cost effectiveness ,
with aggregate unit costs 10 percent below the System
average . Meanwhile, as a result of a quality-improvement
program initiated several years ago , the Bank improved its
quality of performance, as measured by reductions in
errors and processing times on various operational tasks .
The Federal Reserve is now actively reviewing measures
of quality because of the new emphasis on market­
oriented services under the Monetary Control Act.
Lastly, as a means of assuring the effectiveness of future
operations , the Bank continued construction work on a
12-story, 653 ,000-square-foot headquarters building on
San Francisco's Market Street. The present headquarters
building was built in the 1920s and is small and inefficient
from the standpoint of 1981-style banking operations.
Indeed , with recent increases in workload, the Bank 's
headquarters operation now has spread over five separate
buildings. The new facilities are scheduled for occupancy
in late 1982 , ready to assist the Bank in providing many
central-banking services to a large and diverse group of
Western financial institutions .

Improved Productivity
Throughout the year, the Bank 's management struck an
appropriate balance between cost effectiveness of opera­
tions and qual ity of output. The San Francisco Reserve

Summary of Operations


Volume [thousands)


Custody Services
Cash Services

Currency paid into c irculation

Coin paid into circulation

1,281 ,41 6

4,895,306 1






N/ A
11 7,237

N/ A





41 ,298



Fiscal Agency Services

Savings Bonds original issues

Savings Bonds redem pt ionsp rocessed *

Other T sury original issues

Food coupons p rocessed


1,31 8



Payments Mechanism Services
Check Processing Services

Commercia l checks proc essed

Fine sort b und lesprocessed

Gove rnment c hec ksproc essed

Return items proc essed

Electronic Funds Transfer Services
Wire transfers processed
Automa ted c learing house transactionsprocessed

Discounts and Advances
Totald iscounts and advances*

Numb er of fina nc ia l institutionsacco mmodated *

*Number (not in thousa nds)

Unusuall y high volume of pa yout d ue to implementation of direct mint shipmentsto b anks


Financial Services Group
At midyear the Bank formed a new Financ ial Services
Depar tmen t to develop and price the var ious operating
serv ices offered to financial institutions. This de part ment
is handling price adm inistration , serv ice relations, and
plann ing and development of additional Reserve Ban k
serv ices .

John F. Hoover
Vice Presid ent. Financial Services , San Francisco
Martha F. Perry
Financial Servi ces Off icer, Customer Relations
San Franc isco


Mauree n E. Shields
Financial Serv ices Off icer, Produ ct Manage ment
San Francisco
William C. Ferensen
Financial Serv ices Off icer, Seattle
William W. Hall
Financial Servi ces Officer, Salt Lake City
Susan L. B. Robertson
Financial Services Officer, Portland


Richard L. Rasmussen
Vice President, Administration , Los Angeles







* * *

The Federal Reserve carries out its central-banking
functions through a nationwide network of 12 Federa l
Reserve Banks and their 25 branches , under the policy
gu idance , coordination and general supervision of the
Board of Governors in Wash ington, D.C. The Head Office
of the Federal Reserve Bank of San Francisco has a
nine-member Board of Directors. Each of the Bank's other
offices at Los Angeles , Portland , Salt Lake City and
Seattle has a seven-member board .

* * *

Federal Reserve directors bring management expertise to
the task of overseeing Reserve Bank operat ions. They
also prov ide first-hand information on key econom ic
developments in various areas of the District , comple­
men ting the Bank 's internal resea rch effor ts. In addition,
Board members give adv ice 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 discoun t rate ,
subject to review and approval by the Board of Gove rnors.



* * *

* * *


Head Office
Chairman of the Board and Federal Reserve Agent
Caroline Leonetti Ahmanson
Chairman of the Board, Caroline Leonetti Ltd.
Hollywood, California

Deputy Chairman
Alan C. Furth
President, Southern Pacific Company
San Francisco, California


Fred W. Andrew
President and Chief Executive Officer
Superior Farming Company
Bakersfield, California


Frederick G. Larkin, Jr.
Chairman of the Executive Committee
Security Pacific National Bank
Los Angeles, California
Ole R. Mettler
President and Chairman of the Board
Farmers and Merchants Bank of Central
Lodi, California




Clair L. Peck, Jnr.
Chairman of the Board
C. L. Peck Contractor
Los Angeles, California


J. R. Vaughan
Senior Member
Richards, Watson, Dreyfuss & Gershon
Los Angeles, California

George H. Weyerhaeuser
President and Chief Executive Officer
Weyerhaeuser Company
Tacoma, Washington


Robert A. Young
Chairman of the Board and President
Northwest National Bank
Vancouver, Washington

Federal Advisory

Council Member


Federal Advisory Council Member

Joseph J. Pinola
Chairman of the Board, First Interstate Bancorp
Los Angeles, California


Los Angeles

Chairman of the Board

Bruce M. Schwaegler
Pres ident , Bullock's-Bullocks Wilshire
Los Angeles , California

Robert R. Dockson
Chairman and Chief Executive Officer
California Federal Savings and Loan Associat ion
Los Angeles, California

Bra m Goldsmith
Cha irman of the Board , City National Bank
Beverly Hills, Californ ia

Lola McAlpin-G rant

Ass istant Dean , Loyola Law School

Los Ange les, California


James D. McMahon
Pres ident , Santa Clarita National Bank
Valen cia , California


Togo W. Tanaka

Pres ident , Gramercy Enterprises

Los Angeles , California


William L. Tooley
Managing Partner, Tooley & Company, mvestrnent
Los Angeles , California




Chairman of the Board
John C. Hampton
Chairman of the Board and President
Willamina Lumber Company
Portland , Oregon

Herman C. Bradley, Jr.
President and Chief Executive Officer
Tri-County Banking Company
Junction City, Oregon

Caro lyn S. Chambers
Execut ive Vice President/Treasurer
Liberty Communications , Inc.
Eugene , Oregon

John A. Elorriaga
Chairman and Chief Execut ive Officer
United States National Bank of Oregon
Portland , Oregon

Jack W. Gustavel
President and Chief Execut ive Officer
The First National Bank of North Idaho
Coeur d'Alene , Idaho

William S. Naito
Vice President , Norcrest China Company
Portland , Oregon


Phillip W. Schne ider
Former Northwest Regional Executive
National Wildlife Federation
Portland , Oregon




Salt Lake City
Chairman of the Board
Wende ll J . As hton

Publisher , Deseret News

Salt Lake City, Utah


Spencer F. Eccles
Cha irman , President and Chief Executive Off icer
First Security Corporation
Salt Lake City, Utah

Lela M. Ence
Executive Director
University of Utah Alumn i Asso ciat ion
Salt Lake City, Utah

Robert A. Erkins
Geo ther mal Ag ri/ Aquaculturist
White Arrow Ranch
Bliss, Idaho


Albert C. Gianol i
President and Cha irman of the Board
First National Bank of Ely
Ely, Nevada


Fred H.Stringham
Pres ident , Valley Ban k and Trust Company
South Salt Lake, Utah

J. L. Tertel ing
Pres ident , The Tertel ing Company, Inc .
Boise , Idaho




Chairman of the Board
John W. Ellis
President and Chief Executive Officer
Puget Sound Power & Light Company
Bellevue , Washington

Merle D. Adlum
President, Maritime Trades Department ,
Puget Sound District Council , AFLICIO
Seattle . Washington

Lonnie G. Bailey
Executive Vice President and Chief Operating Officer
Farmers and Merchants Bank of Rockford
Spokane , Washington

Dona ld L. Mellish
Cha irma n of the Board. National Bank of Alaska
Anchorage , Alaska

John N. Nordstrom
Co -Chairman of the Board , Nordstrom, Inc.
Seattle , Washington

Virgin ia L. Parks
Vice President for Finance and Treasurer
Seattle University
Seattle , Washington


G. Robert Truex, Jr.
Cha irman and Chief Executive Officer
Rainier Bancorporation and Rainier National Bank
Seattle, Washington




Comparative Statement of Account
(Thousandsof Dollars)
December 31 ,

S 1,253,000

S 1,083,000









Cash items in process of collection .. ,

Bank premises
, .. ,

Operating equipment ,
, .. , ...



Other assets:

Denominated in foreign currencies

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

All other ... ,.








Total depository institutions-reserve accounts

Foreign ... ,.'

Other deposits



Total deposits











Gold certificate account

Special Drawing Rights certificate account

Other cash .,.,
,., .. ,.,

Loans to depository institutions
Federal Agency obligations. ,
United States Government securities:

, .. , .. ,
, ., .. , " . ,
, .. , .. ,
, , .. ,
, .. , ,
, .. , .. ,.,.,
, .. ,




Total United States Government securities

Total loans and securities .,.,

Total assets .. ,

Federal Reserve notes

Deferred availability cash items ... , ..

Other liabilities
, , .. , ...

Total liabilities

Capital Accounts
Capital paid in .... ,.,.,.,.,.,
Surplus ..... , .. "., ..... ,.,

, .. ,

, ..

Total liabilities and capital accounts
Contingent liability: earned credits due to depository institutions


, , .. ,



Earnings and Expenses

(Thousands of Dolla rs)
December 31.

Current Earnings

Disc ou nts an d advan ces
United Sta tes Government securities
Fo reig n cu rrenc ies
Inc ome from servic es
A ll other

S 12.977


N/ A
1,696 ,626




99,6 74


92,45 1

1,616,91 8

1,964 ,685


152 83










S 14,797
1,9382 92





- 12.583
N/ A
- 9,880

- 65,890
- 10,177


194 264
209 ,300




Total current earnings

Current Expenses
T ta l c urrent expenses
Less reimbursemen t for c erta in fiscal agenc y a nd other exp enses
Ne t expenses


Profit and Loss
Current net ea rning s

Add itions to c urrent earnings

Prof it on sa les of United Stat es Government securities (net)

Profits on fore ig n exc ha ng e transactions

A ll other


Tota l add itions

Deduc tion s from c urrent net ea rning s

Loss o n fo reign excha nge transacti ons (net)
Lo ss on sa les of United Sta tes Government securities (net)

All othe r



Tota l deductions

Net additions ( + ) deducti ons (- )

Eamed c redi ts used by d epos itory institutions

Assessments for exp end itures of Boo rd of Governors
Ne t e arnings b efore p a yments to United States T sury

Divid e nd s pa id

Payments to United Sta tes Treasury (interest on Fed era l Reserve note s)

Transferred to surplus

Surp lus Ja nua ry 1
Surplus Decemb er 31




,." . . "



,." ,
" . ,

"", .. ,


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

About the photos:
Th is Annual Report contains photographs of directors and senior off icers , plus a group of
financial-service off icers-the major public-contact personnel for the Bank 's new Financial
Services Department. In addition , interspersed throughout the text are candid photos of
individuals from a number of operating and staff departments.
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, Yvonne Levy and Gary Zimmerman.


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