The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
€/lnnual
^ebort
1978
\i
••f^mt--'
Board of Governors of the Federal Reserve System
Letter of Transmittal
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, D.C., April 20, 1979
THE SPEAKER OF
THE HOUSE OF REPRESENTATIVES
Pursuant to the requirements of Section 10 of the Federal Reserve
Act, as amended, I am pleased to submit the Sixty-Fifth Annual
Report of the Board of Governors of the Federal Reserve System.
This report covers operations of the Board during the calendar
year 1978.
Sincerely,
G. William Miller, Chairman
Contents
Part 1 Monetary Policy and the
U.S. Economy in 1978
3
5
8
9
10
11
12
INTRODUCTION
THE ECONOMY IN 1978
Household sector
Business sector
Government sector
Labor market developments
Prices
14 MONETARY POLICY AND FINANCIAL MARKETS
15 Monetary aggregates and interest rates
20 Aggregate flows of funds
25
INTERNATIONAL DEVELOPMENTS
31
OFFICIAL STATEMENTS ON GROWTH RANGES FOR
MONETARY AGGREGATES
Part 2 Records, Operations,
and Organization
65
RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
102
RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE
266
FEDERAL RESERVE OPERATIONS IN FOREIGN
CURRENCIES
269
269
275
292
307
312
CONSUMER AFFAIRS
Introduction
Truth in Lending
Equal Credit Opportunity
Federal Trade Commission Act
Home Mortgage Disclosure
314
SECURITIES ACTS AMENDMENTS OF 1975
315
GOVERNMENT IN THE SUNSHINE
316
316
317
318
319
319
319
320
LEGISLATIVE RECOMMENDATIONS
Monetary improvement program
Financial transactions with affiliates
Lending authority of Federal Reserve Banks
Expansion of Class C directors
Term of Chairman of the Board of Governors
Loans to examiners
Authority for bank holding companies to acquire banks
across State lines in emergency and failing-bank situations
Simplification of Truth in Lending Act
Uniform rules for credit and EFT transactions
320
321
323
323
332
LITIGATION
Bank holding companies—Antitrust action
—Review of Board actions
Other litigation involving challenges to Board procedures and
regulations
337
337
338
340
349
350
351
3,51
352
352
353
353
353
354
354
355
LEGISLATION ENACTED
International Banking Act
Full Employment and Balanced Growth Act
Financial Institutions Regulatory and Interest Rate Control Act
Securities Investor Protection Act amendments
Federal Banking Agency Audit Act
Debt ceiling increase
New York City loan guarantees
National Consumer Cooperative Bank
Futures Trading Act
Bretton Woods Agreements Act amendments
Susan B. Anthony Dollar Coin Act
Ethics in Government Act
Renewal of Federal Reserve Banks' direct purchase authority
Housing and Community Development Act amendments
Revenue Act
357
357
365
368
BANK AND BANK HOLDING COMPANY SUPERVISION
A N D REGULATION BY THE FEDERAL RESERVE SYSTEM
Domestic activities and applications
International activities and applications
Schools
369
369
371
372
373
CONDITION OF T H E BANKING SYSTEM
Trends in indexes of bank soundness
International activities
Supervisory improvements
Conclusion
375
375
375
376
REGULATORY IMPROVEMENT PROJECT
Project plan
Implementation
Accomplishments
378
378
378
379
380
381
381
382
FEDERAL RESERVE BANKS
Payments mechanism developments
Examination
Earnings and expenses
Federal Reserve bank premises
Holdings of loans and securities
Loan guarantees for defense production
Volume and cost of operations
383
383
390
392
396
398
399
400
402
404
405
406
407
407
408
410
411
412
413
414
418
419
421
435
BOARD OF GOVERNORS
Financial statements
STATISTICAL TABLES
1. Detailed statement of condition of all Federal Reserve Banks
combined, December 31, 1978
2. Statement of condition of each Federal Reserve Bank, December 31, 1978 and 1977
3. Federal Reserve Bank holdings of U.S. Government and
Federal agency securities, December 31, 1976-78
4. Federal Reserve Bank holdings of special short-term Treasury
certificates purchased directly from the United States, 1971-78
5. Open market transactions of the Federal Reserve System, 1978
6. Earnings and expenses of Federal Reserve Banks during 1978
7. Earnings and expenses of Federal Reserve Banks, 1914-78
8. Bank premises of Federal Reserve Banks and branches, Decernber 31, 1978
9. Volume of operations in principal departments of Federal
Reserve Banks, 1975-78
10. Principal operations of Federal Reserve Banks—expense, ratio
of expense for each operation to total expenses, and average
number of employees, 1975-78
11. Number and salaries of officers and employees of Federal
Reserve Banks, December 31, 1978.
12. Federal Reserve Bank interest rates, December 31, 1978
13. Member bank reserve requirements
14. Maximum interest rates payable on time and savings deposits
15. Margin requirements
16. Fees and rates under Regulation V on loans guaranteed pursuant to Defense Production Act of 1950, December 31, 1978
17. Principal assets and liabilities, and number of insured commercial banks, by class of bank, September 30, 1978 and 1977
18. Member bank reserves, Federal Reserve Bank credit, and
related items—year-end, 1918-78, and month-end, 1978
19. Changes in number of banking offices in the United States
during 1978
20. Number of par and nonpar banking offices, December 31, 1978
21. Mergers, consolidations, acquisitions of assets or assumptions
of liabilities approved by the Board of Governors during 1978
MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS
FEDERAL RESERVE DIRECTORIES AND MEETINGS
438 Board of Governors of the Federal Reserve System
440 Federal Open Market Committee
441 Federal Advisory Council
442 Consumer Advisory Council
443 Federal Reserve Banks and branches
468
INDEX
Part 1
Monetary Policy and
the U.S. Economy in 1978
Introduction
U.S. economic activity remained on an upward path during 1978,
making the current cyclical expansion to date the second longest of
the postwar period. Employment increased substantially, and the unemployment rate declined further despite large increases in the labor
force. At the same time, however, acceleration in the rate of inflation
posed a threat to continued economic progress.
Inflation emerged clearly as the Nation's most urgent economic
concern in 1978. The legacy of past price increases imparted a
strong momentum to the inflationary process, and upward pressures
on costs and prices were exacerbated by the poor performance of
productivity, by adverse agricultural supply conditions, and by
Government-mandated cost increases.
The deterioration in U.S. price performance added impetus to
the decline in the international exchange value of the dollar that
had begun in the latter part of 1977; the falling dollar in turn
reinforced inflationary pressures by raising the costs of imported
goods and by easing competitive constraints on the prices of domestically produced goods. By late October the decline of the dollar had
become precipitous, and it imperiled the health of both the U.S.
economy and the international financial system. On November 1
the Federal Reserve and the Department of the Treasury announced
a package of actions intended to fight inflation and to bolster the dollar. The dollar improved markedly in subsequent weeks, but nonetheless showed a large net decline for the full year against other
major currencies.
Throughout 1978 monetary policy was directed toward resisting
additional inflationary pressures while providing financial conditions
conducive to moderate economic expansion. Federal Reserve policy
actions were designed to restrain growth of the monetary and credit
aggregates and to resist further depreciation of the dollar abroad.
The actions of the System, coupled with strong demands for money
and credit and a heightened level of inflation, caused interest rates
—especially on short-term instruments—to rise substantially.
Introduction
Despite the tightening of credit conditions, the momentum of
economic expansion was sustained throughout 1978 and into 1979.
A liberalization of Federal regulations on deposit interest rates
prevented a recurrence of disintermediation, and banks and thrift
institutions were able to supply the credit necessary to finance high
levels of homebuilding and other business and consumer outlays.
Monetary restraint—as well as progress toward fiscal restraint—
did, however, contribute to a needed moderation of economic growth
from the stronger pace earlier in the expansion. A continued slowing of growth appears in prospect for 1979; and this slowing is desirable if the Nation is to avoid further inflation emanating from
increased pressure on the relatively small margin of unutilized resources of capital and skilled labor.
The Economy in 1978
The economic expansion was maintained well into its fourth year
during 1978, but was accompanied by a serious intensification of
inflationary pressures. Gross national product rose 4Vi per cent in
real terms during the four quarters of 1978, somewhat less than
during the two previous years.1 As in 1976 and 1977, expansion
of activity was uneven from quarter to quarter. Real GNP declined
slightly in the first quarter due to a lengthy coal strike and an
unusually severe winter, but a vigorous rebound of activity during
the spring indicated considerable underlying strength in aggregate
demand. Real growth moderated somewhat in the third quarter,
but the pace of over-all activity picked up again in the final months
of the year.
Capital spending by businesses provided a major part of the
impetus for the year's advance, in contrast to the early part of the
expansion, when consumption and housing were the most supportive
sectors. Even so, the gain was sufficient to boost real capital spending only slightly above its prerecession peak—a performance that
remains deficient by prior cyclical standards. Advances in consumer
spending moderated from earlier years, apparently because of the
slower growth in real after-tax incomes and record debt burdens.
Expenditures for residential construction remained high in 1978,
following 2 years of vigorous growth; the sustained strength of
residential construction activity apparently reflected both the appeal
of housing investment as a hedge against inflation and the improved
ability of mortgage markets to withstand tightening financial conditions.
The slower growth of private final demands was accompanied by
a smaller increase in government outlays. Federal Government purchases of goods and services declined in real terms while State and
local purchases rose more moderately than during the previous year.
The over-all budgetary position of the government sector became
less stimulative; a decline in the Federal deficit was offset only in
1
Unless otherwise indicated, annual figures represent changes from the end
of 1977 to the end of 1978.
The Economy in 1978
Indicators of Economic Performance
Percentage change
Percentage change
10
Real final sales
Percentage change
Real business fixed investment
Real consumption
expenditures
1975
1976
1977
1978
1975
1976
1977
1978
All percentage changes are measured from the previous quarter and are seasonally adjusted at annual rates.
The unemployment rate (seasonally adjusted monthly data) and the change in unit labor
costs are from U.S. Department of Labor. All other data are from U.S. Department of
Commerce.
The fixed-weight price index (1972 weights) is for gross domestic business product. Series
designated as "real" axe based on 1972 dollars.
Scales for unemployment rate and inventory change are larger than those for the other
panels.
The Economy in 1978
part by a reduction of the large operating surpluses experienced by
State and local governments in recent years.
Inflation worsened noticeably during 1978, with the change in
most broad measures of prices about 2 percentage points larger
than over the previous year. The intensification of inflation early in
the year was attributable in part to rapid increases in food prices;
however, homeownership costs and gasoline prices also accelerated
markedly from their rates of increase in 1977. In addition, the depreciation of the dollar on international exchange markets had inflationary effects on prices of imports and many import-competing
goods. Moreover, labor cost pressures intensified as sizable increases
in compensation continued—in part because of a boost in the minimum wage and higher payroll taxes—and labor productivity rose
relatively little over the year.
The persistence of high rates of inflation apparently influenced
the pattern of economic activity in several ways. To some extent,
the continued relative strength in consumer spending for durable
goods reflected the desire to purchase in anticipation of price increases. The personal saving rate remained at the lower end of its
postwar range and aggregate household indebtedness relative to disposable personal income reached record levels. In the business sector,
accelerating inflation continued to add uncertainties that probably
lessened the willingness of firms to commit funds for major capital
spending projects.
The economy displayed strong momentum at the end of 1978,
with sales and production registering sizable gains. Employment and
personal income posted large increases, and housing starts remained
strong. In the business sector, new orders for capital goods held at
a high level, and inventories remained generally lean relative to sales.
Even so, there were mixed signs about the longer-run economic
outlook. Survey and appropriations data suggested that capital outlays by businesses would grow more slowly over 1979. Retail sales
strengthened markedly during the final months of the year, and the
personal saving rate edged even lower at year-end to 5 per cent—
near the lower end of its postwar range. This factor, together with
continuing high debt burdens and weakening consumer sentiment,
could retard near-term advances in consumption. Finally, the prospects for sustained growth were clouded by the persistence of intense
inflationary pressures.
The Economy in 1978
HOUSEHOLD SECTOR
Moderation of growth in real household spending accounted for
much of the slowing of growth in real GNP in 1978. Consumer
outlays increased 4 per cent in real terms, compared with average
increases of 5V4 per cent during the three previous years. Nominal
personal income rose at about the pace recorded earlier in the expansion, but inflation and higher tax burdens cut gains in real disposable
income from the pace of the previous year. Wage and salary disbursements were up sharply in nominal terms, especially early in the
year, and a rebound in farm income reflected higher food prices and
government support programs.
Retail sales were depressed in the first quarter by severe weather,
although outlays for heating increased sharply. Spending rebounded
strongly in the spring, sparked by an increase in automobile sales to
a near-record annual rate of 12.1 million units. In the second half of
the year, growth of consumer spending was sustained at a generally
rapid pace despite a slight decline in automobile sales.
In the housing sector, activity remained at a high level in 1978.
Starts totaled 2 million units, up slightly from the previous year.
Single-family starts edged off to 1.4 million units, while sales of
new and existing homes remained at about the advanced rate of
late 1977. Average prices of new units sold rose about 13 per cent
during the year, in part reflecting some upgrading in quality. Starts
of multifamily dwellings increased about 9 per cent to 580,000
Income, Consumption, and Saving
Percentage change
-•
>:
sal disposable income
4
Percent
, •' 4
1976
1978
Based on U.S. Department of Commerce data, seasonally adjusted at annual rates.
"Real" is in terms of 1972 dollars. Changes are from fourth quarter to fourth quarter.
The Economy in 1978
units; nonetheless, activity in this sector remained well below the
peak levels of the early 1970's. Multifamily construction in 1978
was supported by an increase in units under the Section 8 rental
subsidy program of the Department of Housing and Urban Development, which is aimed at low- and moderate-income families.
At the end of the year, housing markets remained generally firm.
Sales of new single-family homes, which had dipped during the
summer, turned up again during the fourth quarter, and total starts
remained close to the annual rate of 2 million units that had prevailed for a year and a half. High interest rates on mortgages and
already large household debt burdens are, however, likely to retard
housing activity in 1979.
BUSINESS SECTOR
Business fixed investment rose over 9V4 per cent in real terms during
1978, slightly more than the 1977 gain and about twice the rate of
advance in over-all economic activity. A very sharp increase in real
capital spending in the first half of the year was followed by a rise
of 6Vi per cent in the second half. Outlays for structures began to
show relatively greater strength in 1978 than in 1977, paced by
large increases for industrial and commercial buildings. Investment
in producers' durable equipment grew somewhat more slowly, as
business purchases of motor vehicles tapered off.
Investment in the manufacturing sector continued to grow moderately as utilization rates gradually increased through the year.
Gains in capital outlays were strongest among producers of durable
goods, particularly in the stone, clay, and glass, electrical machinery,
and aircraft industries. In the nondurable goods sector, producers
of rubber and food also recorded large increases. Investment by
materials producers, a group that includes some manufacturers in
both the durable and the nondurable goods categories, continued to
advance at a relatively modest pace, reflecting an adequate margin of
unused capacity. Outside the manufacturing sector, the air transportation industry posted the largest increase in spending, and
strong gains were also evident in railroads, communications, and
electric utilities.
Advance indicators of capital spending were mixed at year-end.
Contracts and orders for plant and equipment generally moved
ahead vigorously in the fall after having been nearly unchanged over
10
The Economy in 1978
most of the summer. Surveys of business intentions and capital appropriations for the manufacturing sector suggested some slowing of
spending during 1979.
Inventory policies were generally cautious in 1978, continuing a
trend that has characterized most of the present expansion. Inventory investment declined somewhat over the year, and inventorysales ratios for most sectors remained low to normal on an historical basis. Most of the accumulation of stocks in the manufacturing
sector was at durable goods producers, reflecting the relatively more
intense demand for these products. At the trade level, wholesale
stocks were swollen early in the year by rapid increases in prices
of agricultural products and food; in the fall some overhang did
emerge at general-merchandise retailers, but the sales surge in the
final quarter appears to have absorbed a good deal of this excess.
GOVERNMENT SECTOR
As is typical during a business expansion, the government sector
provided less stimulus to aggregate activity in 1978 than earlier. At
the Federal level, the growth of spending slowed, and large gains in
nominal incomes combined with mandated tax increases to push up
receipts. As a result, the Federal deficit for the calendar year declined
to about $30 billion on a national income accounts basis—roughly
$18 billion less than in 1977, but still large relative to similar phases
of past expansions.
Federal expenditures rose 9 per cent during 1978. Purchases of
goods and services—the component of spending that is included
directly in GNP—declined slightly in real terms, following an increase of 6 per cent during 1977. The reduction in purchases was
most noticeable in the nondefense area, as net loan redemptions
by farmers under the agricultural price support program of the Commodity Credit Corporation (CCC) more than offset increases in
other nondefense expenditures.2 Real defense spending declined in
1978 following a 3 per cent rise in 1977.
Transfer payments to individuals grew only moderately, owing
to a sizable decline in unemployment compensation. Grants to State
2
CCC loans are treated as Federal purchases in the national income accounts
because the value of farm products in inventory, which are used as collateral
for the loans, is transferred from the farm to the government sector. Similarly,
loan repayments are treated as negative purchases in the Federal Government
accounts.
The Economy in 1978
11
and local governments rose briskly over most of the year, with an
expansion in local public works and public employment programs;
however, late in the year funds for the countercyclical revenuesharing program expired and funding for public service employment
began to taper off.
At the State and local government level, purchases of goods and
services grew at a 3V2 per cent rate in real terms over the course
of 1978, somewhat below the gain of the previous year. Construction outlays, supported by Federal grants, increased sharply in real
terms, dramatically reversing the trend of recent years. State and
local employment, however, grew by only 200,000 jobs—about half
of the average gain since 1970—as the number of jobs in the Federally supported public service employment program reached targeted
levels. The operating surplus in the State and local sector—that is,
the surplus excluding net savings by social insurance funds—fell
sharply in 1978. Indeed, the sector's receipts and expenditures moved
into virtual balance by the third quarter, marking the end of the large
operating surpluses that had prevailed since late 1976.
Fiscal conservatism at all levels of government became a prominent political and economic issue in 1978, and the passage of California's Proposition 13 in early summer stimulated action in other
areas of the Nation. Budget-reduction proposals appeared on the
ballots of 19 other States in November, and although voters generally chose less rigid methods of holding down tax burdens, the
growth of State and local government budgets is likely to be
restrained for a number of years.
LABOR MARKET DEVELOPMENTS
Demand for labor remained strong during 1978. Employment in
private nonfarm establishments increased by 3Vi million, exceeding
the exceptionally strong rise during 1977 despite the slower growth
in over-all output. Construction employment rose about 450,000 to
a record level, and manufacturing employment increased by more
than 700,000, with sizable gains in the machinery, transportation
equipment, and metals industries.
Hiring outpaced the continued rapid growth of the labor force
over the year, and the unemployment rate declined 0.8 percentage
point to an average of 5.8 per cent in the fourth quarter. While
labor markets for experienced and skilled groups of workers tight
12
The Economy in 1978
ened, joblessness was still very high at year-end among persons
aged 16 to 24 and among minorities.
A major disappointment in 1978 was the poor performance of
productivity: output per hour in the nonfarm business sector showed
relatively little growth. Productivity growth had bounced back in a
fairly typical fashion in the first 2 years of the expansion, but after
1976, growth in output per hour resumed the slow pace that had
been characteristic of over-all productivity since the late 1960's. The
reason for this pattern is not entirely clear, although several factors
appear to have contributed to it, including the sluggish performance
of capital spending in recent years, the emergence of a less experienced labor force due to demographic changes, and environmental
and safety requirements that have directed resources to uses traditionally not measured as output.
Reflecting the lackluster performance of productivity and the continuing large increases in hourly compensation, the rise in unit labor
costs during 1978 accelerated to about 9 per cent, the sharpest rise
since 1974. Compensation in 1978 was boosted by a pronounced
speed-up in wage rate increases outside the manufacturing sector.
Construction wages rose sharply for the first time since 1974, and
pay rates in the relatively low-wage sectors such as trade and services
were pulled up in part by the legislated rise in the minimum wage.
At the same time, wages in the manufacturing sector rose %VA per
cent, about the same pace as that during 1977 despite a light schedule of collective bargaining. In addition to more rapid wage increases,
higher payroll taxes for social security and unemployment insurance
added further to the acceleration in hourly compensation.
PRICES
In addition to the sizable increases in unit labor costs, special developments in the food, homeownership, and international sectors contributed to the acceleration in the rate of inflation in 1978. In part
because of these special factors, price increases far exceeded most
forecasts made at the beginning of the year: the consumer price index
rose about 9 per cent during 1978 as did thefixed-weightprice index
for gross business products and the producer price index for finished
goods.
Retail food prices increased about 12 per cent during 1978, the
largest rise since 1974. The increases at the retail level reflected a
The Economy in 1978
13
jump of nearly 20 per cent in prices of farm products following little
change in the previous year. Price increases for meat were especially
rapid and those for other food items were also quite large.
In general, prices outside the food area also rose rapidly during
1978. Energy prices increased about 8 per cent at retail. Gasoline
prices changed little in the first half, but a tightening of supplies led
to a sharp upturn later in the year. Natural gas prices continued to
surge upward during most of the year. Consumer prices of services
excluding energy accelerated to an annual rate of 9Vi per cent from
8 per cent in 1977, reflecting in part the l2Vi per cent rise in the
homeownership component; strong demand pressures on house prices
and rising mortgage interest rates were mainly responsible for that
rise. Also, consumer prices were boosted by the depreciation of the
dollar, which had noticeable direct impacts on the prices of imported
merchandise and indirect effects on prices of domestic automobiles
and other goods that are competitive with imports.
At the producer level, prices of capital equipment accelerated less
during 1978 than those for finished consumer goods. Prices of crude
materials—both food and nonfood commodities—were up sharply,
and prices for construction materials also rose rapidly.
In an effort to restrain price increases, the President in late October
announced an anti-inflation program that included a commitment
to Federal budgetary restraint as well as voluntary wage and price
standards and regulatory reform. The general price standard calls on
firms to limit their increases to 1/2 of a percentage point below their
average annual price rise during the 1976-77 period. Wage increases
are to be generally limited to 7 per cent a year. The program also
sets an alternative profit-margin standard, provides for public monitoring of certain price and wage increases, and includes a legislative
proposal for real-wage insurance.
Although the program holds out hope for a gradual unwinding of
the wage-price spiral, inflationary forces appear likely to continue
strong in 1979. The collective bargaining calendar is quite heavy, and
no relief from food price pressures is in sight. In addition, legislated
increases in the minimum wage and in social security taxes will
once again add a premium to labor costs. Furthermore, the Organization of Petroleum Exporting Countries has announced an increase in
the price of oil for 1979, which will have an adverse effect on prices,
as will the continuing impact of the 1978 depreciation in the international exchange value of the dollar.
14
Monetary Policy and Financial Markets
Monetary policy in 1978 sought to foster financial conditions that
would contribute to the reduction of inflationary pressures and the
stabilization of international exchange markets while supporting
moderate economic growth. During the year, the acceleration of
inflation increased the public's transactions requirements for cash
balances and resulted in strong demands for money. In addition,
expectations of continued rapid inflation apparently encouraged many
households and businesses to borrow, in the belief that the burden
of debt service would diminish while the prices of real assets would
rise. These factors, coupled with the need to bolster international
confidence in the dollar, prompted the Federal Reserve to seek
increasing tautness in financial markets.
Employing all of the major tools of monetary policy—open market
operations, the discount rate, and reserve requirements—the System
contributed to a progressive firming in money market conditions over
the course of the year. Short-term interest rates generally rose 3 to 4
percentage points during 1978, and most long-term bond rates
climbed 1 to 114 points. By year-end the prime lending rate at
commercial banks had increased 4 percentage points to H3/4 per
cent, and the average interest rate on new commitments for home
mortgage loans at savings and loan associations had reached a record
10% per cent. The System's actions helped to restrain the growth of
money and credit. Although growth of the narrowly defined money
stock, Af-1, exceeded the announced annual growth ranges of the
Federal Open Market Committee, all of the major monetary aggregates, including Af-1, grew less rapidly than during 1977. The expansion of the total flow of credit to nonfinancial sectors of the economy
also slowed.
Although conditions in credit markets had tightened considerably
by year-end, there was little evidence of financial strains that would
prevent further moderate expansion in over-all economic activity.
Interest rates were not unduly high if allowance is made for
inflationary expectations; moreover, credit generally remained in adequate supply, owing in part to changes in Federal regulations on
deposit rates and to other institutional developments that enhanced
the efficiency of the capital markets.
Monetary Policy
15
MONETARY AGGREGATES AND INTEREST RATES
Growth rates of the major monetary aggregates varied considerably
from quarter to quarter during 1978, responding in large measure
to changes in interest rates and in the pace of economic expansion. In
broad terms, growth in M-l was a bit less rapid on average in the
second half than in the first, reflecting the somewhat smaller gains
in nominal GNP and the much higher short-term interest rates that
characterized the last 6 months of 1978. The pattern for the interestearning components of the broader monetary aggregates—M-2 and
M-3—was quite the opposite, however, as a liberalization of Federal
ceilings on rates payable on certain small-denomination time accounts
resulted in stronger inflows of such deposits beginning in June. Thus
Adopted Longer-Run Growth Ranges
and Actual Growth Rates
of Monetary Aggregates, 1976-781
Per cent
Period
M-l
M-2
M-3
Annual
1976 Q4 to 1977 Q4
Adopted
Actual
4I/2-61/2
7.9
7-10
9.8
8 Vi-llV4
11.7
1977 Ql to 1978 Ql
Adopted
Actual
41/2-61/2
7.7
7-9 Vz
8.8
8V2-II
10.5
1977 Q2 to 1978 Q2
Adopted
Actual
4 - 6 V2
8.2
7-9 Vz
8.6
8^2-11
10.0
4 - 6 >/2
8.1
6V2-9
8.6
8-10 Vz
9.6
4 - 6 y2
6V2-9
8.5
7!/2-10
9.4
1977 Q3 to 1978 Q3
Adopted
Actual
1977 Q4 to 1978 Q4
Adopted
Actual
7.3
Quarterly (annual rate)
1977
Ql.
Q2.
Q3.
Q4.
7.4
7.4
8.6
7.4
10.9
9.0
10.1
7.9
12.4
10.5
11.8
10.1
1978
Ql.
Q2.
Q3.
Q4.
6.6
9.2
8.1
4.4
7.0
8.4
9.9
7.7
8.4
10.4
9.4
1
Growth rates are based on quarterly averages.
16
Monetary Policy
there was no recurrence of the marked disintermediation that had
been a prominent feature of other recent periods when market rates
of interest had moved to relatively high levels.
Monetary expansion moderated in the first quarter of 1978 from
the relatively rapid pace of 1977. Growth in M-\—currency and
bank checking accounts—decelerated to a 6!/2 per cent annual rate,
the upper end of the Federal Open Market Committee's long-run
range. The slowing apparently was attributable to the weather- and
strike-associated lull in economic activity. Because the interruption
of economic growth was related largely to temporary dislocations
in product markets rather than to a deficiency in aggregate demand,
no easing of monetary policy was warranted. Indeed, the persistent
weakness of the dollar on foreign exchange markets led the System
to raise the Federal Reserve discount rate from 6 to 6Vi per cent
in early January and to adopt a less accommodative stance in the
provision of reserves to the banking system through open market
operations. The interest rate on Federal funds (overnight loans of
immediately available bank funds) climbed 1/4 of a percentage point
over the quarter to around 63A per cent, and most other short- and
longer-term security yields increased by similar amounts.
The advance in market interest rates during January widened the
gap that had already developed in the latter part of 1977 between
yields on market instruments and those on savings deposits and smalldenomination time deposits with maturities of less than 4 years. Consequently, growth of the interest-bearing component of M-2 also
slowed in the first quarter, notwithstanding heavy issuance by commercial banks of those large time deposits ($100,000 and over)
included in this aggregate. M-3 showed an even sharper deceleration
as savings and loan associations and mutual savings banks experienced substantial reductions in deposit inflows. On the other hand,
net sales of money market fund shares rose sharply and noncompetitive tenders in auctions of Treasury securities also increased,
suggesting a diversion of individual savers' funds from depositary
institutions.
As economic activity rebounded in the second quarter, growth in
M-l accelerated markedly—to an annual rate of 9XA per cent. This
was well above the long-run range established by the Federal Open
Market Committee; consequently, the Committee permitted the associated demand for reserves to drive up the interest rate on Federal
Monetary Policy
17
Interest Rates
Percent per annum
Short-term
12
1974
Monthly averages except for conventional mortgages, which are based on quotations for
one day each month. Yields: U.S. Treasury bills, market yields; prime commercial paper,
dealer offering rates; conventional mortgages, rates on first mortgages in primary markets,
unweighted and rounded to nearest 5 basis points, from U.S. Department of Housing and
Urban Development; Aaa utility bonds, weighted averages of new publicly offered bonds
rated Aaa, Aa, and A by Moody's Investors Service and adjusted to a Aaa basis; U.S.
Government bonds, market yields adjusted to 20-year constant maturity by U.S. Treasury;
State and local government bonds (20 issues, mixed quality), Bond Buyer.
funds to about 11A per cent in late April and then to around IV2
per cent in late May. Because the general upward movement in shortterm market rates led member banks to increase their borrowing at
the discount window, the Federal Reserve boosted the discount rate
to 7 per cent in May. Intermediate- and long-term interest rates also
climbed 25 to 50 basis points during this period as investors became
more concerned about the outlook for inflation and the possibility
of further increases in money market yields.
18
Monetary Policy
With the additional rise in market rates early in the second quarter,
growth of bank time and savings deposits other than large certificates
of deposit remained sluggish, and deposit inflows at nonbank thrift
institutions slowed to the lowest rate since 1974. To prevent a drastic
curtailment of credit flows to borrowers reliant on these institutions,
the Federal Reserve Board, Federal Deposit Insurance Corporation,
and Federal Home Loan Bank Board authorized, effective June 1, two
new categories of time deposits. One was an 8-year account yielding
up to 7% per cent at commercial banks and up to 8 per cent at thrift
institutions. The other was a 6-month, $10,000 minimum "money
market certificate" whose ceiling rate would vary with the average
yield in the weekly auction of 6-month Treasury bills; the ceiling for
banks was equal to the auction average and that for thrift institutions
was 1/4 of a percentage point higher. Because the combination of
rapid growth in M-l and brisk inflation caused the System to tighten
reserve availability another notch just before midyear, the structure
of market interest rates rose enough to make the 8-year account relatively unattractive to most savers. However, the 6-month account,
with its ceiling rate tied to current market yields, proved immediately
successful in supporting deposit flows to banks and thrift institutions.
Growth in M-l moderated somewhat in the third quarter because
of the slowing in economic expansion and the accumulating impact
of more restrictive credit conditions. Nevertheless, with M-l still
increasing quite rapidly and the dollar under downward pressure on
foreign exchange markets, the System moved steadily toward tighter
money market conditions. The Federal funds rate rose about 1 percentage point over the quarter, to about S3A per cent, and the discount rate was raised in three steps from 7 to 8 per cent. Other shortterm interest rates increased by similar amounts. Bond yields generally
fell in late July and early August, when evidence of slowing economic
activity led many investors to think that interest rates might be nearing cyclical peaks; but these long-term rates moved up again toward
the end of the summer as short-term rates continued to climb and
inflation showed no sign of abating.
Despite the advance in short- and intermediate-term market rates
during the third quarter, growth in interest-earning deposits at commercial banks and thrift institutions continued to accelerate and thus
to contribute to more rapid expansion in Af-2 and M-3. The faster
growth of M-2 reflected a sharp increase in large-denomination time
deposits included in this aggregate, which are not subject to Regula
Monetary Policy
19
tion Q ceilings, and sizable sales of the new money market certificates.
The 6-month certificates had an even larger impact on the growth
of M-3, as deposit inflows at savings and loan associations and mutual
savings banks accelerated sharply during the summer.
The advance of market interest rates in the third quarter was followed by an increase in the discount rate to 8V2 per cent in midOctober. Despite the substantial rise of U.S. interest rates and progress
toward reduction of the Federal budget deficit, participants in foreign
exchange markets remained apprehensive about U.S. price and trade
prospects, and the dollar came under extraordinary downward pressure. After the President announced his wage-price program on
October 24 the dollar's decline accelerated, threatening to undercut
the anti-inflation effort at home and to lead to greater erosion of
confidence abroad.
The Federal Reserve responded by announcing on November 1
an increase of 1 percentage point in the discount rate and a supplementary reserve requirement of 2 percentage points on largedenomination time deposits. In conjunction with the Treasury, a
series of actions was outlined that would increase access to foreign
currencies for exchange-market intervention. The System also adjusted its open market operations to restrict further the availability
of nonborrowed reserves.
As a result, the Federal funds rate rose to nearly 10 per cent, and
short-term interest rates increased sharply. Bond yields initially
declined, since investors apparently viewed the actions of the Government on November 1 as enhancing prospects for the control of
inflation; however, they reached their highest levels of the year in
December as a result of a further increase in short-term market rates,
the announcement of a rise in oil prices by the Organization of
Petroleum Exporting Countries that was larger than anticipated, and
evidence of strong economic growth in the fourth quarter.
The appreciable rise in market interest rates likely contributed
to a moderation in AM expansion in the fourth quarter to the lowest
rate in 2 years. Another factor was the introduction of a new banking service on November 1 that permits individuals to have funds
transferred automatically, as needed, from savings to checking
accounts at commercial banks; a substantial volume of funds was
shifted from demand deposits to savings deposits as customers took
advantage of this new means to economize on nonearning transactions
balances. Because of the slackened pace of growth in AM, expansion
20
Monetary Policy
of M-2 and M-3 also slowed somewhat in the fourth quarter even
though inflows to money market certificates and large time deposits
sustained sizable gains in the interest-earning components of the
broader aggregate.
AGGREGATE FLOWS OF FUNDS
Total funds raised in domestic financial markets by all sectors are
estimated to have increased from $400 billion in 1977 to $483
billion in 1978. A rise of nearly 60 per cent in funds raised by
financial sectors was attributable to enlarged borrowing by both
private and government-sponsored financial intermediaries. Funds
raised by nonfinancial sectors of the economy increased 14 per cent,
a considerably slower growth than in previous years of the cyclical
upswing. The effects of tightening credit markets were perhaps most
evident in the markedly decelerated growth inflowsof funds to private
domestic nonfinancial sectors after the second half of 1977.
The household sector borrowed a record amount in 1978. Home
mortgage debt formation increased moderately from the previous
year's total, as demand for housing credit remained strong despite
the sharp upward movement in interest costs. Most of the rise in
household credit flows, however, was in consumer credit. The annual
rate of growth in such credit outstanding was about 17 per cent in
each half of the year, and tracked fairly closely the strong upward
movement in consumer spending on durable goods. Repayment
obligations for both mortgage and consumer debt increased substantially in 1978, raising the ratio of repayments to disposable
personal income to a record high.
Nonfinancial businesses also increased their demands for funds
in 1978. Although nonfinancial corporations experienced an appreciable rise in reported pretax profits, growth in their outlays for
inventories and fixed capital outstripped the increase in gross
internal funds and caused a large increase in external financing requirements. The composition of external financing also changed, as
many firms avoided issuing bonds at the relatively high interest
rates prevailing and instead relied heavily on shorter-term bank loans
and commercial paper. Gross public offerings of corporate bonds fell
to the lowest level since 1973, owing mainly to the absence from the
market of large, highly rated industrial issuers, and private place-
Monetary Policy
21
ments declined somewhat from the record volume of 1977. Business
use of mortgage credit increased sharply in 1978, reflecting in part
the substantial improvement in commercial construction activity
during the year. Historically low price-earnings multiples discour-
Net Funds Raised and Supplied in Credit Markets
Billions of dollars
1977 i
Sector or type of instrument
Total funds raised
Sector
Nonfinancial sectors, total
U.S. Government
State and local government.
Nonfinancial business
Households
Foreign
Financial sectors, total
Sponsored credit agencies..
Mortgage pools
Private financial
intermediaries
Type of instrument
U.S. Government securities. . .
Public debt and budget
agency securities
Other
Corporate and foreign bonds..
Corporate equities
Tax-exempt securities
1975
1976
1977
1978 i
1978
HI
H2
HI
H2
219.8
301.7
399.4
483.2
363.7
435.0
481.1
485.3
208.1
85.4
13.2
47.7
48.6
13.2
272.5
69.0
18.5
74.4
89.9
20.7
340.5
56.8
25.9
106.0
139.6
12.3
389.4
53.7
24.9
123.9
161.3
25.7
302.2
42.6
22.7
98.1
131.2
7.5
378.9
71.0
29.0
113.7
148.0
17.2
378.1
58.7
21.7
125.5
155.0
17.2
400.7
48.6
28.1
122.2
167.5
34.1
11.7
3.2
10.3
29.2
2.9
15.7
58.8
5.8
20.5
93.8
22.6
16.5
61.5
7.2
17.9
56.2
4.4
23.1
102.9
24.9
16.6
84.6
20.2
16.3
-1.9
10.6
32.6
54.7
36.5
28.7
61.4
48.0
98.2
84.3
92.8
70.0
98.6
100.3
85.2
85.5
12.7
36.4
10.8
15.6
69.1
19.0
37.2
12.9
19.0
56.9
27.4
36.1
4.8
29.2
53.8
39.0
32.1
3.6
29.6
42.6
27.4
30.5
2.5
29.3
71.0
27.5
41.7
7.0
29.0
58.8
41.5
32.3
3.0
28.5
48.7
36.5
31.8
4.2
30.7
Mortgages
Residential
Other
Bank loans, n.e.c
Open-market paper and
repurchase agreements. . .
Consumer credit
Other
57.2
41.4
15.8
-13.9
87.1
67.3
19.8
6.4
134.0
106.8
27.2
32.2
145.9
112.4
33.5
50.2
121.2
98.1
23.1
28.4
146.7
31.3
35.9
140.3
110.5
29.8
48.2
151.5
114.2
37.3
52.2
-2.4
9.4
8.6
13.3
23.6
14.1
19.8
35.0
24.0
42.8
50.5
35.6
27.6
35.7
18.5
11.9
34.4
29.8
43.7
49.8
34.8
41.9
51.2
36.3
Total funds supplied
Sector
Private domestic nonfinancial..
Households
Nonfinancial business
State and local government.
219.8
301.7
399.4
483.2
363.7
435.0
481.1
485.3
41.2
25.6
12.3
3.4
40.7
13.3
12.7
14.7
55.5
30.7
-1.5
26.4
84.1
52.6
8.3
23.3
44.6
28.1
-2.0
26.5
66.3
41.2
-1.0
26.2
88.4
58.7
6.4
23.3
79.9
46.4
10.2
23.3
Private financial intermediaries
Commercial banks
Thrift institutions
Insurance and pension funds
Other
129.6
27.8
52.1
50.8
-1.1
203.7
58.0
71.5
66.0
8.2
255.7
85.8
85.2
72.1
12.6
294.3
119.2
79.2
78.4
17.8
247.4
81.1
85.7
72.0
8.6
264.2
90.5
84.7
72.3
16.7
285.3
120.4
77.3
74.6
13.0
303.5
117.9
81.0
82.0
22.5
U.S. Government and
sponsored credit agencies.
Mortgage pools
Federal Reserve System
Foreign sources
19.3
10.3
8.5
10.8
13.9
15.7
9.8
17.9
18.3
20.5
7.1
42.2
45.9
16.5
7.0
35.3
14.8
17.8
10.2
28.9
21.8
23.1
4.2
55.4
47.4
16.6
13.0
30.3
44.3
16.3
1.0
40.3
1
Half-year figures are at seasonally adjusted annual rates.
115.4
22
Monetary Policy
aged new stock issues, and a sizable volume of outstanding shares
was retired through repurchases and mergers. The relatively modest
acquisitions of liquid assets by nonfinancial corporations in 1978,
together with heavy emphasis on short- and intermediate-term borrowing, caused measures of corporate liquidity to lose much of the
improvement recorded earlier in the economic expansion.
Net borrowing by State and local governments remained large in
1978, roughly equaling the previous year's unprecedented level; it
included a record amount of bond issuance for advance refunding
purposes. Nearly all of these advance refunding operations were
conducted prior to September, when changes in rulings of the Internal Revenue Service reduced their attractiveness. Tax-exempt yields
rose sharply in the final months of the year, yet remained quite low
historically relative to yields on taxable bonds. Commercial banks
and property-casualty insurance companies acquired the bulk of
tax-exempt securities in 1978, but households were substantial buyers
as well.
The U.S. Government continued to borrow a sizable volume of
funds to finance its deficit in 1978. Major purchasers of Treasury
securities included households, foreign central banks (which generated a large volume of investable funds through dollar-support
operations in foreign exchange markets), and State and local government units (which were investing the proceeds of their advance
refunding operations in special nonmarketable issues). The Treasury
concentrated its marketable borrowing in coupon securities, chiefly
issues with intermediate-term maturities. On balance, the outstanding supply of Treasury bills remained about unchanged in 1978,
while coupon issues increased $33 billion. Net borrowing by Federally sponsored credit agencies increased sharply in 1978, reflecting
primarily activities of the agencies responsible for channeling funds
to the residential mortgage market.
Private financial institutions again provided the largest volume
of funds to nonfinancial sectors in 1978, although the upward movement in market interest rates relative to deposit rate ceilings forced
depositary intermediaries to increase their reliance on funds raised
in credit markets to meet the strong loan demands. Insurance companies and pension funds continued to acquire large amounts of
investable funds, and they purchased a record volume of corporate
bonds in 1978. In addition, mortgage lending by insurance com-
Monetary Policy
23
Major Components of Bank Credit
Change, billions of dollars
Change, billions of dollars
Treasury securities
40
I
Business loans
20
0
20
40
Other securities
Real estate loans
20
rntii
.
Total loans
0
120
_L_J
100
Consumer loans
80
60
40
20
-
0
Nonbank financial loans
i
20
0
1976
1978
1976
1978
Seasonally adjusted. Total loans and business loans are adjusted for transfers between
banks and their holding companies, affiliates, subsidiaries, and foreign branches.
panies reached record proportions, mainly to provide permanent
financing for multifamily and commercial structures.
Total loans at commercial banks grew 14V£ per cent during
1978. Real estate loans rose markedly, as banks apparently increased
their lending to both residential and commercial borrowers. Consumer and business loans also grew rapidly. Inflows into demand,
savings, and small-denomination time accounts were insufficient to
finance the large increase in lending, and banks reduced their holding of U.S. Government securities and increased their reliance on
managed liabilities. Large-denomination time deposits expanded $46
billion during 1978, and banks also obtained sizable amounts of
funds from nondeposit sources such as Federal funds and security
repurchase agreements. As a result, most conventional measures of
aggregate commercial bank liquidity eroded steadily over the year.
At nonbank depositary institutions, total mortgage lending contracted somewhat in 1978, mainly because of a reduced pace of
24
Monetary Policy
mortgage acquisition by savings and loan associations. Confronted
with smaller deposit inflows, savings and loans cut back their net
mortgage lending to $52 billion, down $6 billion from the preceding year. The institutions experienced strong liquidity pressures
during the first half, when they curtailed their acquisition of securities and borrowed at a record rate from Federal Home Loan Banks.
As deposit growth accelerated following introduction of the money
market certificates in June, savings and loans initially devoted a
sizable share of the funds to rebuilding asset positions, but they also
increased their outstanding mortgage loan commitments.
25
International Developments
The strong downward pressure on the dollar in foreign exchange
markets that had begun in September 1977 continued and at times
intensified during 1978, leading to the announcement on November 1
of a coordinated package of internal and external stabilization measures. A prime source of concern about the strength of the dollar
was the rising rate of inflation and the continued large trade deficit
of the United States. The possibility of reducing the U.S. trade
deficit was limited by the relatively slow economic recovery in other
industrial countries from the 1975 recession. The discrepancy between the high trade deficit and inflation rate of the United States
and the trade surpluses and low inflation rates of such countries as
Germany, Japan, and Switzerland resulted in a large shift in bilateral
exchange rates in 1978.
In the course of the year the focus of concern about currentaccount imbalances shifted from the large surpluses of the Organization of Petroleum Exporting Countries (OPEC), which fell sharply
to about $10 billion, to the imbalances among the United States and
other major industrial countries. Although the large deficit of the less
developed oil-importing countries as a group expanded further, many
of these countries were able to accumulate reserves and the problems
of financing the deficits of some others became less acute.
The U.S. merchandise trade deficit rose to more than $35 billion
at an annual rate in the final quarter of 1977 and to more than $45
billion at an annual rate in the first quarter of 1978, giving impetus
to the decline of the dollar. By the second quarter exports were rising, however, reducing the rate of deficit to about $25 billion by the
end of the year. Nevertheless, this high rate of deficit, together with
worsening price inflation, continued to undermine market confidence
in the dollar.
The performance of U.S. nonagricultural exports was quite strong
in 1978, despite slack demand in other industrial countries. Export
volume of these products increased 16 per cent from the fourth
quarter of 1977 to the fourth quarter of 1978 while export prices
in dollar terms rose about 13 per cent. During the year the depreciation of the dollar tended to enhance the competitiveness of U.S.
26
International Developments
products as prices in terms of foreign currency held relatively steady.
Agricultural exports grew quite rapidly, with volume up sharply
and prices rising.
Imports, other than oil, also grew rapidly in 1978, although the
rate of increase in volume tapered off to about 8 per cent from the
fourth quarter of 1977 to the fourth quarter of 1978. The dollar
price of these imports rose considerably, however, as the dollar
equivalent of prices expressed in foreign currencies was raised by
the depreciation of the dollar. The value of oil imports rose
moderately in that period: the price declined slightly while the
volume rose moderately.
U.S. International Transactions1
Billions of dollars
1977
1978
Transaction
Year
Q4
Yearp
Ql
Q2
-15.3
-31.1
120.6
-151.7
17.5
3.0
-4.7
Private capital flows
-17.0
Bank-reported capital, net (outflow, —).
-4.7
U.S. net purchase (—) of foreign
-5.4
securities
. .
-6.1
-9.4
29.6
-39 0
3.8
.5
-1.1
-9.3
-5.6
-16.0
-34.1
141.0
176.0
19.9
3.3
-7.6
-11.9
30.8
-42.7
4.9
.7
-3.3
-7.9
35.3
-43.1
4.6
1.2
—44 5
4.9
.7
-1.3
.6
2.9
-12.2
-.3
.8
-3.2
.5
Current account
Merchandise trade balance
Exports
Imports
Investment income (net) 2
Other services
Unilateral transfers, private and
government
Foreign net purchase ( + ) of
U.S. Treasury securities....
Foreign net purchase ( + ) of
other U.S. securities
U.S. direct investment abroad 2 . .
Foreign direct investment
in
United States 2 .
Other corporate capital flows,
net
-.7
Q3
Q4P
-3.7
-8.0
36.5
-1.3
-6.4
39.3
-45 7
5.6
.7
-1.2
-16.2
-14.2
-5.1
-1.3
-1.3
-25.7
-17.1
-3.4
-12.1
.8
1.8
-6.6
1.3
2.3
-.9
— 1.1
-.5
-.9
2.2
2.9
-15.4
.9
.8
-1.1
.5
-5.0
1.3
-4.0
.5
-2.7
1.6
.6
-3.7
5.6
.8
1.9
2.2
.7
-1.4
-.8
-.5
-1.7
.5
.8
-.3
Foreign official assets in United
States (increase, -f)
37.1
15.5
34.0
15.8
-5.7
4.9
19.0
U.S. Government foreign assets,
net (increase, —)
Reserve position in IMF
Convertible currencies and other
reserve assets
-3.9
-.3
.1
-.8
-3.7
4.2
-3.4
-.7
.3
j
-.8
.4
-.1
-1.4
.2
-.1
-.9
3.3
-3.1
U.S. Government foreign credits
and other claims, net
-3.7
-.8
-4.7
-.9
-1.2
-1.5
11.4
4.5
9.1
-1.6
-1.1
-.6
Statistical discrepancy
1
3.3
-.9
*
.8
Current-account items are seasonally adjusted; seasonal factors are no longer calculated for most
capital transactions. Data are from U.S. Department of Commerce, Bureau of Economic Analysis. Details may not add to totals because of rounding.
2
Includes reinvested earnings.
* Less than $50 million.
p Preliminary.
International Developments
27
Partly offsetting the increased deficit on merchandise trade was
a gain in the net income of U.S. direct foreign investments, reflecting in part the increased dollar value of earnings in countries with
appreciating currencies.
The current-account balance of the international accounts—combining trade, services, and unilateral transactions—registered a
slightly higher deficit in 1978 than the year before, but the deficit
declined sharply from the fourth quarter of 1977 to the fourth quarter of 1978. With export volumes rising faster than import volumes,
the international sector made a small net positive contribution to the
change in U.S. real product in that period.
The dollar came under severe pressure in exchange markets several times during the year, and reached a low point on October 30
just prior to the announcement of a set of measures aimed at curbing inflation and restoring exchange market stability. From the
beginning of the year to the end of October the trade-weighted average value of the dollar against 10 leading currencies had declined
about 14 per cent, and declines against a number of currencies had
been much greater. The measures announced on November 1 included, in addition to domestic monetary actions, an increase in the
Treasury monthly gold auction to IV2 million ounces starting in
December; an increase in the Federal Reserve swap lines with Germany, Switzerland, and Japan by $7.6 billion to a combined total
of $15 billion; sales of $2 billion equivalent of special drawing
rights to those three countries; the drawing of $3 billion of foreign
currencies from the International Monetary Fund; and the sale by
the Treasury of up to $10 billion equivalent of securities denominated in foreign currencies. All of these measures had been initiated
by the end of the year, including the sale in Germany of $1.6 billion
equivalent of notes denominated in German marks.
Announcement of these measures and their forceful implementation
brought a sharp rise in the dollar's exchange rate—to about the
average level of August and September. However, while the market
regained a measure of stability, it remained vulnerable to adverse
developments. The announcement on December 17 of a larger-thanexpected increase in oil prices by OPEC triggered heavy selling pressure. This was met by determined intervention by U.S. and foreign
authorities, but by year-end the dollar's weighted-average exchange
value was 10 per cent lower than it had been at the beginning of the
year.
28
International Developments
U.S. Balances on Trade and
Current Account
Industrial Production
1970=100
Billions of dollars
20
40
1974
1976
1978
1974
1976
1978
* Multilaterally weighted average of G-10 countries plus Switzerland, using 1972-76 trade
weights.
Data are from the U.S. Department of Commerce and are seasonally adjusted annual
rates.
Efforts by monetary authorities to combat disorderly markets and
severe swings of some exchange rates vis-a-vis the dollar required
large-scale purchases of dollars. Such purchases by foreign authorities
accounted for most of the rise in foreign official assets in the United
States (see the table), which amounted to about $34 billion for
the year. The increase accrued to the Group of Ten countries and
Switzerland; official holdings of OPEC countries in the United States
declined slightly, after having risen by about $7 billion in 1977. U.S.
authorities purchased (net) the equivalent of $0.9 billion of foreign
currencies in exchange markets in the first 9 months of the year, but
sold a large amount in the fourth quarter as pressure on the dollar
intensified. The extent of official transactions in exchange markets
reflects a number of factors, including not only reactions to the U.S.
current-account balance and private capital flows but also desired
increases in reserves.
Recorded private capital outflows in 1978 were considerably
above the $17 billion recorded in 1977. Much of the outflow occurred
early in the year, before U.S. interest rates began a steep rise, and
again at the end of the year. Bank-reported capital outflows were
substantially higher than in 1977, and U.S. direct foreign investment
International Developments
29
U.S. and Foreign 3-Month
Interest Rates
International Value of the Dollar
1975-100
Percent
U.S. CD's/
Foreign* exchange value
of the U.S. dollar/^
Relative consumer prices
Foreign *>L.S.
90
1974
1976
1978
1976
1977
1978
* Multilaterally weighted average of G-10 countries plus Switzerland, using 1972-76 trade
weights.
abroad, including a rising amount of retained earnings, was somewhat higher. On the other hand, foreign securities were issued in the
U.S. market at a reduced rate, reflecting in part the relatively high
level of U.S. interest rates. The unrecorded element in the international accounts was strongly positive at times in the first half.
During the year, the fall in the external value of the dollar became
an increasingly strong influence on the course of the economy. Most
important, the depreciation of the dollar beginning in the fall of
1977 was greater than the difference between U.S. and foreign inflation rates and exerted a further inflationary influence. As the U.S.
economy expanded, and especially as the inflation rate showed a
tendency to rise, some upward tilt in interest rates was to be expected.
The Federal Reserve, in determining the appropriate stance of monetary policy, emphasized the need to restore confidence in the dollar.
Thus, announcements of discount rate increases, from January 6,
1978, when the rate was raised from 6 per cent to 6V2 per cent,
to November 1, when it was raised to 9Vi per cent, stressed the
urgency of stabilizing the foreign exchange value of the dollar. In
contrast, interest rates in other industrial countries changed little on
balance. This divergence was due in large part to the differences in
the underlying economic situation between the United States and such
30
International Developments
countries as Japan, Germany, and Switzerland, where domestic demand was relatively slack and inflation rates were low. It also reflects,
however, the response of policies to exchange market pressures.
In retrospect, during 1978 only limited progress was made toward
achieving better balance in international trade and payments. Concerns about U.S. inflation, and the strong contrast between U.S. trade
deficits and foreign surpluses, tended to heighten exchange market
volatility. As the year ended, the imposition of major and progressive
increases in oil prices by OPEC countries and the interruption of
production in Iran added to the uncertainties in the economic outlook. Nevertheless, the somewhat more rapid growth expected in
foreign industrial countries in 1979, together with slower growth and
price moderation in the United States, should help to reduce the
U.S. deficit and bring better balance to international economic
relationships.
31
Official Statements on Growth
Ranges for Monetary Aggregates
Given below are statements by Federal Reserve Chairman G. William
Miller on March 9, April 25, July 28, and November 16, 1978, in
response to H. Con. Res. 133, passed March 24, 1975, concerning
objectives and plans of the Federal Reserve with respect to the ranges
of growth or diminution of monetary and credit aggregates in the
upcoming 12 months.
STATEMENT BEFORE THE COMMITTEE ON BANKING,
FINANCE AND URBAN AFFAIRS, U.S. HOUSE OF
REPRESENTATIVES, MARCH 9, 1978
I am pleased to appear today, for the first time, to present the report of the Board of Governors of the Federal Reserve System on the
conduct of monetary policy. This will also be our first report since
passage of the Federal Reserve Reform Act of 1977, which originated
in this committee and which wrote into law the monetary oversight
hearings that have been held quarterly in recent years. These hearings have provided a useful forum for discussion of economic and
financial conditions and monetary policy. I have no doubt that they
will continue to do so, and look forward to participation in them.
During the past year, the Federal Reserve continued to pursue the
objective of fostering financial conditions consistent with expansion
of economic activity and moderation of inflationary pressures. Gross
national product (GNP)—the broadest measure of economic activity
—rose 53A per cent in real terms during 1977, about the same rapid
pace as we experienced on average in the earlier stages of the current
recovery. However, the rate of inflation remained disturbingly high.
Very recently, sales and production have weakened, but this seems
to reflect mainly—if not entirely—the temporary effects of the unusually severe winter weather and the coal strike. While prolongation
of the strike could lead to more extensive economic disruption, basically our economy is strong, and the year 1978 should see continued
expansion in economic activity at a moderate pace and a further
32
Growth Ranges
reduction in the unemployment rate. At the same time, recent trends
provide little basis for optimism with regard to an abatement of inflationary pressures.
The brisk increase in production last year made it possible to reduce unemployment significantly despite further large growth in the
size of the Nation's labor force. In the past 12 months, the jobless
rate has fallen more than a percentage point. Total employment has
risen by more than 4 million, and the proportion of our population
that is employed stands at the highest level in the postwar period.
The advance of production and employment during the past year
was broadly based, with most of the major sectors of aggregate demand registering good gains. Consumer spending followed an uneven
course during 1977, but for the year as a whole growth was substantial by historical standards. Residential construction continued to
provide considerable impetus to expansion, with single-family housing starts reaching an exceptionally high level and multifamily building also posting appreciable gains from earlier depressed levels. Business fixed investment expanded somewhat more rapidly in 1977 than
in earlier years of the recovery, although such investment continued
to lag well behind its performance in previous cyclical upswings. The
pace of governmental spending—at both the Federal and the State
and local levels—also picked up last year.
As domestic activity expanded rapidly, our imports of goods from
abroad continued their steep climb, boosted by our increasing appetite for imported oil. Meanwhile, the sluggish performance of economic activity in other major industrial countries limited the demand
for our exports. As a result, our trade deficit deepened from about
$10 billion in 1976 to more than $30 billion in 1977.
The widening of the trade deficit contributed importantly to the
downward pressure on the exchange value of the dollar over the past
several months. The Federal Reserve, in cooperation with the Treasury, has taken steps to counter disorder in foreign exchange markets
and to emphasize U.S. concern about the integrity of the dollar. But
the key to a sound dollar and a stable world financial system lies
ultimately in the resolution of some of our fundamental, longer-range
economic problems. In particular, we must establish an energy policy
that promises to reduce our reliance on foreign sources of petroleum;
we must create a better climate for business investment, so as to enhance labor productivity and to increase our international competi-
Growth Ranges
33
tiveness; and most importantly, we must make progress toward the
restoration of domestic price stability.
One of the great disappointments of the past year has been the
lack of progress in reducing the pace of inflation. Wage increases
have continued to outstrip gains in output per hour worked; unit
labor costs in private industry have again risen substantially; and
prices have been trending upward at about a 6 per cent annual rate.
Prudent monetary management is, of course, an essential ingredient
in the control of inflation over the longer run. Too much money
growth would add to inflationary pressures and would tend to encourage still larger increases in wages, costs, and prices.
Confronted with very strong demands for money and credit this
past year, the Federal Reserve took actions to moderate monetary
growth and to help ensure that inflationary forces would not get out
of hand. Although interest rates have risen, domestic financial markets have remained supportive of economic growth. Supplies of credit
have been ample, with the total volume of funds raised in the Nation's
money and capital markets approaching $400 billion in 1977—a
record both in dollar terms and as a percentage of GNP.
In the household sector mortgage loans accounted for the bulk of
an unprecedented increase in indebtedness. Families sought mortgage
credit not only to finance the purchase of homes but also to fund
other expenditures and to add to their holdings of financial assets.
Meanwhile, consumer instalment credit grew very rapidly, especially
during the first half of the year when sales of new cars were strongest.
Borrowing by nonfinancial business firms also rose sharply in 1977.
The volume of new publicly offered bond issues fell off somewhat
from the preceding year, as many of the larger, higher-rated companies had completed the restructuring of their debt in 1975 and
1976. But lower-rated firms continued to place large quantities of
bonds privately with life insurance companies and other lenders. And
companies of all types tapped financial institutions for increased
amounts of mortgage and term loans, as well as for short-term credit.
Governmental demands for credit in 1977 remained exceptionally
large by historical standards. Borrowing by State and local units surpassed previous levels by a wide margin. A substantial portion of the
increase in tax-exempt bond issuance was for the advance refunding
of debt obligations incurred in prior years when interest rates were
higher, but States and municipalities also borrowed large amounts
34
Growth Ranges
for current and future capital outlays. At the Federal level, the outstanding volume of Treasury debt rose by the third largest amount in
history, as a consequence of the U.S. Government's large budget
deficit. Financing of the continued Federal deficit contributed to upward pressures on interest rates last year—a year in which private
credit demands were especially strong.
In an environment of briskly expanding economic activity and
credit demands, the monetary aggregates also tended to grow more
rapidly last year. The public's demand for M-l—currency and checking account balances—strengthened considerably, and growth in this
measure of money accelerated. Over the year as a whole, M-l grew
about IV2 per cent, well in excess of the range established by the
Federal Reserve. The broader monetary aggregates—M-2 and M-3—
grew at rates near the upper end of the ranges that had been adopted
by the Federal Reserve in early 1977.
Knowing that a sustained, rapid monetary expansion would
threaten a build-up over time of inflationary pressures, the Federal
Reserve began in early spring to be less accommodative in its provision of reserves to the banking system. The adjustment of policy was
a cautious one, in view of the possibility that the burst of monetary
expansion that had developed might reflect simply a transitory swing
in the public's demand for cash balances. But as relatively rapid
monetary expansion continued, the Federal Reserve gradually exerted increasing restraint in the provision of bank reserves relative to
the strong demands for them.
As a result, the Federal funds rate—the rate banks pay to borrow
reserves from one another on an overnight basis—rose about 13A percentage points from April to October, reaching a level of about 6x/i
per cent. And the discount rate at Federal Reserve Banks was raised
in two steps to 6 per cent by late October. Subsequently, in early
January, the discount rate was increased to 6Vi per cent and the
Federal funds rate was moved slightly higher to help stabilize conditions in the market for dollars on international exchanges.
Over all, since last April short-term market rates of interest have
risen about 2 percentage points. Intermediate- and long-term yields
have also risen, with increases largest in the market for Treasury
securities, where rates have adjusted upward by % to 1 Vi percentage
points over the past 10 months. These increases in interest rates on
longer-term securities may well have reflected some increase in the
Growth Ranges
35
inflation premium, as investors reacted to the lack of progress in reducing inflation. Neverthless, despite the increases of the past year,
most short-term rates are still less than 1 percentage point above
their levels at the beginning of the present economic expansion in
early 1975, and corporate and municipal bond yields are significantly
below their levels then.
Growth rates for all the monetary aggregates have slackened appreciably, on average, in the last few months. Growth in Af-2 and
M-3 has slowed, in part, because the rise in interest rates on market
instruments has made them more attractive to some savers than
interest-bearing deposits at banks and thrift institutions. At the same
time, however, demands for loans at depositary institutions have remained strong. Under the circumstances, these institutions have had
to supplement their deposit flows by borrowing and by reducing their
holdings of liquid assets.
Although these pressures may be causing depositary institutions to
become a bit more cautious in their lending policies, credit supplies
still appear to be ample. Moreover, the financial condition of the key
nonfinancial sectors remains generally strong. It is true that household debt burdens, as measured, for example, by the ratio of consumer and mortgage loan repayments to disposable income, are historically high, and they deserve careful monitoring. But to date, there
has been no rise in delinquency rates, so families appear thus far to
be handling their increased indebtedness well. Businesses added further to their liquid assets last year, and corporate balance sheets on
the whole appear to be strong, although there is considerable variation
from firm to firm. And State and local governments, with record
operating surpluses in 1977, appear in the aggregate to enjoy a
healthy financial position.
Thus, financial conditions remain supportive of expansion in economic activity. As 1977 drew to a close, aggregate demands for goods
and services were strong. As I noted earlier, severe winter weather
and the coal strike have caused some steep declines in economic indicators recently. However—assuming a reasonably prompt resumption of activity in the coal industry—we can expect favorable underlying trends soon to reassert themselves. Growth of employment and
income has been substantial over recent quarters, and consumer confidence has remained high. Consumer spending, therefore, should
grow at a reasonably good pace and would be bolstered later this
36
Growth Ranges
year by the proposed tax cuts. In the business sector, new orders for
nondefense capital goods have continued the uptrend that began
about 3 years ago and presage further expansion in business fixed investment. In addition, the rate of inventory accumulation is likely to
accelerate in coming months; inventory investment had slowed in the
fourth quarter, and stocks are lean in many product lines. Moreover,
with prospects for our exports improved by the likelihood of stronger
economic growth abroad this year, it appears that our foreign trade
deficit will not deteriorate further.
Over all, it is the Federal Reserve's judgment that trends in the
national economy favor continued expansion at a moderate rate in
economic activity and a further reduction in the rate of unemployment over the course of 19.78. There is, however, less reason to be
sanguine about progress in curbing the rate of inflation. Food and
material prices have risen substantially in recent months. And labor
costs continue to rise at a relatively rapid rate. The decline in the
value of the dollar on international exchanges is another cause for
concern. It not only contributes to upward pressures on domestic
prices but also threatens to erode business confidence here and
abroad.
The monetary growth ranges that were adopted by the Federal
Open Market Committee (FOMC) at its February meeting are expected to prove consistent with continued expansion in economic
activity, as well as with a gradual winding down of inflation over
the longer run. For the year ending with the fourth quarter of 1978,
the M-l growth range was set at 4 to 6Vi per cent. A range of 6V2
to 9 per cent was established for M-2, which includes, in addition to
M-l, time and savings deposits other than large certificates of deposit
(CD's) at commercial banks. And a growth range of IV2 to 10 per
cent was adopted for M-3—which includes, besides M-2, deposits
at nonbank thrift institutions.
The ranges for M-l and M-2 are identical to those that the Committee previously had adopted for the year ending in the third quarter
of 1978. The range for M-3, however, has been adjusted downward
by V2 percentage point in light of the higher level of market interest
rates now prevailing and the apparent effect of these rates in retarding growth in time and savings deposits at thrift institutions. All of
the ranges adopted by the FOMC anticipate a deceleration of monetary expansion from the growth rates actually recorded in 1977.
Growth Ranges
37
Progress over time in this direction is necessary to ensure the ultimate
achievement of reasonable price stability.
Specification of growth rates for the aggregates is, of course, subject to considerable uncertainty. The rate of growth in money needed
to support economic expansion depends in part on changes in the
velocity of money—that is, on the rate at which the public uses the
existing stock of money to finance transactions. In recent years,
regulatory changes and financial innovations have encouraged increases in the velocity of M-l by enabling the public to economize on
demand deposits. However, the retarding effect of such changes and
innovations on the demand for M-l apparently diminished in 1977,
when M-l growth accelerated. Thus far in 1978, growth in M-l has
been quite moderate, but it is far too early to say whether this marks
a slower trend in growth or is simply a transitory development in a
highly volatile series.
The behavior of the broader aggregates—M-2 and M-3—will be
affected in the year ahead by the constraint placed on the ability of
depositary institutions to attract funds under existing regulatory ceilings on deposit rates. Banks have adjusted to the recent marked slowing of inflows of deposits subject to rate ceilings in part by offering
increased amounts of large-denomination time deposits, which are
not subject to ceilings. Some of these deposits, mainly large-denomination deposits issued in nonnegotiable form, are included in M-2 and
M-3; they have tended to sustain growth in these aggregates, especially M-2, in recent months.
There are other factors that may work to sustain growth in the
broader aggregates in the year ahead. To some extent, the recent
slowdown in inflows of savings and also small-denomination time
deposits may represent a one-time shift of highly interest-sensitive
funds; if so, once the shift has been completed, deposit growth should
strengthen somewhat. Moreover, the fact that longer-term time certificates, which are subject to heavy penalties for early withdrawal,
account today for a larger share of interest-bearing deposits—
especially at thrift institutions—suggests that over-all deposit growth
should be less volatile than in the past.
Nonetheless, if heavy demands for money and credit should place
further upward pressure on market interest rates, deposits subject to
regulatory rate ceilings will be placed at a substantial competitive disadvantage. In such a circumstance, growth in M-2 and M-3 could fall
38
Growth Ranges
short of the ranges. Upward adjustments in the ceiling rates on some
or all categories of time deposits may be required to avoid a potential
distortion in the flow of credit through our financial system, to promote equity for small savers, and to ensure the availability of loans
to home buyers and others who rely on institutional sources of credit.
We recognize the considerable uncertainties surrounding the
shorter-run relationship between growth rates of the monetary aggregates, on the one hand, and the behavior of output and prices on the
other. The Federal Reserve will continue, therefore, to maintain a
vigilant and flexible approach, putting the long-run performance of
the economy above the pursuit of any fixed monetary growth rates.
Economic and financial developments in the current year, it should
be noted, will depend to an appreciable extent on governmental
policies beyond the province of the Federal Reserve. The outcome of
legislative action on energy policy and on taxation will have a considerable influence on the strength of business investment and on international confidence in the dollar. So, too, will this Nation's ability
to find a way to reduce the upward wage-price pressures that continue to plague our economy.
STATEMENT BEFORE THE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS, U.S. SENATE,
APRIL 25, 1978
Mr. Chairman, members of the committee, it is a pleasure to meet
with you and to report, on behalf of the Board of Governors of the
Federal Reserve System, about the outlook for the national economy
and about the course that the Federal Reserve has chartered for monetary policy over the year ahead. I look forward to a continuing dialogue with you on these matters at this committee's regular monetary
oversight hearings.
Economic Activity Is Rebounding
The economy is currently rebounding from a slack period early in the
year when economic activity was constrained by severe weather and
the long coal strike. Retail sales and industrial production have risen
sharply since midwinter. Auto sales have strengthened. Housing starts
increased markedly in March from the relatively depressed levels of
January and February.
Growth Ranges
39
Employment has grown steadily since the beginning of the year.
Although the length of the average workweek declined in the first
quarter, the number of people on the Nation's payrolls rose substantially between December and March, and the unemployment rate
edged down from 6.4 to 6.2 per cent. The continuing uptrend in employment suggests that businessmen have had sufficient confidence in
the underlying strength of the economy to be positioning themselves
for further increases in production.
Looking ahead, growth in economic activity is expected to be sustained over future months by expanding consumer and business demands. The near-term prospects for good gains in consumer spending
appear favorable, as indexes of consumer sentiment have remained at
high levels.
Business spending also should provide impetus to expansion. Inventories generally remain lean, and businesses are likely to be building
their stocks in the next few quarters. Business investment in plant and
equipment, after lagging early in the economic upswing, has increased
at a good pace over the past 2 years. Surveys of capital spending plans
and other advance indicators suggest at least moderate further growth
in the year ahead.
Although State and local governments by and large continue to
pursue cautious financial policies, they also may register significant
increases in real expenditures in the period ahead. Residential construction should show sizable increases in the next few months before
tapering off gradually in the second half of this year. And the foreign
trade deficit, while remaining large, should moderate somewhat from
the very high first-quarter rate.
But Inflation Has Worsened
While the prospects for economic activity thus appear to remain favorable, there are other aspects of recent economic performance that
reflect fundamental problems, which will not be put behind us quickly.
Inflation undoubtedly is the most troubling of these to the American
people. Even as growth in real gross national product was interrupted
in the first quarter, the rate of increase in prices accelerated. Wholesale prices rose at a 9.6 per cent annual rate during the past 3 months
—well above the already uncomfortably high rates experienced last
year. Consumer price increases also accelerated. To be sure, a substantial spurt in volatile food prices contributed importantly to the
40
Growth Ranges
advance in the broad price indexes, but prices of industrial commodities and of services also have continued to rise at a brisk pace. These
unfavorable trends in prices are displayed in the charts.
Upward Cost Pressures Remain
There is little reason to be optimistic about the likelihood of achieving
a significant reduction in underlying inflationary forces in the near
future. Cost pressures remain strong. In 1977, for example, total compensation per hour in the private business sector rose almost 9 per cent,
while productivity increased only 2l/i per cent; as a result, unit labor
costs rose more than 6 per cent. There has been no sign of any abatement of the advance in wage rates, and at this stage of economic
expansion there is little likelihood of a sustained pick-up in productivity growth. Therefore, rising unit labor costs can be expected to
continue to exert considerable upward pressure on prices.
Governmental Programs Have Added to Costs and Inflation
Price pressures have been exacerbated by governmental actions. Certain tax actions, while they have helped to reduce the budgetary deficit
and in this way have worked to restrain one of the forces feeding inflation, simultaneously have added to labor costs. This has been the
case, for instance, with increases in employer contributions for social
security and unemployment insurance. Some other governmental actions also have added to inflationary forces without any compensating
restraint. In this class are the increase in the minimum wage, agricultural price supports, and various import restrictions. In general, there
has been a tendency by Government over the years to treat the problems of individual sectors without adequate regard to the cumulative
inflationary bias that the programs have imparted to the economy.
So Too Has the Declining International Value of the Dollar
Another disturbing aspect of economic performance in the opening
months of this year has been the pronounced widening of the foreign
trade deficit and the weakness of the international value of the dollar.
The estimated trade deficit was greatly enlarged in the first quarter
of 1978, as exports remained sluggish and imports in nearly all categories increased sharply. Against this backdrop, the dollar declined in
foreign exchange markets, and by the end of March its trade-weighted
Growth Ranges
41
value against other major currencies was SV2 per cent lower than early
last fall. The depreciation of the dollar is tending to raise the domestic
price structure in various ways: higher prices of imported finished
goods raise directly the prices paid by consumers; higher prices of
imported materials raise the costs of domestic manufacturers; and
higher prices of foreign goods reduce the pressure to hold down prices
of the domestically produced goods with which they compete in our
markets.
In recent weeks, the dollar has risen relative to other major currencies. Such a trend, if continued, will help moderate inflationary
pressures.
The President's Anti-Inflation Program Offers Hope of
Breaking Inflationary Psychology
President Carter recently outlined a broad program to help deal
with the problem of inflation. The Federal Reserve welcomes this
initiative. Given the support of the Congress and of the general public,
the program is a constructive step toward breaking the inflationary
patterns and psychology that today are so firmly entrenched. The
job of containing inflation requires a concerted effort on the part of all
Americans. The Federal Reserve will play its part in supporting the
President's initiative by exercising appropriate restraint in the provision of bank reserves, credit, and money.
The prospects for inflation will play a major role in shaping future
financial developments. The strength of the dollar on foreign exchange
markets is influenced by expectations about inflation. So, too, is the
level of interest rates in domestic credit markets. The increase in interest rates during the past 12 months—especially the increase of Vi
to 3A of a percentage point in long-term bond rates—may be attributable in part to heightened inflationary expectations.
Monetary Policy Has Been Adjusted To Restrain Unduly
Rapid Monetary Growth
Yields on most short-term market instruments today are about 1%
to 2 percentage points higher than a year ago. This rise has occurred
gradually as the Federal Reserve adjusted its policies in light of the
tendency for monetary expansion to exceed the growth ranges that
had been established. The tendency was most pronounced in the case
42
Growth Ranges
of the narrowly defined money stock, M-l, which includes only currency and demand deposits. Largely as a result of the rapid expansion
of M-l, however, growth in the broader monetary aggregates—M-2
and M-3—also has remained near the upper ends of their ranges.
M-2 is M-l plus time and savings deposits at commercial banks
(other than large negotiable certificates of deposit), while M-3
includes also time and savings deposits at thrift institutions.
For most of the current cyclical expansion, growth in M-l has been
well within the ranges established by the Federal Reserve. Indeed,
early in the expansion, growth was near the low end of the range. In
part, this was the result of actions by the public to shift funds from
demand deposits to interest-bearing savings deposits and market instruments in response to financial innovations that made it easier to
transfer funds in and out of savings deposits. In part, it seems to have
reflected a lagged response to the unusually high level of interest rates
reached during the 1973-74 inflation. And in part, it may also have
reflected the return of confidence during economic recovery, which
made the public more willing to spend out of existing cash balances
and which thus reduced the need for the Federal Reserve to supply
additional money to the economy.
By last year, the moderating impact on money growth of such factors had considerably lessened. Moreover, persisting upward cost and
price pressures were making it difficult for the Federal Reserve to hold
money growth within bounds while not risking undue interference
with continued economic expansion. Finally, it is possible that the
public earlier had reduced its cash balances to unsustainably low levels
relative to income and that some part of the sizable expansion in
money last year reflected a restoration of cash balances to more normal levels.
Money Growth Has Slowed
Growth in the monetary aggregates slowed during the latter part of
1977 and in the early months of 1978. M-l has moved back within
the ranges of the Federal Open Market Committee, while M-2 has
moved from the upper limits of the ranges toward the lower limits.
M-3 has behaved about the same as M-2. This moderation of monetary expansion has reflected in part the cumulative impact of the restraining actions and rise of short-term interest rates that began in
the spring of last year. The influence of interest rates has been most
Growth Ranges
43
evident in the case of the interest-bearing components of the monetary
aggregates. As market rates of interest rose relative to deposit rate
ceilings, some savers shifted their funds from deposits at banks and
nonbank thrift institutions into market instruments, in the process
contributing to the slowing of growth of M-2 and M-3.
With Credit Demands Strong, Liquidity of Banks and
Thrifts Has Come under Pressure
The slowing of monetary expansion in recent months, in conjunction with strong credit demands, has been accompanied by some erosion in the liquidity of depositary institutions. To finance business,
consumer, and mortgage credit demands, commercial banks have
turned increasingly to the short-term credit markets as a source of
funds. There has been marked growth in the outstanding volume of
large-denomination time deposits, which are not subject to regulatory
interest rate ceilings, and in the nondeposit interest-bearing liabilities
of banks. At the same time, banks have appreciably reduced their
holdings of Treasury securities. Despite these changes in bank portfolios, however, customary measures of bank liquidity still indicate
more comfortable conditions than prevailed a few years ago.
Thrift institutions, with the exception of credit unions, have experienced much the same pressures as commercial banks since mortgage
loan demand has remained strong. To accommodate that demand,
institutions—in particular, savings and loan associations, which are
the largest home mortgage lenders—have borrowed heavily from
Federal home loan banks and curtailed their acquisition of securities.
The savings and loans have also utilized other sources of funds, including the growing markets for private mortgage-backed bonds and
mortgage pass-through securities, to sustain new mortgage lending.
These markets promise ultimately to give thrift institutions greater
flexibility in managing their portfolios and to make the residential
mortgage market less dependent on thrift institutions' deposit flows.
At present, however, with deposit flows running weaker and liquidity
coming under pressure, savings and loans have cut back on the outstanding volume of loan commitments since the year-end. And mortgage interest rates have risen moderately in recent months.
Credit Remains Generally Ample, However
Despite the greater pressures experienced by depositary institutions,
credit generally remains in ample supply. Borrowers are experiencing
44
Growth Ranges
little difficulty in raising needed funds at current interest rate levels.
And while higher than a year ago, interest rates are at relatively
modest levels after allowance is made for the effect of inflation.
Monetary Growth Ranges for the Year Ahead Are Expected To
Support Further Economic Expansion and a Lower Unemployment Rate, but Inflation May Not Decelerate Until Later
The ranges of monetary expansion adopted by the Federal Open
Market Committee for the year ending with the first quarter of 1979
reflect our belief that growth in the monetary aggregates should be
moderate, with credit remaining in reasonably good supply. The Committee has specified a growth range for M-l of 4 to 6Vi per cent. For
M-2, the range selected is 6Vi to 9 per cent, and for M-3, IV2 to 10
per cent. These ranges are the same as the Committee had earlier
specified for the year ending with the fourth quarter of 1978. Although
the FOMC at this time has not made a further reduction in its monetary growth ranges, it remains firmly committed to a gradual reduction in monetary growth over time to rates more nearly consistent
with reasonable price stability. The ranges just adopted in fact contemplate that actual monetary growth in 1978 and into early 1979
will be slower than last year. Because there have been signs of a
resurgence in M-l growth over the last few weeks, the Federal Reserve has recently been less accommodative in supplying reserves in
order to keep monetary growth within reasonable bounds over the
long run. The money market in consequence has tightened a bit over
the past few days.
In addition to adopting ranges for the monetary aggregates, the
FOMC also adopted an associated range for bank credit that projects
an increase of between IV2 and XOVi per cent over the 1-year period
ahead. Such a range would allow for continued expansion in bank
credit at around its recent pace.
It was the consensus of the FOMC that expansion of monetary and
credit aggregates within these ranges would be consistent with moderate growth in real GNP over the coming year and with some further
decline in the unemployment rate. However, upward price pressures
remain strong, and the rate of increase in the average price level,
therefore, might be somewhat more rapid over the year ahead than
it was in 1977. Full and effective public support of the administration's anti-inflation program, and success in keeping the budget deficit
Growth Ranges
45
under control, would aid in restraining upward pressure on prices and
would help create conditions whereby we could look forward to a
gradual deceleration of the inflationary process.
Let me supplement this with my own views about the outlook for
the economy in quantitative terms. My personal expectation is that,
over the year ending with the first quarter of 1979, real GNP probably
will increase in a range of AVA to 5 per cent, the unemployment rate
probably will drop into the area of 5% to 6 per cent, and the GNP
price deflator is likely to rise by 63A to IVA per cent. It is hardly
necessary to add that quantitative projections, such as these, are subject to considerable margins of uncertainty. Necessarily they have to
be re-evaluated on the basis of incoming economic data and changing
conditions here and abroad.
Specifying growth rates for the monetary aggregates, too, is subject
to considerable uncertainty. The growth in the narrowly defined
money supply (MA) needed to support economic expansion depends
in part on changes in the velocity of money—that is, on the rate at
which the public uses the existing stock of money to finance transactions. Velocity may rise rapidly or slowly, depending on shifting
public preferences for demand deposits as compared with other assets
and on the state of consumer and business confidence.
The behavior of the broader aggregates—M-2 and M-3—will be
affected in the year ahead also by the constraint placed on the ability
of depositary institutions to attract funds under existing regulatory
ceilings on deposit rates. If heavy demands for money and credit
should place further upward pressure on market interest rates, deposits subject to regulatory rate ceilings will be placed at a substantial,
competitive disadvantage. In such a circumstance, growth of M-2 and
M-3 could fall short of the ranges set by the FOMC, unless there are
upward adjustments in the ceiling rates on some or all categories of
time and savings deposits.
Federal Reserve Should Not Be Left To Combat Inflation Alone.
Effective Anti-Inflation Program Requires Cooperative Effort
The Federal Reserve believes that its determination to hold monetary growth within the ranges just adopted will work to curb inflation
over the longer run and at the same time provide adequate money and
credit for continued economic growth. However, under current conditions—when inflationary pressures are to a great extent embodied in
46
Growth Ranges
the structure of the economy—any deceleration in monetary growth
rates has to be undertaken with caution. The pace of deceleration
cannot proceed much more rapidly than the pace at which built-in
inflationary pressures are wrung out of the economy if satisfactory
economic growth is to be maintained. Thus, bringing inflation under
control urgently requires the cooperative efforts of the administration,
the Congress, the Federal Reserve, and the private sectors of the
economy. The Federal Reserve should not be left to combat inflation
alone.
STATEMENT BEFORE THE COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS,
U.S. HOUSE OF REPRESENTATIVES,
JULY 28, 1978
Mr. Chairman and members of this distinguished committee, it is a
pleasure to meet with you to present the report of the Federal Reserve
on the outlook for the economy and monetary policy.
Economic Gains Continued at a Good Pace into Fourth
Year of Expansion
The current economic expansion, which began in early 1975, is
now into its fourth year. Only one postwar upswing—that beginning
in 1961—has lasted significantly longer. Thus, we have had an unusually durable expansion, and it has been well sustained thus far this
year.
Especially encouraging has been the performance of the labor
market. Payrolls have swelled by more than 2 million workers since
last December. The over-all unemployment rate has dropped below
6 per cent, and the rate for heads of households is 3.6 per cent. Joblessness among youths and minorities remains disturbingly high, but
these groups, too, have experienced appreciably improved employment opportunities in recent months.
And Economic Indicators Point to Further Growth
The willingness of businessmen across the country to hire in such
large numbers suggests that they are looking forward to further
growth of production. And indeed, economic indicators generally
point in that direction. Buying sentiment still is at a high level, and
Growth Ranges
47
with recent employment gains providing an impetus to income, consumer spending should continue to rise.
In the business sector, cautious inventory management has kept
stocks in good balance in most sectors; rising sales are therefore likely
to prompt further advances in inventory investment. Various surveys
of business intentions—as well as data on equipment orders and construction contracts—suggest moderate increases in capital spending
in months ahead. In addition, our net export balance, which has
deteriorated over the past 2 years, is beginning to improve. Imports
are likely to rise less rapidly during the next year. At the same time,
exports should pick up if activity abroad increases as expected and
as the changes in exchange rates that have occurred since last fall
improve the competitive position of U.S. goods.
The increase in housing starts last month suggests that construction
activity will remain at a high level over the near term, but it appears
likely that building will begin to taper off later this year, partly as
a consequence of the firmer conditions prevailing in the mortgage
market. And growth in State and local government expenditures probably will remain modest, in light of the increasing pressure for restraint in public spending.
On balance, the various indicators of spending and activity suggest that the current expansion will continue in the year ahead. As
an expansion matures, however, growth can be expected to moderate,
and I think it is likely that over the next four quarters real GNP will
grow by about 3V4 to 33A per cent. Such a pace should be adequate
to keep unemployment from rising; during the second quarter of 1979,
the unemployment rate may average 53A to 6 per cent.
Inflation, However, Is a Serious Concern
As an expansion continues, there is also always the danger that developing imbalances will weaken and ultimately dissipate its forward
thrust. The greatest threat to the present expansion lies in accelerating
inflation. Price increases have stepped up sharply so far this year—
through May consumer prices rose at an annual rate in excess of 10
per cent. To be sure, much of this surge is attributable to adverse
developments in the volatile agricultural sector, and relief from
double-digit food price increases should be forthcoming later this
year. But the prices of other goods and services also have been rising
briskly recently, and the advance in unit labor costs—a key deter-
48
Growth Ranges
minant of price trends—has accelerated. My best guess is that during
the four quarters ahead prices in general will rise at an average rate
of 7 to 7% per cent.
With the economy moving into a period of heavy collective bargaining, the intensified inflation we have been experiencing and the
greater tautness of labor markets could be reflected in higher wage
demands, and if they are met, labor costs would rise even more rapidly. As it is, these costs will be boosted early next year by additional
mandated hikes in social security taxes and in the minimum wage.
The continued interplay of wage and price rises, coupled with the
legislated cost increases, will make it difficult to achieve much relief
from underlying inflationary pressures over the next year.
The strong momentum of inflation must be a central consideration
for Government policymakers today. If we pursue a course that does
not soon contain the forces accelerating the advance of prices, the
result will be increasing economic disruption and distortion, ending
in all probability in serious recession. Monetary policy has been—
and will continue to be—designed to restrain inflation. But monetary
policy cannot do the job alone. Placing too great a burden on monetary policy would entail dangers of severe financial dislocation that
could have unfortunate longer-run consequences for the domestic and
international economies.
Financial Markets Showing Inflationary Pressures
Financial markets have already begun to show the strains of inflationary pressures. Debt burdens have grown tremendously as households and also businesses have borrowed to finance desired real outlays at rapidly rising prices. Financial institutions meanwhile have
experienced declining liquidity as they have attempted to accommodate heavy loan demands. The most obvious sign of these mounting
pressures of supply and demand in credit markets has been the upward path of interest rates since the spring of 1977. The increase in
interest rates can be attributed in good part to the diminishing
confidence of borrowers and lenders that inflation will slow in the
future.
The willingness of households to go heavily into debt at relatively
high interest rates in some degree reflects a feeling that it is best to
buy now before prices rise still further. This sentiment undoubtedly
has been a major factor in the demand for houses throughout the
Growth Ranges
49
past few years, and it seems to have played an important role in the
burst of sales of cars and other consumer durable goods during the
first half of 1978. The volume of consumer and mortgage credit
extended in connection with these purchases has been growing rapidly
and so has the ratio of debt repayment obligations to disposable
personal income; both have reached unprecedented heights. To date,
loan delinquency experience has not deteriorated significantly, so
households evidently have not encountered serious problems in meeting scheduled payments; however, this situation bears careful watching.
So, too, does the apparently declining level of corporate liquidity.
During the past 2 years profits and other internal funds of businesses
have fallen increasingly short of the sums needed for investment in
inventories and fixed capital. The result has been a rising volume of
borrowing and a declining volume of liquid asset accumulation; balance sheet ratios have been deteriorating since late 1976.
On top of these private credit demands have come sizable public
demands. State and local governments have issued bonds in record
volume during the past couple of years, but these governmental units
also have provided funds to credit markets through a record accumulation of financial assets. The same cannot be said for the Federal
Government. In financing the Federal budget deficit, the Treasury
has competed actively with the private sector for credit and has added
to the general upward pressure on interest rates.
Liquidity of Depositary Institutions Has Declined
During the early stages of economic recovery, commercial banks
and thrift institutions were able readily to satisfy the loan demands of
households and businesses while at the same time adding large
amounts of Government securities to their portfolios. In the past
year, by contrast, there has been a fairly steady decline in liquidity
ratios of these institutions. With rising yields on Treasury bills and
other market instruments diverting funds from savings and smalldenomination time deposits, commercial banks, besides curtailing
security acquisitions, have issued a substantial volume of large certificates of deposit (CD's) and other short-term liabilities. Meanwhile,
savings and loan associations—the leading home mortgage lenders—
have reduced their holdings of Treasury securities and have borrowed
heavily from Federal home loan banks and other sources.
50
Growth Ranges
Growth in M-l High Relative to Long-Run Ranges,
But M-2 and M-3 within Them
The Federal Reserve might have attempted to alleviate some of
the liquidity pressures in the economy by aggressively providing bank
reserves and money. But at best this would have offered no more than
a temporary palliative. And it would have set the stage for an explosion of monetary expansion and exacerbated our problem of inflation.
As it is, since early 1977 there has been a rather persistent tendency
for growth in the narrowly defined money stock, M-l, to run above the
rates the System had projected. Over the past four quarters, for example, M-l—which includes only currency and demand deposits—
increased 7.9 per cent, well above the range of 4 to 6V2 per cent
reported to this committee a year ago.
Over the same four-quarter span, however, the broader monetary
aggregates—M-2 and M-3—recorded net increases that were well
within their announced ranges. M-2 is M-l plus time and savings
deposits at commercial banks (other than large negotiable CD's).
M-3 includes also time and savings deposits at thrift institutions.
The fact that growth rates of M-2 and M-3 remained within their
ranges over the past year, while M-l growth was strong, is attributable to the slowing in expansion of the interest-bearing components
of the broader aggregates. A year ago, yields on shorter-term market
debt instruments were below those that depositary institutions are permitted to pay on savings and small-denomination time deposits. But
as market rates rose, they surpassed the regulatory ceilings, prompting many savers to divert funds from deposits to Treasury securities,
money market mutual funds, and other high yielding investments.
New Certificates Enhance Growth of Time and Savings Deposits
To help preserve the competitiveness of depositary institutions—
and thus to avoid the distortion of credit flows that might occur if
these intermediaries were unable to accommodate borrowers who do
not have access to open market sources of funds—the Federal regulatory agencies created two new deposit categories, effective June 1. One
is an 8-year time deposit on which banks may pay up to 13A per cent
and thrift institutions up to 8 per cent. The other is a 6-month,
$10,000 minimum balance account whose ceiling is determined by
the results of the most recent weekly auction of 6-month Treasury
Growth Ranges
51
bills. Banks are permitted to pay a rate equal to the average discount
yield in the auction, and thrift institutions lA of a percentage point
more.
A noticeable pick-up in inflows to savings and small-denomination
time deposits in June is evidence of the success of depositary institutions in exploiting the new certificates. The 6-month floating-ceiling
certificate appears to have been quite effective in stemming the outflow of funds into market investments. An estimated $8Vi billion of
the new instruments were issued in June alone—%6Vi billion at thrift
institutions—and growth has continued brisk this month.
Need To Restrain Inflation
The Federal Open Market Committee at its meeting last week
considered carefully these recent patterns of monetary expansion, as
well as the prospects for the economy, in deciding on the appropriate
longer-term ranges for the monetary aggregates. Although, as always,
members of the committee differed somewhat in their appraisal of
the outlook, there was a broad consensus that inflationary pressures
would remain strong, if not strengthen, in the year ahead. While the
recently published 5.7 per cent unemployment rate is not low by historical standards, most analysts agree that the unemployment levels
at which inflationary pressures are likely to mount have been raised
substantially by compositional changes in the labor force and by the
effects of unemployment compensation and other institutional factors
on decisions regarding work. Under the circumstances, it is critical
that macroeconomic policy be conducted most prudently at this
juncture to assure that economic expansion continues at an appropriate pace without fueling the already unacceptable intensity of inflationary pressure.
Monetary Growth Ranges Unchanged
Growth ranges for the monetary aggregates selected by the FOMC
for the year ending with the second quarter of 1979 are identical to
those announced 3 months earlier. The range for M-\ is 4 to 6x/i
per cent; for M-2, 6V2 to 9 per cent; and for M-3, IV2 to 10 per
cent. The growth range for bank credit, though, was raised to 8V2 to
ll 1 /^ per cent in recognition of the greater share of borrower demands being directed toward banks.
52
Growth Ranges
The committee discussed at some length arguments in favor of
raising the upper limit of the range for M-l. A major part of the
discussion focused on the question of whether the persistent tendency
over recent quarters for M-l growth, on average, to overshoot the
FOMC's longer-run range represented a fundamental shift in the
demand for M-l relative to GNP that should be accommodated. The
committee concluded that an upward adjustment in the range at this
time would be undesirable in light of continuing inflationary pressures. Nonetheless, it was recognized that, in light of the recent
behavior of money demand, growth in this aggregate over the year
ahead might well be around its upper limit.
Scheduled regulatory changes could lead to a lower measured
growth in M-l, however. Once the new regulation allowing automatic
transfers of funds from savings to checking accounts goes into effect
this coming November, the public can be expected to economize more
on demand balances and to shift some funds from demand deposits
to savings deposits. Such shifts would tend to reduce growth in M-l
during a transition period in which bank customers adjust to the new
service. But the extent to which such a shift in funds will occur over
the year ahead is quite uncertain. It will depend on the structure of
charges posted by banks for the new service and on the speed with
which the public takes advantage of the addedflexibilityin cash management. In the transition period, therefore, M-l will become a less
reliable indicator of monetary conditions.
The broader monetary aggregates are not likely to be affected significantly by the automatic transfer regulation. They are expected to
grow well within their current ranges in the months ahead, with
growth sustained in part by the availability of the new certificate
accounts. Thus, a generally ample flow of credit through banks and
thrift institutions can be expected.
There are always great uncertainties surrounding monetary projections, but the FOMC believes that these ranges for the four quarters ahead are consistent with further moderate expansion of economic activity. Unfortunately, I cannot report that the committee
expects a diminution of inflationary pressure over the coming year.
A reduction in the rate of price advance will require more time if it
is to be accomplished in an orderly manner, given the present built-in
biases toward inflation in the country.
These biases—regulatory, legislated, and expectational—prevented
Growth Ranges
53
the committee from taking a further step at this time toward the
lowering of the monetary growth ranges—a process that must be
continued over time if the Nation is to achieve reasonable price
stability. In any event, under current circumstances, continuation of
the present growth ranges for the aggregates implies a continued posture of restraint against inflationary pressures and probably involves
some additional—but tolerable—liquidity pressure on financial intermediaries.
Need for a Longer-Range Effort To Treat Structural Problems
These observations underscore the limitations of monetary policy as
the main bulwark against inflation and the need to mount a broad
attack on the economic problems we face. A significant reduction in
the Federal budget deficit would be an important first step in reducing
inflationary pressures. But a longer-range effort to treat the structural
problem of inflation also is necessary.
We must reshape our tax laws to make certain that there are adequate incentives for saving and investment. The Nation has for many
years now devoted too large a proportion of its production to consumption and too small a share to the expansion and modernization
of its industrial plant. As a result, growth in productivity has languished, with serious consequences for inflationary trends and our
standard of living.
We must take steps as well to bolster our position in international
trade and thereby to strengthen the dollar. We should continue to
seek freer access to world markets and should attempt to make
American businessmen more aware of opportunities for sales abroad.
We must seek ways of training and placing those individuals who,
because of lack of skills or limited knowledge of employment opportunities, are not readily absorbed into the work force.
And we must remove the impediments to competition, relieve the
undue regulatory burdens, and avoid the costly governmental actions
that have contributed importantly to inflationary pressures in recent
years.
It is important to take strong measures now to curb inflation, and
with the continued cooperation of the administration, the Congress,
the Federal Reserve, and the private sectors of the economy, I believe
that within the next several years we can establish an economic
environment conducive to full employment with price stability.
54
Growth Ranges
STATEMENT BEFORE THE COMMITTEE ON
BANKING, FINANCE AND URBAN AFFAIRS,
U.S. SENATE, NOVEMBER 16, 1978
Events in recent months have presented a formidable challenge to
our Nation. While sustained economic expansion has led to higher
levels of output and employment, continuing domestic inflation and
a sharp decline in the value of the dollar on foreign exchange markets
have posed growing threats to the vitality of the U.S. and world
economies. Monetary policy is being directed forcefully toward helping to resolve these urgent problems.
The objective of the Federal Reserve has, for some time now,
been to foster monetary and financial conditions that would lead to
a reduction of inflationary pressures, while encouraging continued
moderate economic growth. Real gross national product rose at a
4 per cent annual rate, on average, during the first three quarters of
this year, as compared with 5Vi per cent over the course of 1977.
This slower pace in the expansion has been sufficient to achieve substantial further gains in employment, but at the same time it has
avoided a significant overshoot of general levels of resource utilization that would have intensified inflationary demand pressures in
labor and product markets.
Even so, there has been a marked pick-up in the rate of inflation.
For example, consumer prices have climbed at an annual rate of 9Vi
per cent so far this year. A number of factors have contributed to this
development. Reduced supplies of some agricultural commodities—
especially meats—have caused sharply higher food prices. Legislated
increases in the Federal minimum wage and in employer contributions for social security and unemployment compensation have
boosted labor costs. Wage gains have been somewhat larger this year
than last, on average, while our productivity performance has been
lagging. And the depreciation of the dollar in international exchange
has raised the prices of imports and weakened competitive restraints
on the prices of domestically produced goods.
With a heavy calendar of collected bargaining in prospect for 1979
and with wage demands likely to be intensified by recent price advances, the threat of a further escalation of labor costs is very real.
Furthermore, scheduled increases next year in the minimum wage
and social security taxes will again provide a significant inflationary
impulse to costs.
Growth Ranges
55
President Carter has announced a major program to break the
self-destructive cycle of wages chasing prices and prices chasing
wages. The program includes quantitative guidelines that establish
standards for constructive behavior on the parts of labor and management. In addition, the President has indicated that he will seek to
eliminate needlessly costly and anticompetitive regulation. He has
also committed his administration to the containment of Federal
spending and greater fiscal restraint.
On November 1, the administration's anti-inflation program was
fortified by the joint actions of the Federal Reserve and the Treasury
Department to strengthen the dollar in exchange markets. The Federal Reserve discount rate was raised 1 percentage point, and reserve
requirements on large-denomination time deposits were increased. In
addition, $30 billion in key foreign currencies were mobilized for
exchange-market intervention. The speculative assault on the dollar
in international currency markets had depressed its exchange value
well below what could be justified on the basis of fundamental economic considerations. The psychological momentum of the markets,
if not broken, threatened to worsen our inflation problem and to
undermine confidence at home and abroad. The clear willingness of
the United States to intervene actively in exchange markets and the
monetary actions of the Federal Reserve have led to a rebound in
the exchange value of the dollar and to a more stable market environment. These should be beneficial for domestic price performance in
the period ahead and bolster confidence in the Nation's economic
policies.
If the cooperation of business and labor that is so essential to the
success of the administration's anti-inflation program is to be obtained
and if we are to gain the fullest benefit of the recent dollar-support
initiatives, it is absolutely essential that monetary and fiscal policies
demonstrate prudent restraint. If inflation is to be gradually slowed,
aggregate demand must not be permitted to expand to the point at
which it presses excessively on available supplies of labor and industrial resources. This means that real GNP at this juncture probably
should not grow at an annualized rate much above 3 per cent, in line
with the prospective growth of potential output. Nor, of course, do
we want to see a protracted shortfall from that pace that would bring
on recession and underutilization of labor and productive capacity.
Recent trends in the economy and in financial markets suggest
56
Growth Ranges
that expansion likely will be sustained, but at a more moderate pace
over the next year or so. One noteworthy development has been the
less robust pattern of spending by households following exceptional
strength earlier in the cyclical recovery. Personal consumption expenditures rose at an estimated annual rate of less than 3 per cent in real
terms during the first three quarters of this year, after having advanced
at an average rate of SV2 per cent in the preceding 2% years. Rising
costs of foods and other necessities have put substantial pressure on
the budgets of many families, and the proportion of disposable income
spent has been unusually high. Record levels of borrowing have played
an important role in supporting consumer outlays, and the heavy
repayment burdens that households face are likely to be an increasing
constraint on spending in the forthcoming year. As a consequence,
personal consumption expenditures probably will no more than keep
pace with increases in personal income.
In addition, financial factors should induce some tapering off in
homebuilding in 1979. To date, housing starts have remained on a
high plateau, but the effects of recent increases in interest rates will
soon begin to show through. The 6-month certificates, introduced in
June, have enabled thrift institutions to avoid the disintermediation
that has curtailed mortgage credit availability in the past, but they
have not sheltered the housing market from the effects of higher
interest rates. Builders already are experiencing steeper rates on
construction loans, for which charges tend to move in step with the
bank rate on loans to prime business borrowers, and the stock of loan
commitments for permanent mortgage financing made earlier at lower
rates is being depleted. The combined effects of higher mortgage rates
and inflated house prices on the cost of homeownership are likely
to bring about some decline in building—although nothing approaching the disastrous drops seen in the past seems in store.
Business investment meanwhile should remain supportive of economic expansion. Inventories by and large are quite lean in relation
to current sales levels, and even with a continuation of cautious
inventory policies, businessmen likely will wish to expand their
stocks in line with rising sales. As for spending on plant and equipment, a recent private survey of investment intentions suggests only
a modest increase next year in real terms. On the other hand, contracts and orders for new plant and equipment have been running
well ahead of year-earlier levels—even after adjustment lot inflation.
Growth Ranges
57
In general, the willingness of businessmen to commit funds for major
investment projects will hinge in large part on the success of efforts
to control inflation, thereby providing the basis for greater confidence
in the future health of the economy.
The foreign trade sector represents an element of strength in the
economic outlook. The U.S. trade deficit should continue to shrink as
a result of the stronger growth in prospect for some of our major
trading partners and as a result of the effects of past exchange-rate
changes on our competitive position.
In all, it is my expectation that real GNP will increase by roughly
V/i to 3 per cent in the year ending with the third quarter of 1979.
With growth in the labor force unlikely to be so rapid as in the past
couple of years, this rise in activity should be enough to keep the
unemployment rate in the area of 5% to 6*4 per cent.
In this projection I have assumed that inflation will slow into the
range of 6% to IV2 per cent. There are as always many uncertainties
on the price front: the effects of weather on crop harvests and the
decisions of the Organization of Petroleum Exporting Countries'
cartel, for example, are factors beyond the sphere of economic
analysis. What is clear is that the cost increases already in train will
be placing continued pressure on the price structure so that it will be
difficult to break the momentum of inflation. However, if there is
general compliance with the administration's guidelines, the advance
of prices next year could be held to around the low end of the range
I have projected. This would represent a substantial deceleration
from the increase of WA per cent in the GNP deflator expected for
this year, and would be a good start in the difficult process of restoring price stability.
The recent credit-restraining actions of the Federal Reserve have
aroused fears in some quarters that an overly restrictive monetary
policy might precipitate an economic downturn. There is no doubt
that domestic credit markets are tauter than they were 6 months ago.
Nonetheless, current financial conditions appear consistent with the
moderate economic expansion that is desirable at this juncture.
The Federal Reserve has been moving its policies in a progressively
less accommodative direction this year in an effort to prevent excessively rapid growth in money and credit. In an environment of inflation and of heightened inflationary expectations, borrowers have become willing to pay higher rates of interest in order to obtain credit
58
Growth Ranges
to finance acquisition of assets the values of which they anticipate will
be rising more rapidly than the rate of inflation. This phenomenon
is seen most clearly in the real estate market, but the behavior is
common in other sectors as well. To hold down nominal rates of
interest in such a circumstance is to invite a credit-financed surge in
aggregate demand that would add further to inflationary pressures.
Consequently, the Federal Reserve has pursued policies that have
permitted market rates to rise appreciably this year. Yields on Federal
funds and other short-term instruments have increased more than 3
percentage points since the beginning of 1978, while interest rates
on long-term bonds and mortgages have risen about 1 percentage
point.
These are sizable movements, to be sure, but the fact is that, even
at current levels, real rates of interest—that is, actual rates adjusted
for inflationary expectations—are not very high, and credit remains
in adequate supply to finance a volume of spending that is appropriate
in light of the availability of real resources in the economy. Usury
ceilings, which are unrealistic in relation to present market interest
rates in many States, are cutting into credit availability in some local
markets, and it would be desirable if these obstacles to the efficient
operation of our financial system were eliminated. But there has been
nothing like a general "credit crunch," and we do not foresee one.
It is the intention of the Federal Reserve to work toward a gradual
deceleration of monetary and credit expansion to a pace consistent
with price stability. The speed with which we can move in that direction without severely disrupting economic activity is limited by the
degree to which inflation has become embedded in our economy. But
some progress has been made in the past year. While MA growth
over the past four quarters—at 8 per cent—was about the same as in
the previous year, growth in M-2 and M-3 decelerated to rates of
8V4 and 9% per cent, respectively. Growth in these broader aggregates was 3 to 3 Vi percentage points slower than in the previous year.
The actual growth in M-l over the past four quarters was well above
the range of 4 to 6Vi per cent set for this aggregate, but growth in
the broader aggregates was within their ranges. To have achieved
significantly lower growth rates for the monetary aggregates than
actually developed would have required substantially higher market
rates of interest and a sharper curtailment in credit supply, which in
our judgment would have run an unacceptably high risk of wrenching
Growth Ranges
59
financial markets so severely as to lead to an economic recession.
Growth in the monetary aggregates has to be evaluated in relation
to basic economic and financial forces affecting the public's preferences for money in its various forms. During the past four quarters
growth in nominal GNP has remained very rapid as moderate expansion in real output was accompanied by an accelerated rate of price
increase, generating a substantial demand for money—particularly
M-l—to finance transactions. Federal Reserve policy did not fully
accommodate these strong demands, and in fact, the rate of growth
in real money balances actually slowed.
The pattern of growth in the broader aggregates has been strongly
influenced by the introduction at banks and thrift institutions in June
of this year of a 6-month money market certificate whose ceiling
varies weekly with changes in the auction yield on 6-month Treasury
bills. Growth in savings and small-denomination time deposits subject to Federally regulated interest-rate ceilings had slowed markedly
in the fall of 1977 and in the first half of this year as higher yields
on market securities increasingly attracted funds that would otherwise have been held in accounts at banks or thrift institutions. In
order to enable these institutions to compete more effectively for
lendable funds, the Federal Reserve and other regulatory agencies
created two new deposit categories—an 8 per cent, 8-year certificate
and the 6-month money market certificate.
The money market certificates have proved especially successful.
They have been widely offered, most frequently at the ceiling rates,
and have resulted in a marked pick-up in consumer-type deposit
growth. Growth in deposits at savings and loan associations and
mutual savings banks, which averaged 63A per cent at an annual
rate in the first 5 months of 1978, have averaged 13 per cent since
the introduction of the new accounts. This growth has permitted thrift
institutions to increase their commitments for mortgage loans while
reducing their dependence on borrowed funds and stemming the
decline in their liquidity positions. At commercial banks, which have
a rate disadvantage relative to the thrift institutions of VA of a percentage point, there has been a less marked, but still noticeable gain
in growth of the combined total of savings and small time deposits—
from 3% per cent through May to 6V2 per cent in the past 5 months.
Nonetheless, with bank credit demands remaining strong, banks continued to liquidate Treasury securities and to increase short-term
60
Growth Ranges
borrowings through such instruments as large certificates of deposit
and Federal funds to finance these demands.
At its October meeting, the Federal Open Market Committee
(FOMC) updated its longer-term ranges for the monetary aggregates.
Its task was complicated by new uncertainties associated with the
introduction on November 1 of automatic transfer services (ATS),
which permit consumers to authorize their banks to shift funds from
savings to demand deposit accounts as needed to cover checks written. The major impact of this innovation should be on M-l, as consumers take advantage of the opportunity to reduce their holdings of
non-earning demand deposits, but the size of this effect cannot be
projected with any real precision. M-2 and M-3 will be less affected
because shifts of funds from thrift institutions to banks, and from
market instruments to deposits, are likely to be comparatively modest.
Against that background, the continuity in the FOMC's objectives
with respect to the monetary aggregates for the 1-year period from
the third quarter of 1978 to the third quarter of 1979 is more clearly
indicated by the broader aggregates, M-2 and M-3. The Committee
re-established the ranges for these two aggregates at 6V2 to 9 per cent
and IVi to 10 per cent, respectively. It is expected that growth in
these aggregates will be well within these ranges as monetary policy
pursues a course of responsible restraint to complement the administration's program to combat inflation through fiscal discipline, wage
and price moderation, and regulatory reform. The Committee anticipates growth in bank credit at a rate of %Vi to ll 1 /^ per cent to be
associated with the ranges adopted for the monetary aggregates.
With regard to M-l, the FOMC expects growth within a range of
2 to 6 per cent over the period from the third quarter of 1978 to the
third quarter of 1979. The existing range of 4 to 6V2 per cent has
been lowered because the public can be expected to shift funds to
take advantage of the ATS service, and the range has been widened
because of uncertainties about the speed and extent to which the
public may undertake such shifts.
Because of uncertainties about the relationship between M-l and
the transactions demand for money during the transition to the new
ATS service, and in view of the widening role in financing transactions played by savings accounts, the Committee also indicated a
growth range for M-1 + (M-l plus savings accounts at commercial
banks, negotiable orders of withdrawal accounts, demand deposits at
Growth Ranges
61
mutual savings banks, and credit union share drafts) that it expected
to be generally consistent with ranges of growth in the other aggregates. This range has been set at 5 to IV2 per cent over the 1-year
period ending in the third quarter of 1979.
The structure of the domestic payments system has been changing
considerably over the past several years as a result of regulatory
changes and financial innovations. Deposits in thrift institutions have
been increasingly used for third-party payments. At banks, liquidity
reserves of the public, as well as funds held against expected transactions needs, have come to be held more and more outside of
demand accounts. On the other hand, banks and particularly thrift
institutions have also lengthened the maturity of consumer-type time
deposit liabilities, so that some deposits have become less money-like.
And in general, distinctions among depositary institutions with respect
to their deposits have become increasingly blurred. Existing measures of the monetary aggregates are, as a result, becoming outdated.
The Federal Reserve is studying possible adjustment to these measures to reflect the changing institutional environment. The measure
of M-l 4- represents an interim step in this process, while a more
comprehensive revision is under way. It should be noted that one
consequence of these ongoing changes is a need for more timely and
broader reporting of deposit data—not only from nonmember commercial banks but also from thrift institutions.
While monetary aggregates are useful indicators of financial conditions, the continuing change in the institutional environment and in
public preferences for different deposits indicates that any single
monetary measure, or even a set of several measures, can by no
means be the sole focus of policy. Thus, a broad range of financial
indicators—including nominal and real interest rates, credit flows,
and liquidity conditions—necessarily must be considered in assessing
the stance of monetary policy.
Looking beyond these relatively technical questions about how best
to characterize monetary policy, it is clear that in the present environment we cannot rely solely on monetary management to contain
inflationary pressures. It is essential to obtain public cooperation in
the administration's anti-inflationary program and to exercise restraint
in fiscal policy if the Nation is to achieve a gradual, orderly reduction
in the rate of inflation. You can be assured that monetary policy will
do its part in achieving that objective.
Part 2
Records, Operations,
and Organization
65
Record of Policy Actions
of the Board of Governors
REGULATION A (EXTENSIONS OF CREDIT BY
FEDERAL RESERVE BANKS)
May 10, 1978—Interpretation
The Board adopted an interpretation of Regulation A, effective May 10,
1978, that provides that bankers acceptances secured by field warehouse receipts covering readily marketable staples are eligible for discount
by a Federal Reserve Bank even though the warehouse manager is a
present or former employee of the owner of the goods.
Votes for this action: Messrs. Miller, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Gardner and
Wallich.1
This interpretation, which superseded one that had been adopted
by the Board in 1933, took into account the changes in commercial
law and business practice over the last 45 years. Field warehouse
receipts are not frequently offered to Reserve Banks for discounting;
however, by making them eligible for discount, the new interpretation removed the reserve liability that a member bank would have
incurred if it sold an acceptance that was not eligible for discount.
REGULATION B (EQUAL CREDIT OPPORTUNITY)
March 13, 1978—Amendment and Interpretation
The Board amended Regulation B, effective March 13, 1978, to clarify
the definition of adverse action as it relates to point-of-sale or loan
transactions and to specify the circumstances under which failure to
authorize the use of an open-end credit account constitutes an adverse
action.
1
On this and subsequent pages, footnote 1 indicates that there was one
vacancy on the Board at the time the action was taken
66
Board Policy Actions
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Vote against this action: Mr.
Miller. Absent and not voting: Messrs. Gardner
and Burns.
In a second action, the Board decided to draw more narrowly the
applicability of an interpretation that permitted the collection of information about a borrower's religious affiliation for marketing purposes.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Messrs.
Gardner and Burns.
The amendment specified three instances of denial of credit at
point of sale for which the creditor must provide borrowers with an
explanation: (1) a change in the terms of the account at point of
sale unfavorable to the customer; (2) termination of an account at
point of sale; or (3) denial of an application for an increase in the
credit limit. Other instances of credit refusal at point of sale would
not constitute adverse action and the creditor would not be required
to explain them; these would include the use of a lost or stolen credit
card or one that is not currently valid, or the malfunctioning of the
card issuer's authorization center.
Chairman Miller favored an approach that would define more
instances of denials as adverse actions. He preferred that the amendment define the type of credit refusals at point of sale that would not
constitute adverse action, with the understanding that in all other
circumstances a credit denial would necessitate an explanation. He,
therefore, dissented from the Board's action.
The revised interpretation was the result of reconsideration of an
official staff interpretation issued in 1977 that permitted the collection of information for marketing purposes that otherwise would be
prohibited by Regulation B. The original interpretation had stated
that a seller of religious goods could inquire about a customer's religion so long as the information was used for marketing purposes
and was not a factor in determining whether to grant credit; the interpretation also extended to other creditors in similar circumstances.
After issuance of that interpretation, the Board received a number of requests that it limit the applicability of the interpretation;
Board Policy Actions
67
those requesting the change felt that permitting the collection of such
information would facilitate unlawful discrimination. Consequently,
the existing interpretation was rescinded, and a revised staff interpretation was issued that made more explicit the applicability of the
interpretation to the particular circumstances involving the seller of
religious goods.
REGULATION B (EQUAL CREDIT OPPORTUNITY) AND
REGULATION Z (TRUTH IN LENDING)
April 19, 1978—Amendments
The Board amended Regulations B and Z, effective April 21, 1978, to
revise the procedures for issuing official staff interpretations.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.1
Official staff interpretations generally are of a technical rather than
a policy nature and provide a defense to any creditor who acts in
good faith in conforming to them. The Board had received complaints about existing procedures for issuance of official staff interpretations; under such procedures a staff interpretation was published
in the Federal Register within 2 weeks of issuance and became
effective upon publication. Those questioning the procedures felt that
an official staff interpretation should be considered a rule, as defined
by the Administrative Procedure Act, and therefore should be announced and published for comment before becoming effective.
The changes adopted provide that the effective date for any staff
interpretation will be delayed 30 days. If an interpretation is challenged, the effective date will be suspended and the interpretation
will be published for comment. If no questions are raised about an
interpretation, it will become effective 30 days after publication in
the Federal Register.
Concurrently with these revisions, the Board also deleted from the
regulations existing criteria for determining whether a question merits
an official staff interpretation and the procedures for requesting
reconsideration.
68
Board Policy Actions
REGULATION D (RESERVES OF MEMBER BANKS)
November 1, 1978—Amendment
The Board amended Regulation D by establishing a supplemental reserve
requirement of 2 per cent on all time deposits of $100,000 or more and
on certain other liabilities of member banks, effective with outstanding
deposits beginning November 2, 1978, for reserves required to be maintained beginning November 16, 1978.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Gardner and Jackson.
Reserve requirements were increased as one of several measures
taken jointly by the Federal Reserve and the Treasury Department to
improve the position of the dollar on foreign exchange markets and
to reduce inflationary pressures. The action was taken to help moderate the expansion of bank credit and to increase the incentive for
member banks to borrow abroad, thereby improving the demand for
dollar-denominated assets.
REGULATION D (RESERVES OF MEMBER BANKS)
AND REGULATION M (FOREIGN ACTIVITIES OF
NATIONAL BANKS)
August 25, 1978—Amendments
The Board amended Regulations D and M to eliminate the reserve requirements imposed on foreign borrowings of member banks, effective
with the reserves required to be maintained beginning October 5, 1978.
Votes for these actions: Messrs. Miller, Gardner,
Wallich, Jackson, and Partee. Votes against these
actions: None. Absent and not voting: Mr. Coldwell.1
The amendments eliminated the 4 per cent reserve requirement
that had been imposed on borrowings—primarily Euro-dollars—of
member banks from their foreign branches or from other foreign
banks and on assets held by foreign branches that were acquired
from their domestic offices. The Board also removed the 1 per cent
reserve requirement on loans of foreign branches to U.S. borrowers.
Board Policy Actions
69
These changes were expected to encourage member banks to borrow
in the Euro-dollar market.
The Board took these actions in conjunction with other measures
to combat domestic inflation and to counter the disorder that existed
in foreign exchange markets.
REGULATION E (PURCHASE OF WARRANTS)
November 8, 1978—Rescission of Regulation
The Board rescinded Regulation E, effective November 9, 1978.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Miller and Gardner.
As part of a comprehensive review of the Board's regulations and
related rules to determine whether they need clarification, simplification, or cancellation, the Board determined that Regulation E should
be rescinded.
Regulation E, which governs the purchase by Reserve Banks of
short-term securities of State or local governments in anticipation of
tax receipts or other assured income, was adopted in 1915 to enable
the Reserve Banks to provide a source of liquidity to member banks.
Since 1933, however, statutory changes to the Federal Reserve Act
have expanded the System's alternatives for investing in open market
instruments and have eliminated the need for Reserve Banks to purchase warrants directly from State or local governments.
REGULATION F (SECURITIES OF MEMBER STATE
BANKS)
October 4, 1978—Amendment
The Board amended, effective January 29, 1979, the provisions of Regulation F that deal with disclosure of information to conform with certain
changes in rules made by the Securities and Exchange Commission.
Votes for this action: Messrs. Miller, Coldwell,
Jackson, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Gardner and Wallich.
70
Board Policy Actions
The amendment affects the type of information that must be disclosed and the treatment of information in the following six areas:
(1) confidential treatment of preliminary proxy materials; (2) proposals by security holders; (3) dissemination of proxy material to
beneficial owners of registered securities; (4) tender offer statements;
(5) consolidation and revision of several reports; and (6) stock
appreciation rights.
REGULATION G (SECURITIES CREDIT BY PERSONS
OTHER THAN BANKS, BROKERS, OR DEALERS),
REGULATION T (CREDIT BY BROKERS AND DEALERS),
AND REGULATION U (CREDIT BY BANKS FOR THE
PURPOSE OF PURCHASING OR CARRYING MARGIN
STOCKS)
May 10, 1978—Amendments
The Board amended Regulations G, T, and U, effective June 15, 1978,
to revise the requirements for inclusion on the Board's list of over-thecounter (OTC) stocks subject to margin requirements.
Votes for this action: Messrs. Miller, Gardner,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Wallich.1
The amendments provide that the OTC list will include only those
stocks for which dealers submit bona fide bids and offers to an automated quotation system.
The amendments also revise certain procedures for determining
the stocks to be included on or deleted from the list. The use of an
automated quotation system will reduce the time needed to review
stock market data and will allow publication of the OTC list more
promptly.
REGULATION G AND REGULATION U
June 21 and 29, 1978—Interpretations
On June 21 the Board adopted an interpretation of Regulation G, effective June 29, 1978, that permits a lender, in connection with certain
types of consumer loans, to accept purpose statements by mail, without
Board Policy Actions
71
the need for a face-to-face interview with the borrower, provided that
the lender institutes certain procedural safeguards to establish the borrower's good faith.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.1
On June 29, effective immediately, the Board adopted an interpretation of Regulation U, superseding an earlier interpretation, that permits
banks to accept mailed purpose statements under the same conditions
as those set forth in the June 21 interpretation of Regulation G.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Miller and
Gardner.1
A 1965 interpretation of Regulation U had required that a borrower
furnish the loan officer with a statement of the purpose of the loan
during a personal interview to permit the officer to obtain sufficient
information about the circumstances of the loan. Since 1965, however,
several safeguards have been added to the Board's securities credit
regulations that make a face-to-face interview unnecessary if other
protective measures are instituted.
The interpretation of Regulation G allows acceptance of mailed
purpose statements if the lender establishes a program to obtain sufficient information about a borrower and adopts procedures to verify
the accuracy of the information received. The interpretation of Regulation U allows the mailing of purpose statements under the same
conditions as those set forth in Regulation G.
REGULATION H (MEMBERSHIP OF STATE BANKING
INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM)
April 19, 1978—Amendment
The Board amended Regulation H, effective April 20, 1978, to make the
provisions governing real estate loans by State member banks in floodhazard areas conform to recent changes in the national flood insurance
program.
72
Board Policy Actions
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.1
The Housing and Community Development Act of 1977 removed
the prohibitions against making loans secured by improved real estate
or a mobile home located in a flood-hazardous area of a community
that does not participate in the national flood insurance program. For
loans made in flood-hazardous areas—including communities that do
not participate in the flood insurance program—the act also required
a notice to inform borrowers that a flood hazard exists and to indicate
whether Federal disaster relief assistance is available.
REGULATION K (CORPORATIONS ENGAGED IN
FOREIGN BANKING AND FINANCING UNDER THE
FEDERAL RESERVE ACT)
November 6, 1978—Amendment
The Board amended Regulation K, effective November 16, 1978, to conform to the International Banking Act of 1978.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, Partee, and Mrs. Teeters. Votes
against this action: None. Absent and not voting:
Mr. Gardner.
The International Banking Act removed the statutory 10 per cent
minimum reserve requirement imposed on U.S. deposits of Edge
corporations. The amendment eliminates the 10 per cent minimum
requirement from Regulation K, leaving Edge corporations subject to
the same reserve requirements as those imposed by Regulation D on
member banks.
REGULATION M (FOREIGN ACTIVITIES OF
NATIONAL BANKS)
August 25, 1978—Amendment
This amendment is discussed under Regulation D.
Board Policy Actions
73
REGULATION O (LOANS TO EXECUTIVE OFFICERS
OF MEMBER BANKS)
February 22 and June 29, 1978—Amendments
On February 22 the Board amended Regulation O, effective March 24,
1978, to increase from $1,000 to $5,000 the amount of credit that a member bank may extend to its executive officers through the use of bank
credit cards or similar plans.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Burns,
Gardner, and Lilly.
The Board increased the limit on officer indebtedness in recognition
of the general rise in price levels since the adoption of the $1,000
limit in 1967. The Board also noted that the use of credit cards in
general had become more widespread since that time and that the
lines of credit extended under credit-card plans likewise had grown;
therefore it considered an increase in the exemption for credit-card
indebtedness by bank officers to be appropriate.
On June 29 the Board adopted a clarifying amendment, effective June 30,
1978, to specify that an executive officer may not become indebted
to a member bank under a bank credit-card, check-credit, or similar plan
with terms more favorable than those offered to the general public.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Miller and
Gardner.1
After adoption of the amendment in February the Board received
several inquiries about provisions of the amendment that appeared to
conflict with an existing interpretation. The clarifying amendment
stipulates that the regulation precludes any type of credit-card arrangement under which an executive officer would receive special terms
that are not offered to all cardholders.
74
Board Policy Actions
REGULATION Q (INTEREST ON DEPOSITS)
May 1, 1978—Amendment
The Board amended Regulation Q, effective November 1, 1978, to permit member banks to transfer funds automatically from the savings
account of a depositor to a demand deposit or other account.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action. None.1
The amendment enables individuals to authorize their bank to transfer funds automatically and without penalty from savings accounts to
checking accounts. The service is not available to businesses or governmental units.
The automatic transfer service may be offered in addition to telephonic transfer and preauthorized bill-paying services, which previously had been authorized for member banks, and it would provide
depositors with an alternative to arrangements such as automatic loans
to cover overdrafts of checking accounts. The Board set an effective
date of November 1 to provide banks sufficient time to prepare for the
new service.
The amendment was expected to improve the efficiency of the
System's check-clearing operations by reducing the number of checks
that are returned for insufficient funds.
May 10 and 26, 1978—Amendments
On May 10 the Board amended Regulation Q to permit member banks
to offer two new categories of time deposits beginning June 1, 1978: (1) a
deposit of $1,000 or more with a maturity of 8 years or longer on
which banks could pay a maximum interest rate of 7% per cent; and (2) a
short-term time deposit of $10,000 or more that would mature in 26
weeks and would earn interest at a rate equal to the discount rate on
26-week Treasury bills. The amendment also had the effect of raising to
8 per cent the maximum rate payable on funds deposited on or after
June 1 in individual retirement accounts (IRA's) and Keogh plan retirement accounts.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, and Partee. Votes against this
action: None. Absent and not voting: Mr. Jackson.1
Board Policy Actions
75
The 8-year time deposit category was established to help lengthen
the maturity of bank liabilities and to promote greater stability in
the cost and availability of funds. The short-term time deposit category
would assist banks in attracting funds that otherwise might be invested
in money market instruments. Both changes were made to assure continued flows of funds for mortgages.
On May 26 the Board amended its May 10 action to permit the new
8 per cent ceiling rate on IRA's and Keogh retirement accounts to be
applicable to funds already deposited in such accounts as well as to
new deposits, effective June 1, 1978.
Votes for this action: Messrs. Miller, Wallich,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Gardner
and Cold well.1
The amendments announced on May 10 drew comments from many
banks that the new rate structure for IRA's and Keogh accounts would
result in operating problems because only the new deposits would earn
interest at the higher rate. Banks indicated that maintaining a dual
interest rate structure for a single pool of retirement funds would be
difficult, and they also thought customers might become confused by
the dual rates. Therefore, they requested reconsideration of the Board's
decision not to allow the higher rate to be paid on funds already deposited in IRA's and Keogh accounts. In view of these problems and
because retirement accounts function more as open-end accounts—
with periodic deposits—than as ordinary time deposits, the Board
approved an amendment establishing the 8 per cent ceiling for all
deposits in IRA's and Keogh accounts.
December 6, 1978—Amendment and Interpretation
The Board amended Regulation Q, effective immediately, to modify the
interest penalty applicable to early withdrawal of funds from Keogh
plan and individual retirement accounts and certain other time deposits.
The Board also adopted an interpretation to permit depositors to withdraw without penalty the interest earned on a time deposit.
Votes for these actions: Messrs. Miller, Wallich,
Coldwell, Partee, and Mrs. Teeters. Votes against
these actions: None.2
2
On this and subsequent pages, footnote 2 indicates that there were two
vacancies on the Board at the time the action was taken.
76
Board Policy Actions
The amendment applies to (1) time deposit open accounts in which
the deposit of additional funds automatically resets the maturity of all
funds in the account and (2) time deposits that may not be withdrawn prior to the expiration of a specified period of notice (notice
accounts). Previously, when funds were withdrawn from such accounts
prior to maturity, Regulation Q required member banks to impose an
interest forfeiture penalty retroactive to the date of the original deposit.
The amendment reduces the severe impact that the early withdrawal
penalty would have had on longer-term deposits.
The amendment changes the penalty rule for early withdrawal of
these types of time deposits. For time deposit open accounts with
automatically resetting maturities, such as individual retirement accounts and Keogh plan accounts, the amendment allows banks to
treat each deposit as though it had a separate maturity equal to the
maturity of the original deposit. The penalty for early withdrawals
from such accounts is calculated on the basis of the length of the
maturity period specified for the original deposit. For notice accounts,
the penalty is imposed for a period of time no greater than that specified by the notice.
The interpretation authorizes member banks to permit the withdrawal of interest earned on a time deposit without penalty, regardless
of the method used by the bank to compound or credit such interest.
Previously, banks had been advised that when interest is credited to
an account, it becomes part of the underlying time deposit and subject to the same penalty for early withdrawal.
REGULATION T (CREDIT BY BROKERS AND DEALERS)
May 10, 1978—Amendment
This amendment is discussed under Regulation G.
July 12, 1978—Amendment
The Board amended Regulation T, effective July 12, 1978, by broadening
the conditions under which a broker or dealer can make subordinated
capital loans to other brokers and dealers.
Board Policy Actions
77
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.1
The amendment permits any individual or firm that is subject to
Regulation T to extend subordinated credit to other brokers or dealers for capital purposes. Previously, only those who were members of
a national exchange could make such loans, and the loans were
limited to intracompany loans or loans between members of the same
exchange. Also, the amendment removes certain restrictions on the
use of the proceeds of the loan if the borrower has no other customer relationship with the lender.
September 20, 1978—Amendment
The Board amended Regulation T, effective October 30, 1978, to permit
brokers and dealers, under certain circumstances, to extend credit on nonconvertible corporate debt securities that are not listed on a national
securities exchange.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, Partee, and Mrs. Teeters. Votes against this action: None.
The amendment provides that brokers may extend margin credit
on an unlisted corporate bond if the bond satisfies certain criteria
relating to the size of issue, the availability of information on the
security, and the status of principal and interest payments of the
corporate issuer. The amount of credit that may be extended is the
amount that the broker ordinarily would extend on nonconvertible
securities traded on national exchanges.
REGULATION U (CREDIT BY BANKS FOR THE
PURPOSE OF PURCHASING OR CARRYING MARGIN
STOCKS)
May 10, 1978—Amendment
This amendment is discussed under Regulation G.
78
Board Policy Actions
June 29, 1978—Interpretation
This interpretation is discussed under Regulation G.
REGULATION Y (BANK HOLDING COMPANIES)
January 18, 1978—Termination of Rulemaking
The Board decided to terminate the rulemaking proceedings relating to a
proposed amendment to Regulation Y that would have permitted bank
holding companies to underwrite and deal in U.S. Government securities,
State government securities, and municipal securities. Instead, the Board
agreed to review applications to underwrite and deal in such securities
on a case-by-case basis.
Votes for this action: Messrs. Burns, Gardner,
Coldwell, Partee, and Lilly. Votes against this
action: None. Absent and not voting: Messrs.
Wallich and Jackson.
The Board had been considering an amendment to Regulation Y
that would have permitted bank holding companies to engage in the
activities of underwriting and dealing in government securities, municipal securities, and any other security in which a State member bank
is permitted to deal. The amendment, first proposed in 1974, was
occasioned by an application by a bank holding company to form a
subsidiary that would deal in municipal securities.
When the Board considered the application in October 1976, it
decided that the proposed activity was closely related to banking, but
suspended further consideration of the proposal. The second part of
the two-step test to determine if a proposed activity is permissible for
holding companies requires a finding that the activity is a proper
incident to banking. Rather than making that finding for purposes of
amending Regulation Y during its current consideration of the issue,
and thereby permitting the activity generally, the Board preferred to
process applications to engage in these activities on a case-by-case
basis.
The Board took this action because of the belief that it should
move cautiously in expanding the list of activities permissible for
holding companies and because it preferred to delay action until
it could assess the effects of the activity on individual bank holding companies. Consequently, the Board decided to process hold-
Board Policy Actions
79
ing company applications involving securities underwriting on a caseby-case basis, in lieu of amending Regulation Y.
January 25, 1978—Interpretation and Termination of
Rulemaking
The Board adopted an interpretation, effective January 25, 1978, that
codified past applications of the divestiture provisions of Regulation Y.
At the same time, the Board terminated a rulemaking proposal that would
have amended Regulation Y by establishing additional presumptions for
determining whether a holding company continued to control divested
activities when certain debt or officer relationships continue to exist.
Additionally, the Board agreed to terminate the practice of publishing
in the Federal Register notices of routine applications for determinations
that divestitures had been completed. Virtually no comments had been
submitted on such applications.
Votes for these actions: Messrs. Gardner, Coldwell, Jackson, and Partee. Votes against these actions: None. Absent and not voting: Messrs. Burns,
Wallich, and Lilly.
A majority of the comments received on the proposed rulemaking
had opposed the amendment because the scope of the proposal was
too broad. The Board withdrew the proposed amendment and instead
issued an interpretation specifying that if a bank holding company
transfers shares to a company that is indebted to the holding company or has an officer or director relationship with the holding company, then control of the transferred shares is presumed not to have
changed unless the Board determines otherwise. The interpretation
defines the criteria the Board will consider when determining whether
control relationships have been terminated.
March 6, 1978—Amendment
The Board amended Regulation Y, effective April 5, 1978, to require
bank holding companies that are authorized to deal in municipal securities to provide certain information about persons who serve as their
municipal securities principals and representatives.
Votes for this action: Messrs. Wallich, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Burns and
Gardner.1
80
Board Policy Actions
In August 1977 the Board considered amendments to Regulation
H (Membership of State Banking Institutions in the Federal Reserve
System) and Regulation Y that would require those State member
banks that engage in municipal securities activities to provide the
Board with certain information about persons whom they employ as
principals or representatives. The amendment to Regulation H was
adopted, but the Board deferred action on the proposal to amend
Regulation Y pending a decision whether to permit bank holding
companies to underwrite and deal in municipal securities.
On January 18, 1978, the Board decided to review on a case-bycase basis applications by bank holding companies to deal in municipal securities. Accordingly, the Board adopted notification requirements for municipal securities principals and representatives associated with holding companies similar to those required of State
member banks.
December 15, 1978—Amendment
The Board amended the provisions of Regulation Y pertaining to public
notice of applications by bank holding companies to engage de novo in
permissible nonbank activities both domestically and abroad. The amendment is effective with applications accepted after December 31, 1978.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Partee, and Mrs. Teeters. Votes against
this action: None.2
The amendment eliminates the requirement that a bank holding
company publish in newspapers serving the relevant local communities notice of any proposal to engage de novo in nonbank activities
or to acquire companies engaged in such activities. Instead, the Board
will publish such notices in the Federal Register.
The amendment also eliminates the requirement of publishing
notices in local newspapers in connection with de novo expansion
outside the United States. Bank holding companies and their domestic nonbank subsidiaries may engage in permissible nonbank activities in foreign countries by complying with the established procedures for domestic applications. These procedures, however, do not
apply to foreign activities of foreign bank holding companies or to
the foreign operations of domestic bank holding companies conducted through foreign subsidiaries.
Board Policy Actions
81
REGULATION Z (TRUTH IN LENDING)
January 25, 1978—Amendment
The Board amended Regulation Z, effective March 28, 1978, to modify
the descriptive billing requirements for nonsale credit transactions, such
as cash-advance check transactions, on open-end credit accounts.
Votes for this action: Messrs. Gardner, Coldwell,
and Jackson. Vote against this action: Mr. Partee.
Absent and not voting: Messrs. Burns, Wallich,
and Lilly.
The amendment allows creditors to use, under certain circumstances,
the date on which a cash-advance check is charged to the customer's
account (the debiting date) as a means of identifying on the billing
statement transactions under open-end credit plans. The Board
adopted the amendment because some creditors had experienced difficulty with the descriptive billing provisions of the regulation, which
generally require identification on the customer's account of the date
of transactions, including those involving cash-advance checks. The
Board agreed to permit creditors to use the debiting date on the billing statement for these transactions provided that (1) the debiting
date was properly identified as such; (2) the creditor treated any subsequent inquiry about the transaction as notification of an erroneous
billing, thus invoking the provisions of the Fair Credit Billing Act
for settling billing errors; and (3) the customer was furnished with
documentary evidence of the transaction in connection with any such
inquiry.
Governor Partee objected to the amendment because he believed
the billing problems that some creditors experienced were primarily
operational and could be resolved, albeit with some inconvenience, by
changes in their data processing systems. He felt that customers were
being inconvenienced for the sake of more efficient computer systems.
Governor Lilly, although not present at the meeting, had indicated his
objection to the amendment for reasons similar to those expressed by
Governor Partee.
April 19, 1978—Amendment
This amendment is discussed under Regulation B.
82
Board Policy Actions
May 1, 1978—Supplement
The Board adopted a supplement to Regulation Z, effective immediately,
that prescribes the procedures and criteria under which a State may
apply either for an exemption from the consumer leasing provisions of
the Truth in Lending Act and the regulation, or for a determination that
a State's leasing law is not inconsistent with or pre-empted by the act
and the regulation. In connection with this action, the Board also
amended its Rules regarding Delegation of Authority to permit the
Director of the Division of Consumer Affairs to grant exemptions from
the requirements of the regulation to States that satisfy the criteria.
Votes for these actions: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against these
actions: None. Absent and not voting: Mr. Gardner.1
The Truth in Lending Act authorizes the Board to grant to individual States exemptions from the consumer leasing provision of the act
if it is determined that a State imposes requirements substantially similar to those of the act or gives greater protection and benefit to the
consumer, and that such law contains adequate provision for enforcement. The supplement adopted by the Board explains the procedures
and requirements for obtaining such an exemption.
The supplement also sets forth the criteria under which a State may
apply for a determination that a State law is consistent with the Federal statutes; those criteria include factors such as provision in the
State law for greater protection or benefit to lessees than in Federal
law.
In addition, the Board delegated to the Director of the Division of
Consumer Affairs authority to review applications for exemptions and
to grant (but not to deny or revoke) such exemptions when appropriate.
May 19, 1978—Amendment
The Board amended Regulation Z, effective immediately, to require that
certain creditors extend the minimum 2-year retention period for all
records of compliance with the disclosure provisions of the regulation
until (1) uniform guidelines for Truth in Lending have been adopted,
(2) an examination for compliance has been conducted, and (3) any
required corrective action has been taken.
Board Policy Actions
83
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.1
Prior to adoption of this amendment, the regulation allowed creditors to dispose of credit records 2 years after the date of the transaction. The Board and the four other Federal financial regulatory
agencies (the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Administration) have proposed uniform guidelines
for institutions under their supervision to enforce Truth in Lending,
one provision of which would require corrective action for violations
that occurred more than 2 years previously. The Board amended the
regulation to prevent routine destruction of evidence of possible violations before the guidelines were adopted and to preserve the Board's
supervisory alternatives should the guidelines as finally adopted by the
five agencies require corrective action for violations that occurred more
than 2 years prior to discovery.
June 21 and October 18, 1978—Amendment and
Interpretations
The Board amended Regulation Z, effective August 3, 1978, to establish
an alternative method of complying with the rescission provisions for
individual transactions under certain open-end credit plans that are
secured by borrowers' residences.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.1
In certain situations, Regulation Z requires a creditor to notify a
borrower who pledges his home as collateral for a consumer credit
transaction that he has the right to rescind the transaction within
three business days. Creditors who wished to offer open-end credit
plans (such as cash-advance check plans and overdraft checking
arrangements) secured by a customer's residence had requested that
the regulation be amended to facilitate the offering of these types of
credit plans by exempting individual transactions from the 3-day
rescission right. The Board adopted an amendment covering loan
transactions and three-party transactions (in which the seller is not
84
Board Policy Actions
the creditor); the existing provisions for two-party sale transactions
remain in effect.
The amendment exempts individual transactions but stipulates that
customers must be informed of their right of rescission in the following four instances: (1) when the open-end credit plan is first opened;
(2) when the credit limit is increased; (3) when the terms of the
account are changed; and (4) when a security interest in a home is
added to an existing open-end credit arrangement. Additionally,
creditors must remind customers annually that their homes have been
pledged as security for the account.
Concurrent with this action, the Board issued an interpretation of the
regulation that provided sample disclosure forms for use by creditors to
satisfy the requirements of the regulation.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.1
After the interpretation was issued, the Board received comment
suggesting that one of the sample forms was not sufficiently informative regarding the customer's rights.
On October 18 the Board issued a revised interpretation that clarified
the disclosure.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, Partee, and Mrs. Teeters. Votes
against this action: None. Absent and not voting:
Mr. Gardner.
The disclosure form provided with the June interpretation stated
that a borrower could refuse a change in the terms of the plan and
had 3 days within which to decide. If the change was refused,
the form stated that the creditor had the right to refuse to extend
further credit under the plan and to require repayment of any existing
obligation.
Comment received about the disclosure statement approved in June
suggested that the language of the form might not sufficiently inform
consumers of their rights and, in fact, might create the impression
that the right to repay an existing obligation without a change in terms
is a penalty to consumers who refuse the change. Thus, the Board
Board Policy Actions
85
issued a revised interpretation that modified the wording of the sample
form. The new form stated that if a customer refused a change in
terms, he would have the right to repay any outstanding debt under
the terms of the existing plan. Creditors, however, would then have
the right to refuse to extend further credit. In adopting the new form,
the Board specified that use of the disclosure form approved in June
would not be a violation of the regulation.
August 23, 1978—Interpretation and Amendment
The Board revised an interpretation of Regulation Z to simplify the computation of annual percentage rates for certain transactions with varying
repayment schedules. Concurrently, the Board amended the regulation
to permit disclosure of the complete repayment schedule on the reverse
of the disclosure statement or on a separate page or pages for transactions in which the payments vary. Both actions were effective August 31,
1978.
Votes for these actions: Messrs. Miller, Wallich,
Jackson, and Partee. Votes against these actions:
None. Absent and not voting: Messrs. Gardner
and Coldwell.1
The revised interpretation permits an irregular initial payment period
of up to 62 days to be considered regular for computation of the
annual percentage rate (APR) for transactions involving a repayment
period of 10 years or more. The change would facilitate the use of
APR computation tables for certain long-term transactions, such as
graduated-payment mortgages.
The amendment provides that the required disclosure of the complete repayment schedule may be made on as many pages as necessary
for credit transactions with monthly payments of varying amounts,
such as a mortgage loan with mortgage insurance in which the
amount of the monthly payment declines.
October 18, 1978—Enforcement Guidelines
The Board adopted guidelines for the enforcement of the Truth in Lending Act, effective January 4, 1979. The four other Federal financial regulators also established guidelines on the same date.
86
Board Policy Actions
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, Partee, and Mrs. Teeters. Votes
against this action: None. Absent and not voting:
Mr. Gardner.
The five agencies (the Board, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Home Loan Bank
Board, and the National Credit Union Administration) adopted the
guidelines to promote uniformity in the administrative actions to be
taken when violations that result in overcharges to customers are
detected. The guidelines specify the criteria that the agencies will use
in enforcing the requirements of Truth in Lending for disclosing the
cost of credit transactions.
The enforcement policy applies specifically to transactions other
than open-end credit; violations of the disclosure requirements for
open-end credit transactions will be treated on a case-by-case basis
but will be subject to the same general treatment as other violations
under the guidelines. Violations of the disclosure requirements that
result in an overcharge of one dollar or more must be reimbursed and
the borrower must be informed of the reason for the reimbursement.
Reimbursement will be required for violations involving outstanding
loans made after October 28, 1974, and on terminated loans originated
within the 2-year period prior to the financial examination in which
the violation was discovered.
REGULATION BB (COMMUNITY REINVESTMENT)
October 4, 1978—Adoption of Regulation and Interpretation
The Board adopted Regulation BB, effective November 6, 1978, to implement the Community Reinvestment Act of 1977. The other Federal
financial regulators issued similar regulations on the same date.
Votes for this action: Messrs. Miller, Coldwell,
Partee, and Mrs. Teeters. Vote against this action:
Mr. Jackson. Absent and not voting: Messrs. Gardner and Wallich.
The Community Reinvestment Act required the four Federal regulators of financial institutions (the Board, the Comptroller of the Cur-
Board Policy Actions
87
rency, the Federal Deposit Insurance Corporation, and the Federal
Home Loan Bank Board) to have in place by November 6, 1978,
regulations that would encourage lenders to help meet the credit needs
of their local communities, including the low- and middle-income
neighborhoods. The act also required that each agency take into
account an institution's record of meeting local credit needs when
reviewing applications for acquisitions, mergers, insurance, and certain other matters.
The regulations adopted by the four agencies stipulate that each
lending institution must: (1) prepare a map delineating the local
community; (2) adopt a statement defining the local community and
specifying the types of credit the lender is prepared to extend; (3)
make available to local residents a notice of the requirements of the
act; and (4) maintain a record of comments received from the public
regarding the institution's local lending practices. The statement as
well as the record of public comments will be reviewed and assessed
during the periodic examination of the institution by representatives
of the agencies.
Governor Jackson opposed adoption of the regulation because he
thought that its thrust was contrary to the intent of the Congress.
He believed the regulations were more burdensome than the Congress
had contemplated and that they would be inflationary because the
lenders would pass on to borrowers the higher operating costs associated with complying with the act.
Concurrently, the Board adopted an interpretation of Regulation BB
exempting certain banking facilities that do not provide routine lending
services.
Votes for this action: Messrs. Miller, Coldwell,
Jackson, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Gardner and Wallich.
The interpretation exempts from the regulation institutions that
do not provide commercial or retail banking services; these would
include facilities that serve solely as correspondent banks, as trust
companies, or as clearing agents.
88
Board Policy Actions
POLICY STATEMENTS AND ACTIONS
January 5, 1978—Improper Payments by Banks
The Board issued a policy statement jointly with the Comptroller of the
Currency and the Federal Deposit Insurance Corporation regarding improper or illegal payments by banks and bank holding companies to
domestic or foreign officials. The three agencies adopted the policy,
effective January 13, 1978.
Votes for this action: Messrs. Gardner, Coldwell,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Burns, Wallich, and Lilly.
The statement notified banks and bank holding companies that
improper political contributions and certain other questionable payments may be regarded as unsound banking practices. In order to
prevent these practices, the agencies will use appropriate corrective
action, including issuance of cease-and-desist orders and referral to
law enforcement agencies for possible prosecution, when such payments are discovered. Improper payments may also be taken into
account when the agencies review applications submitted by organizations that have made such payments.
March 17, 1978—Use of Inside Investment Information
The Board adopted a policy statement, effective March 17, 1978, reflecting its view that misuse by banks of material inside information in connection with securities transactions constitutes an unsafe and unsound
banking practice. The statement also called the attention of State member
banks to the penalties for violations.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Messrs.
Gardner and Burns.
The statement pertains to information about securities that banks
obtain in confidence and notes that Federal law prohibits the use of
such material information until the information is publicly disclosed.
The statement notifies State member banks that misuse of material
inside information in connection with securities transactions or
recommendations about such transactions constitutes an unsound
Board Policy Actions
89
banking practice. Banks are expected to adopt procedures to ensure
that material information is not misused because violations could
expose them to financial penalties and criminal charges.
April 14, 1978—Funds Transfer and Clearing Services
The Board approved two actions, effective immediately, to promote
greater efficiency in the Nation's payments system. The first action permitted member banks to use their reserve balances at Federal Reserve
Banks to make net settlement for funds transferred electronically through
a private communications network.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.1
The second action authorized Federal Reserve Banks to provide services that would link automated clearinghouse (ACH) facilities throughout the country.
Votes for this action: Messrs. Miller, ColdwelJ,
Jackson, and Partee. Vote against this action: Mr.
Wallich. Absent and not voting: Mr. Gardner.1
The first change resulted from a request by a nationwide association of commercial banks that members of the association that are
also members of the Federal Reserve System be permitted to use their
reserve balances at the Reserve Banks to settle for payments transactions exchanged through the association's network. This action was
expected to facilitate member bank participation in private-sector
clearing arrangements and to provide same-day fund availability for
member banks using the service. The Board felt that assisting in such
a service also would promote initiatives by the private sector to
improve the efficiency of the Nation's payments mechanism.
The second change, which allowed the Reserve Banks to provide
interregional clearing and settlement services for electronic payments
made through ACH's, would link such associations into a nationwide
network for electronic exchange of payments information.
Governor Wallich dissented from the second action. He thought
that several years would elapse before the savings to the System from
the reduced processing costs associated with the interregional ACH
expansion would offset the equipment acquisition and the develop-
90
Board Policy Actions
mental and operating costs of the new service. He noted that projected savings to the System depended upon the electronic processing
of a large volume of items and he felt that the volume projections
were overly optimistic.
September 20, 1978—Intercorporate Tax Practices of Bank
Holding Companies
The Board adopted a policy statement pertaining to certain accounting
transactions of State member banks and bank holding companies that
divert income from a subsidiary bank to its parent or nonbank affiliates.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, Partee, and Mrs. Teeters. Votes against this action: None.
The Board had become concerned about certain intercorporate tax
accounting procedures that result in the transfer of assets or income
from a bank to its parent holding company or an affiliate without
any offsetting benefit to the bank. The policy statement clarifies the
Board's position on such tax practices and indicates that the Board
will apply appropriate supervisory remedies, including cease-anddesist action if warranted, when it finds inequitable tax treatment of
subsidiary banks.
1978—DISCOUNT RATES
The Board approved seven increases in the discount rate during 1978,
from a level of 6 per cent at the start of the year to 9Vi per cent by
year-end. The Board also voted on fourteen occasions to turn down
requests by individual Federal Reserve Banks to raise the rate. No
requests to lower the rate were submitted by the Reserve Banks
during 1978.
The specific reasons for the Board's decisions are reviewed below.
In reaching those decisions the Board also took into account general
economic and financial developments, including those affecting the
value of the dollar in foreign exchange markets. These developments
are covered in more detail elsewhere in this REPORT, especially
in the quarterly reports to the Congress on the System's monetary
growth ranges and in the Record of Policy Actions of the Federal
Open Market Committee.
Board Policy Actions
91
A listing of the Board's discount rate actions during 1978,
including the votes on the actions and reasons for dissents, follows
this review.
Early January: Increase Approved
On January 6 the Board approved an increase in the discount rate
from 6 to 6 ^ per cent. This action was taken in light of continuing
unsettled conditions in foreign exchange markets. A majority of the
Board believed that such conditions constituted a serious threat not
only to the orderly expansion of the international economy but to
the domestic economy as well. In their judgment the increase was
desirable to help demonstrate the intention of U.S. authorities to
deal with the current weakness of the dollar and also to supplement
the policy of more active intervention in foreign exchange markets
that had been announced on January 4 by the Treasury and the
Federal Reserve.
Mid-January to Early May: No Change
Following the increase in early January, no requests to change the
discount rate were submitted by any Federal Reserve Bank until
April. Market interest rates rose during the first part of January,
but most rates subsequently fluctuated within relatively narrow
ranges until the latter part of March. They then came under some
upward pressure, especially in long-term debt markets. Nonetheless,
the discount rate remained in fairly close alignment with short-term
interest rates until the latter part of April.
During April the Board turned down requests by seven Federal
Reserve Banks to increase the discount rate from 6 ^ per cent to
6% or 7 per cent. The remaining Banks proposed that the current
rate be maintained. In rejecting the pending actions, the Board indicated its preference for a market-following move rather than an
anticipatory increase that might signal a more restrictive monetary
policy. Uncertainty was expressed about the vigor of the economy's
rebound from its midwinter pause and about the significance of the
recent acceleration in the growth of the monetary aggregates. Under
prevailing conditions the Board preferred to wait for further developments before approving a higher discount rate. Nonetheless, as April
92
Board Policy Actions
progressed it was recognized that an increasingly strong case could
be made on both economic and financial grounds for raising the discount rate.
Mid-May to Mid-October: Five Increases Approved
On May 10 the Board voted unanimously to raise the discount rate
from 6Vi to 7 per cent. The action was taken in recognition of the
appreciable increases in short-term market rates over the course of
previous weeks and was designed to bring the discount rate into
closer alignment with short-term rates generally. In particular, the
Federal funds rate had risen to a level well above the discount rate
as System open market operations had moved toward increasing restraint in an effort to curb accelerating rates of monetary expansion.
Other short-term rates had also advanced, and the widening spread
between market rates and the discount rate had fostered a sharp
rise in member bank borrowings. In these circumstances, a higher
discount rate was widely anticipated and the increase in question was
believed likely to have little or no impact on other interest rates.
On June 30 the Board approved another increase in the discount
rate to IVA per cent. This action was taken in recognition of the
further increases in other short-term rates. It was again viewed as a
market-following move designed to bring the discount rate into closer
alignment with other short-term rates, thereby reducing the rate incentive that had recently contributed to another bulge in member
bank borrowings.
Before reaching this decision the Board had acted on June 23 to
disapprove rate increases of VA or Vi percentage point that were
pending at five Federal Reserve Banks. The Board did not believe
that interest rate differentials had widened sufficiently by that date
to establish a compelling case for raising the discount rate. It also
concluded that, in the context of the very sensitive conditions then
prevailing in financial markets, such a move might cause a misreading
of monetary policy intentions and thus complicate the implementation of that policy through open market operations.
The next discount rate increase was approved on August 18, when
the rate was raised by Vi percentage point to 13A per cent. In announcing this action the Board cited the disorderly conditions that
had recently developed in foreign exchange markets and the serious
Board Policy Actions
93
inflationary problem that was continuing to affect the domestic economy. Other developments weighed by the Board included the midAugust decision by the Federal Open Market Committee to raise
the objective for the Federal funds rate and the recent sizable increases in Treasury bill rates. While the vote for a higher discount
rate was unanimous, two Board members indicated that they would
have preferred an increase of % percentage point to provide a
stronger signal of support for the dollar and for the System's antiinflationary policy.
The Board's decision on August 18 was preceded by disapprovals
during the second half of July of then pending requests at five Federal Reserve Banks to raise the discount rate by lA percentage point.
The Board had concluded that a higher discount rate was not desirable at that time in light of indications that monetary growth was
well within the short-run ranges of tolerance established by the Federal Open Market Committee, and no increase in the Federal funds
rate was contemplated. Moreover, Treasury bill rates had fallen considerably during the second half of July when foreign central banks
made large bill purchases. Despite these disapprovals, the Board recognized that inflationary developments in the domestic economy and reemerging pressures on the dollar in foreign exchange markets pointed
to the possible need for a higher discount rate at a later date.
Advances in the discount rate were subsequently approved on
September 22, when the rate was raised from 73A to 8 per cent, and
on October 13, when the rate was moved up to %Vi per cent. Both
actions were taken in recognition of increases in other short-term
interest rates, thereby bringing the discount rate into closer alignment with such rates. The actions were also intended to provide some
support to the dollar, which had continued under considerable pressure in foreign exchange markets. In announcing the increase of
Vi percentage point on October 13, the Board also cited the continuing high rate of inflation and the recent rapid expansion in the monetary aggregates.
During September and October the Board also turned down pending rate increases of VA- or V2 percentage point on three occasions.
The reasons for the disapprovals related in part to timing, especially
vis-a-vis actions being implemented at the direction of the Federal
Open Market Committee to control the growth of the monetary
94
Board Policy Actions
aggregates. Other reasons were more technical and included the rate
spreads between the discount rate and other short-term rates and the
level of member bank borrowings.
November 1: Increase of 1 Percentage Point Approved
On November 1 the Board approved an increase of a full percentage point in the discount rate to a level of 9Vi per cent. The
increase, the largest in 45 years, was one of the measures developed
as part of a broad Government program to strengthen the dollar in
foreign exchange markets and thereby to counter continuing domestic inflationary pressures. These measures included use of other
monetary policy instruments, discussed elsewhere in this REPORT,
such as reserve requirements, open market operations, and expanded
reciprocal currency arrangements with certain central banks abroad.
Subsequently, during the second half of December, the Board
turned down requests to raise the discount rate by V\ or Vi percentage point that were pending at three Federal Reserve Banks.
Current indications of weakness in the monetary aggregates were
the major reason for the Board's decisions. In the circumstances, the
Board concluded that it preferred a steady course for monetary
policy as it continued to assess economic and financial developments.
Votes on Reserve Bank Actions to Change the Discount Rate
Under the provisions of the Federal Reserve Act, the boards of directors of the Federal Reserve Banks are required to establish rates
on discounts for and advances to member banks at least every 14
days and to submit such rates to the Board for review and determination. The Board votes listed below are those that involved approval
or disapproval of actions to change the rate. Specific reference is
made to the rate on discounts for and advances to member banks
under Sections 13 and 13a of the Federal Reserve Act.
A corresponding change in the rates under other sections of the
Federal Reserve Act was approved each time the rate under Sections
13 and 13a was raised during 1978. As of December 31, 1978, the
structure of rates was as follows: 9Vi per cent for borrowings under
Sections 13 and 13a; 10 per cent for borrowings at the regular rate
and lO1/^ per cent for borrowings at the special rate under Section
Board Policy Actions
95
10(b); and HV2 per cent for borrowings by individuals, partnerships, or corporations other than member banks under the last paragraph of Section 13.
January 6, 1978
Effective January 9, 1978, the Board approved actions taken by the directors of the Federal Reserve Banks of New York and Chicago to increase the discount rate from 6 per cent to 6V2 per cent.
Votes for this action: Messrs. Burns, Gardner,
Wallich, and Coldwell. Votes against this action:
Messrs. Partee and Lilly. Absent and not voting:
Mr. Jackson.
The Board subsequently approved similar actions taken by the directors
of the Federal Reserve Banks of Boston, Minneapolis, and Kansas City,
effective January 10; the Federal Reserve Banks of Richmond, St. Louis,
Dallas, and San Francisco, effective January 13; the Federal Reserve
Bank of Atlanta, effective January 16; and the Federal Reserve Banks of
Philadelphia and Cleveland, effective January 20.
Messrs. Partee and Lilly dissented from this action because they
felt higher interest rates posed undue risks from the standpoint of
the domestic economy, whose further recovery they regarded as
uncertain, and because they feared such higher rates might seriously
inhibit the continuing ability of thrift institutions to attract deposits
subject to rate ceilings.
April 7, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Chicago on April 6 to increase the discount rate to 63A
per cent.
Votes for this action: Messrs. Miller, Wallich,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Gardner and
Coldwell.3
3
From the time this action was taken through mid-September, there was one
vacancy on the Board.
96
Board Policy Actions
April 17, 1978
The Board disapproved actions taken by the directors of the Federal
Reserve Bank of St. Louis on April 13 and by the directors of the Federal Reserve Bank of Atlanta on April 14 to increase the discount rate
to 7 per cent.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.
April 21, 1978
The Board disapproved actions taken on April 20 by the directors of the
Federal Reserve Banks of Philadelphia and Kansas City to increase the
discount rate to 63A per cent and by the directors of the Federal Reserve
Bank of New York to increase the discount rate to 7 per cent.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Coldwell.
April 24, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Richmond on April 21 to increase the discount rate to
63A per cent.
Votes for this action: Messrs. Miller, Gardner,
Coldwell, and Partee. Votes against this action:
Messrs. Wallich and Jackson.
Messrs. Wallich and Jackson dissented from this action because
they believed the proposed increase was warranted on general economic grounds and was desirable to bring the discount rate into closer
alignment with market interest rates and to help support the dollar
in foreign exchange markets.
May 10, 1978
Effective May 11, 1978, the Board approved actions taken by the directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland,
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and
San Francisco to increase the discount rate to 7 per cent.
Board Policy Actions
97
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, and Partee. Votes against this
action: None. Absent and not voting: Mr. Jackson.
The Board subsequently approved similar actions taken by the directors
of the Federal Reserve Banks of Boston and Dallas, effective May 12.
June 23, 1978
The Board disapproved actions taken on June 22 by the directors of the
Federal Reserve Banks of Philadelphia, Chicago, Dallas, and San Francisco to increase the discount rate to IV* per cent and by the directors
of the Federal Reserve Bank of Minneapolis to increase the discount rate
to IV2 per cent.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.
June 30, 1978
Effective July 3, 1978, the Board approved actions taken by the directors
of the Federal Reserve Banks of Boston, New York, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco to increase the discount rate to 1V\ per cent.
Votes for this action: Messrs. Wallich, Coldwell,
and Jackson. Votes against this action: Messrs. Miller and Partee. Absent and not voting: Mr. Gardner.
The Board subsequently approved similar actions taken by the directors
of the Federal Reserve Banks of Philadelphia and Kansas City, effective
July 7; and by the directors of the Federal Reserve Bank of Atlanta,
effective July 10.
Messrs. Miller and Partee dissented from this action because they
preferred a steady policy course for the immediate future. In their
judgment, more time was needed to assess current uncertainties in the
economic outlook, the recent moderation in monetary growth rates,
and the less accommodative monetary policy implemented since
mid-April. In their view, an increase in the discount rate under prevailing circumstances might also trigger unwarranted increases in
other interest rates.
98
Board Policy Actions
June 30, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of New York on June 29 to increase the discount rate to
IV2 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.
July 19, 1978
The Board disapproved actions taken by the directors of the Federal
Reserve Bank of Richmond on July 13 and by the directors of the Federal Reserve Bank of Atlanta on July 14 to increase the discount rate to
IV2 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: None. Absent and not voting: Mr. Gardner.
July 21, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of New York on July 20 to increase the discount rate to
IV2 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, and Jackson. Votes against this action:
None. Absent and not voting: Messrs. Gardner and
Partee.
July 31, 1978
The Board disapproved actions taken by the directors of the Federal
Reserve Banks of Cleveland and Minneapolis on July 27 and by the
directors of the Federal Reserve Bank of Atlanta on July 28 to increase
the discount rate to IV2 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Gardner and
Jackson.
Board Policy Actions
99
August 18, 1978
Effective August 21, 1978, the Board approved actions taken by the
directors of all the Federal Reserve Banks to increase the discount rate
to 13A per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes, against this
action: None. Absent and not voting: Mr. Gardner.
September 13, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Minneapolis on September 1 to increase the discount
rate to 8 per cent.
Votes for this action: Messrs. Miller, Gardner,
Wallich, Coldwell, Jackson, and Partee. Votes
against this action: None.
September 22, 1978
Effective September 22, 1978, the Board approved actions taken by the
directors of all the Federal Reserve Banks to increase the discount rate
to 8 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, Partee, and Mrs. Teeters. Votes
against this action: None. Absent and not voting:
Mr. Gardner.
October 6, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Boston on October 3 to increase the discount rate to
8V4 per cent.
Votes for this action: Messrs. Miller, Wallich,
Jackson, and Partee. Votes against this action:
None. Absent and not voting: Messrs. Gardner,
Coldwell, and Mrs. Teeters.
100
Board Policy Actions
October 13, 1978
Effective October 16, 1978, the Board approved actions taken by the
directors of the Federal Reserve Banks of Boston, New York, Cleveland,
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas,
and San Francisco to increase the discount rate to SVi per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Jackson, and Partee. Votes against this
action: Mr. Gardner and Mrs. Teeters.
The Board later approved a similar action taken by the directors of
the Federal Reserve Bank of Philadelphia, effective October 20.
Mr. Gardner and Mrs. Teeters voted against this action in light of
the substantial monetary restraint already implemented over the
course of recent months and the evidence that growth in economic
activity appeared to be moderating. They concluded that it was now
desirable to await further developments before considering any additional monetary restraint.
October 27, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Boston on October 26 to increase the discount rate to
9 per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Gardner and Jackson.
November 1, 1978
Effective November 1, 1978, the Board approved actions taken by the
directors of the Federal Reserve Banks of New York and Minneapolis
to increase the discount rate to 9Vi per cent.
Votes for this action: Messrs. Miller, Wallich,
Coldwell, Partee, and Mrs. Teeters. Votes against
this action: None. Absent and not voting: Messrs.
Gardner and Jackson.
Board Policy Actions
101
The Board subsequently approved similar actions taken by the directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland,
Richmond, Chicago, St. Louis, Kansas City, Dallas, and San Francisco,
effective November 2; and by the directors of the Federal Reserve Bank
of Atlanta, effective November 3.
December 15, 1978
The Board disapproved an action taken by the directors of the Federal
Reserve Bank of Richmond on December 14 to increase the discount
rate to 93A per cent.
Votes for this action: Messrs. Wallich, Coldwell,
Partee, and Mrs. Teeters. Votes against this action:
None. Absent and not voting: Mr. Miller.4
December 22, 1978
The Board disapproved actions taken by the directors of the Federal
Reserve Bank of Boston on December 20 to increase the discount rate
to 10 per cent and by the directors of the Federal Reserve Bank of
Atlanta on December 22 to increase the discount rate to 93A per cent.
Votes for this action: Messrs. Wallich, Coldwell,
Partee, and Mrs. Teeters. Votes against this action:
None. Absent and not voting: Mr. Miller.
4
There were two vacancies on the Board at the time of this action.
102
Record of Policy Actions of the
Federal Open Market Committee
The record of policy actions of the Federal Open Market Committee
is presented in the ANNUAL REPORT of the Board of Governors
pursuant to the requirements of Section 10 of the Federal Reserve
Act. That section provides that the Board shall keep a complete
record of the actions taken by the Board and by the Federal Open
Market Committee on all questions of policy relating to open market
operations, that it shall record therein the votes taken in connection
with the determination of open market policies and the reasons
underlying each such action, and that it shall include in its ANNUAL
REPORT to the Congress a full account of such actions.
In the pages that follow, there are entries with respect to the policy
actions taken at the meetings of the Federal Open Market Committee
held during the calendar year 1978, including the votes on the policy
decisions made at those meetings as well as a resume of the basis for
the decisions. The summary descriptions of economic and financial
conditions are based on the information that was available to the
Committee at the time of the meetings, rather than on data as they
may have been revised later.
It will be noted from the record of policy actions that in some
cases the decisions were by unanimous vote and that in other cases
dissents were recorded. The fact that a decision in favor of a general
policy was by a large majority, or even that it was by unanimous
vote, does not necessarily mean that all members of the Committee
were equally agreed as to the reasons for the particular decision or
as to the precise operations in the open market that were called for
to implement the general policy.
During 1978 the policy record for each meeting was released a
few days after the next regularly scheduled meeting and was subsequently published in the Federal Reserve Bulletin as well as in this
ANNUAL REPORT.
Policy directives of the Federal Open Market Committee are issued
to the Federal Reserve Bank of New York as the Bank selected by
FOMC Policy Actions
103
the Committee to execute transactions for the System Open Market
Account. In the area of domestic open market activities, the Federal
Reserve Bank of New York operates under two separate directives
from the Open Market Committee, an Authorization for Domestic
Open Market Operations and a domestic policy directive. In the
foreign currency area, it operates under an Authorization for Foreign
Currency Operations and a foreign currency directive. These four
instruments are shown below in the form in which they were in effect
at the beginning of 1978. Changes in the instruments during the year
are reported in the records for the individual meetings.
AUTHORIZATION FOR DOMESTIC
OPEN MARKET OPERATIONS
In effect January 1, 1978
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the most recent domestic policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government securities, including securities
of the Federal Financing Bank, and securities that are direct obligations
of, or fully guaranteed as to principal and interest by, any agency of the
United States in the open market, from or to securities dealers and
foreign and international accounts maintained at the Federal Reserve
Bank of New York, on a cash, regular, or deferred delivery basis, for the
System Open Market Account at market prices and, for such Account,
to exchange maturing U.S. Government and Federal agency securities
with the Treasury or the individual agencies or to allow them to mature
without replacement; provided that the aggregate amount of U.S. Government and Federal agency securities held in such Account (including
forward commitments) at the close of business on the day of a meeting
of the Committee at which action is taken with respect to a domestic
policy directive shall not be increased or decreased by more than $3.0
billion during the period commencing with the opening of business on
the day following such meeting and ending with the close of business on
the day of the next such meeting;
(b) When appropriate, to buy or sell in the open market, from or
to acceptance dealers and foreign accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery
basis, for the account of the Federal Reserve Bank of New York at
104
FOMC Policy Actions
market discount rates, prime bankers' acceptances with maturities of up
to 9 months at the time of acceptance that (1) arise out of the current
shipment of goods between countries or within the United States, or (2)
arise out of the storage within the United States of goods under contract
of sale or expected to move into the channels of trade within a reasonable
time and that are secured throughout their life by a warehouse receipt
or similar document conveying title to the underlying goods; provided
that the aggregate amount of bankers' acceptances held at any one time
shall not exceed $100 million;
(c) To buy U.S. Government securities, obligations that are direct
obligations of, or fully guaranteed as to principal and interest by, any
agency of the United States, and prime bankers' acceptances of the types
authorized for purchase under l(b) above, from dealers for the account
of the Federal Reserve Bank of New York under agreements for repurchase of such securities, obligations, or acceptances in 15 calendar days
or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual^dealers;
provided that in the event Government securities or agency issues covered
by any such agreement are not repurchased by the dealer pursuant to the
agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that
in the event bankers' acceptances covered by any such agreement are not
repurchased by the seller, they shall continue to be held by the Federal
Reserve Bank or shall be sold in the open market.
2. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, or, under special circumstances,
such as when the New York Reserve Bank is closed, any other Federal
Reserve Bank, to purchase directly from the Treasury for its own account
(with discretion, in cases where it seems desirable, to issue participations
to one or more Federal Reserve Banks) such amounts of special shortterm certificates of indebtedness as may be necessary from time to time
for the temporary accommodation of the Treasury; provided that the
rate charged on such certificates shall be a rate VA of 1 per cent below
the discount rate of the Federal Reserve Bank of New York at the time
of such purchases, and provided further that the total amount of such
certificates held at any one time by the Federal Reserve Banks shall not
exceed $2 billion.
3. In order to insure the effective conduct of open market operations,
the Federal Open Market Committee authorizes and directs the Federal
Reserve Banks to lend U.S. Government securities held in the System
FOMC Policy Actions
105
Open Market Account to Government securities dealers and to banks
participating in Government securities clearing arangements conducted
through a Federal Reserve Bank, under such instructions as the Committee may specify from time to time.
DOMESTIC POLICY DIRECTIVE
In effect January 1, 1978
The information reviewed at this meeting suggests that real output of
goods and services is growing in the current quarter at about the pace
in the third quarter. The dollar value of total retail sales, which had increased sharply in October, rose considerably further in November. Industrial production continued to expand, and employment increased
substantially. However, the unemployment rate, at 6.9 per cent, remained
in the narrow range prevailing since April. The wholesale price index
for all commodities rose sharply in November for the second successive
month, reflecting another large increase in average prices of farm products and foods. However, the rise in average prices of industrial commodities was less rapid than in the preceding 2 months. The index of
average hourly earnings has advanced at a somewhat faster pace so far
this year than it had on the average during 1976.
The dollar has been under considerable pressure in foreign exchange
markets in recent weeks, and its trade-weighted value against major foreign currencies has declined more than 3 per cent further since midNovember. In October the U.S. foreign trade deficit widened sharply,
primarily as a result of the dock strike at many U.S. ports.
M-\—which had expanded substantially in October—declined slightly
in November, and M-2 increased relatively little. The total of savings
deposits and small-denomination time deposits at commercial banks declined somewhat, but growth in large-denomination time deposits accelerated sharply further as credit demands remained strong. Inflows to
nonbank thrift institutions slowed further in November. Market interest
rates have changed relatively little since mid-November.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial conditions that will encourage continued economic expansion and help resist
inflationary pressures, while contributng to a sustainable pattern of international transactions.
At its meeting on October 18, 1977, the Committee agreed that growth
of M-l, M-2, and M-3 within ranges of 4 to 6!/2 per cent, 6V2 to 9 per
106
FOMC Policy Actions
cent, and 8 to lOVi per cent, respectively, from the third quarter of 1977
to the third quarter of 1978 appears to be consistent with these objectives.
These ranges are subject to reconsideration at any time as conditions
warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead, provided
that monetary aggregates appear to be growing at approximately the rates
currently expected, which are believed to be on a path reasonably consistent with the longer-run ranges for monetary aggregates cited in the
preceding paragraph. Specifically, the Committee seeks to maintain the
weekly-average Federal funds rate at about the current level, so long as
M-\ and A/-2 appear to be growing over the December-January period
at annual rates within ranges of 2Vi to 8V£ per cent and 6 to 10 per cent,
respectively.
If, giving approximately equal weight to M-\ and Af-2, it appears that
growth rates over the 2-month period are approaching or moving beyond
the limits of the indicated ranges, the operational objective for the weeklyaverage Federal funds rate shall be modified in an orderly fashion within
a range of 6 ^ to 63A per cent. In the conduct of day-to-day operations,
account shall be taken of emerging financial market conditions, including
the unsettled conditions in foreign exchange markets.
If it appears during the period before the next meeting that the operating constraints specified above are proving to be significantly inconsistent,
the Manager is promptly to notify the Chairman, who will then decide
whether the situation calls for supplementary instructions from the
Committee.
AUTHORIZATION FOR FOREIGN
CURRENCY OPERATIONS
In effect January 1, 1978
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive and express authorizations by the Committee pursuant thereto,
and in conformity with such procedural instructions as the Committee
may issue from time to time:
FOMC Policy Actions
107
A. To purchase and sell the following foreign currencies in the
form of cable transfers through spot or forward transactions on the open
market at home and abroad, including transactions with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts
to receive or to deliver, the foreign currencies listed in paragraph A
above.
C. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph 2
below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months after any amount outstanding
at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an over-all open position in all foreign currencies
not exceeding $1.0 billion, unless a larger position is expressly authorized
by the Committee. For this purpose, the over-all open position in all
foreign currencies is defined as the sum (disregarding signs) of open
positions in each currency. The open position in a single foreign currency
is defined as holdings of balances in that currency, plus outstanding
contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard
to sign.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for the System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to
renew such arrangements on maturity:
108
FOMC Policy Actions
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
Amount of arrangement
(millions of dollars equivalent)
250
1,000
2,000
250
3,000
2,000
2,000
3,000
2,000
360
500
250
300
1,400
600
1,250
Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be
referred for review and approval to the Committee.
3. Currencies to be used for liquidation of System swap commitments
may be purchased from the foreign central bank drawn on, at the same
exchange rate as that employed in the drawing to be liquidated. Apart
from any such purchases at the rate of the drawing, all transactions in
foreign currencies undertaken under paragraph 1 (A) above shall, unless
otherwise expressly authorized by the Committee, be at prevailing market
rates.
4. It shall be the normal practice to arrange with foreign central
banks for the coordination of foreign currency transactions. In making
operating arrangements with foreign central banks on System holdings
of foreign currencies, the Federal Reserve Bank of New York shall not
commit itself to maintain any specific balance, unless authorized by the
Federal Open Market Committee. Any agreements or understandings
concerning the administration of the accounts maintained by the Federal
Reserve Bank of New York with the foreign banks designated by the
Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee.
5. Foreign currency holdings shall be invested insofar as practicable,
considering needs for minimum working balances. Such investments shall
be in accordance with Section 14(e) of the Federal Reserve Act.
FOMC Policy Actions
109
6. All operations undertaken pursuant to the preceding paragraphs
shall be reported daily to the Foreign Currency Subcommittee. The
Foreign Currency Subcommittee consists of the Chairman and Vice
Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board Members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his
alternate). Meetings of the Subcommittee shall be called at the request
of any member, or at the request of the Manager, for the purposes of
reviewing recent or contemplated operations and of consulting with the
Manager on other matters relating to his responsibilities. At the request
of any member of the Subcommittee, questions arising from such reviews
and consultations shall be referred for determination to the Federal Open
Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about
the division of responsibility for foreign currency operations between the
System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
policy matters relating to foreign currency operations;
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and
Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent
information on System foreign currency operations to appropriate officials
of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3G(1) of
the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.
FOREIGN CURRENCY DIRECTIVE
In effect January 1, 1978
1. System operations in foreign currencies shall generally be directed
at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent
with the proposed IMF Article IV, Section 1.
110
FOMC Policy Actions
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign
exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries and with international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable future needs for
currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly authorized by the
Committee.
4. System foreign currency operations shall be conducted:
A. In close and continuous consultation and cooperation with the
United States Treasury;
B. In cooperation, as appropriate, with foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States
in the International Monetary Fund regarding exchange arrangements under the proposed IMF Article IV.
FOMC Policy Actions
111
MEETING HELD ON JANUARY 17, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services had grown in the fourth quarter of 1977 at a
pace close to that of the third quarter, which the Commerce
Department had revised upward to an annual rate of 5.1 per cent. At
the same time the rise in average prices, as measured by the
fixed-weighted price index for gross domestic business product,
appeared to have stepped up somewhat from the annual rate of 5.0
per cent estimated for the third quarter. Staff projections for the year
from the fourth quarter of 1977 to the fourth quarter of 1978—which
now were based on assumptions that included reductions next fall in
Federal income taxes—suggested a moderately faster expansion
than the projections prepared just before the December meeting of
the Committee. According to the latest projections, growth in real
gross national product (GNP) would be sustained at a good pace
throughout 1978. It was also expected that the rise in prices would
remain relatively rapid and that the unemployment rate would
decline moderately further over the year ahead.
The staff estimates for the fourth quarter of 1977 suggested that
final sales of goods and services had risen substantially more than in
the third quarter, but that the rate of business inventory accumulation had slowed considerably after a slight rise in the third quarter.
With respect to final sales in real terms, gains had been particularly
strong in consumer spending for both durable and nondurable goods
and in residential construction.
Staff projections for the year ahead reflected expectations that the
growth of consumer spending in real terms would moderate during
the first quarter from the exceptionally rapid pace in the fourth
quarter of 1977 and then would pick up as the year progressed—
particularly during the fourth quarter, following the reduction in
personal income taxes assumed to take effect on October 1. Busi-
112
FOMC Policy Actions
ness fixed investment was projected to expand moderately, owing in
part to stimulative modifications of the investment tax credit that
were assumed to be retroactive to the beginning of 1978. It was still
anticipated that the rise in residential construction outlays would
taper off as the year progressed and that the increase in Federal
purchases of goods and services would be smaller than over the past
year.
In December industrial production expanded 0.2 per cent, compared with 0.4 per cent in November. However, the December
increase was held down by a strike that had caused a reduction of
nearly 50 per cent in output of bituminous coal. Auto assemblies
were curtailed somewhat, but output of other consumer goods and
of business equipment continued to rise. For the fourth quarter as a
whole, growth in industrial production slowed to an annual rate of
about 2% per cent from about AXA per cent in the third quarter,
reflecting in part the reduction in the rate of business inventory
accumulation.
Nonfarm payroll employment continued to rise in December, and
after adjustment for strikes, the gain was as large as in November.
Employment increases were again substantial in trade, services, and
State and local government. In manufacturing too, the gain was
sizable, but the average workweek declined, in part because of the
curtailment in assemblies of autos. The unemployment rate dropped
to 6.4 per cent in December from a (revised downward) rate of 6.7
per cent in November.
The dollar value of retail sales, according to the Census Bureau's
advance estimate, had declined a little in December after having
risen sharply in the preceding 2 months. For the fourth quarter as a
whole sales rose by almost 4 per cent, about equaling the large rise in
the fourth quarter of 1976. Unit sales of new domestic and foreign
autos increased somewhat in December, returning to about the
October level, and sales were almost as high in the fourth quarter as
in the third.
Private housing starts, as had been reported before the Committee's December meeting, edged down in November to an annual rate
of about 2.1 million units. The average number of starts for October
and November was 5 per cent above the third-quarter average,
which in turn was the highest of the current expansion.
The latest Department of Commerce survey of business spending
FOMC Policy Actions
113
plans, taken in late November and December, suggested that
spending for plant and equipment would expand 10.1 per cent in
1978. Such spending had increased 13.7 per cent in 1977.
Manufacturers' new orders for nondefense capital goods declined
5 per cent in November, but the October-November average was
about 6Vi per cent above the third-quarter average. Contract awards
for commercial and industrial buildings—measured in terms of floor
space—advanced sharply in November after having declined in
October. The average for the 2 months was somewhat higher than
that for the third quarter.
The index of average hourly earnings for private nonfarm production workers increased relatively little in December, as it had in
November. However, from December 1976 to December 1977 the
index rose 7.4 per cent, which compared with an increase of 6.9 per
cent over the preceding 12 months.
The wholesale price index for all commodities rose 0.5 per cent in
December, considerably less than in October and November. Average prices of farm products and foods advanced only 0.4 per cent in
December, compared with an average increase of 1.8 per cent over
the preceding 2 months. The 0.5 per cent rise in prices of industrial
commodities in December equaled the October-November average.
The consumer price index rose 0.5 per cent in November,
somewhat more than in any of the preceding 4 months. Retail prices
of foods increased 0.6 per cent, in contrast with an average between
0.1 and 0.2 per cent in the July-October period. The pace of
advance in nonfood commodities also picked up, mainly because of
increases for new autos, but the rise in prices of services remained at
a reduced rate.
In foreign exchange markets the dollar continued under strong
downward pressure from mid-December to just after the turn of the
year, and during that period its trade-weighted value against major
foreign currencies declined about 2Vi per cent. On January 4, 1978, it
was announced that the Exchange Stabilization Fund of the U.S.
Treasury would henceforth be utilized actively, together with the
swap network operated by the Federal Reserve System, to check
speculation and to help re-establish order in the foreign exchange
markets. On January 6 the Board of Governors announced approval
of an increase in Federal Reserve discount rates from 6 to 6V2 per
cent, and in an accompanying press release noted that the recent
114
FOMC Policy Actions
disorder in foreign exchange markets constituted a threat to orderly
expansion of the domestic and international economy. The Board
expressed the hope that the need for this increase would prove
temporary. It also noted that the condition of the domestic economy
was sound and that credit supplies to sustain the economic expansion
would remain ample. From January 4 to the time of this meeting the
trade-weighted value of the dollar recovered about 1% per cent.
The U.S. foreign trade deficit declined substantially in November
after a sharp increase in October. The dock strike that had halted
containerized shipments through Atlantic and Gulf Coast ports
between October 1 and November 29 appeared to have depressed
recorded exports and imports by similar amounts in November,
whereas in October the strike had caused much more of a reduction
in recorded exports than imports.
At U.S. commercial banks, total credit contracted slightly in
December, but because it had grown rapidly in October and
November, expansion for the fourth quarter as a whole remained
close to the third-quarter pace. The December halt in growth of bank
credit reflected both a sharp slackening in loan expansion and a
further contraction in holdings of securities.
While the reduced loan expansion at banks in December stemmed
in part from a large net reduction in securities loans, business loan
growth also slowed appreciably. Sales of commercial paper expanded by a roughly similar amount, however, so total short-term
credit to nonfinancial businesses from these sources rose at about the
same pace in December as in November.
The narrowly defined money stock (M-l)1 grew at a 7.6 per cent
annual rate in December and at a 6.8 per cent annual rate for the
fourth quarter as a whole. From the fourth quarter of 1976 to the
fourth quarter of 1977, M-l grew 7.4 per cent, compared with 5.6 per
cent in 1976 and 4.4 per cent in 1975.
In the third quarter of 1977 M-l had grown nearly as fast as
nominal GNP, so the income velocity of M-l—the ratio of nominal
GNP to M-l—had shown little change. It appeared, however, that
income velocity had increased significantly in the fourth quarter as a
result of both faster growth in GNP and a slower rise in M-1.
M-l is composed of private demand deposits and currency in circulation.
FOMC Policy Actions
115
Growth in M-22 increased somewhat in December from the low
November rate. Virtually all of the growth in the time and savings
deposit component of M-2 occurred in large-denomination time
deposits not subject to ceiling rates; savings deposits remained
about unchanged for the second consecutive month and smalldenomination time deposits, which had contracted in November,
expanded only a little. From the fourth quarter of 1976 to the fourth
quarter of 1977, M-2 grew 9.6 per cent, compared with 10.9 per cent
in 1976 and 8.3 per cent in 1975.
Deposit growth at nonbank thrift institutions slowed further in
December, and M-33 expanded at a 7.5 per cent annual rate—about
the same as in November. Most of the December growth in deposits
at thrift institutions presumably occurred in longer-maturity instruments on which the effective offering rates still exceeded yields
available on Treasury securities of comparable maturity. For 1977
as a whole, M-3 grew 11.6 per cent.
At its December meeting the Committee had decided that operations in the period immediately ahead should be directed toward
maintaining about the prevailing money market conditions, provided
that the monetary aggregates appeared to be growing at approximately the rates then expected. Specifically, the Committee sought
to maintain the weekly-average Federal funds rate at about 6V2 per
cent, so long as M-l and M-2 appeared to be growing over the
December-January period at annual rates within ranges of 2Vi to 8Vi
per cent and 6 to 10 per cent, respectively. However, members also
agreed that if growth in the aggregates appeared to approach or
move beyond the limits of their specified ranges, the operational
objective for the weekly-average Federal funds rate should be varied
in an orderly fashion within a range of 6lA to 63A per cent.
The Committee also had included in its directive to the Federal
Reserve Bank of New York the following sentence: "In the conduct
of day-to-day operations, account shall be taken of emerging financial market conditions, including the unsettled conditions in foreign
exchange markets." This instruction had been added to provide the
Manager with somewhat greater flexibility, in part because of the
2
M-2 includes M-l and commercial bank time and savings deposits other than
large-denomination certificates of deposit.
3
M-3 includes M-2 and deposits at nonbank thrift institutions (savings and loan
associations, mutual savings banks, and credit unions).
116
FOMC Policy Actions
Committee's view that pressures on the dollar in foreign exchange
markets might appropriately influence the nature and timing of
domestic open market operations from day to day.
With the monetary aggregates apparently expanding at rates well
within the Committee's specified ranges, the Manager of the System
Account continued to aim for a Federal funds rate of around 6Y2 per
cent in the last weeks of December and the first statement week of
January. Due to technical factors, however—including the usual
money market churning around year-end—Federal funds actually
traded at rates somewhat above this level. The Manager in early
January also shaded his Federal funds rate objective slightly upward
because of downward pressures on the dollar in foreign exchange
markets. On January 9, following the January 6 increase in Federal
Reserve discount rates to 6V2 per cent, the Federal Open Market
Committee concurred in the Chairman's recommendation to raise
the inter-meeting range for the Federal funds rate to 6V2 to 7 per cent
and to instruct the Manager to aim for a rate of around 6% per cent
over the next few days. In the days remaining until this meeting, the
funds rate averaged 6.75 per cent.
During the initial weeks of the inter-meeting period other shortterm interest rates showed little net change, while longer-term rates
tended to move higher. After the discount rate action and the
increase in the funds rate to 63A per cent, short-term market rates
adjusted sharply upward, with the largest net increases—ranging
from 35 to 45 basis points—occurring on Treasury bills. Bond yields
also rose somewhat further over this period but significantly less
than bill rates.
Auctions of 2-year notes and 15-year bonds netted the U.S.
Treasury $2.7 billion of new money during the inter-meeting
period—including $600 million of 2-year notes sold directly to
foreign official institutions on a noncompetitive basis. For the fourth
quarter as a whole, net Treasury sales of marketable debt to the
public totaled nearly $19 billion, a substantial share of which was
purchased by foreign official institutions.
The volume of bonds offered publicly by nonfinancial corporations in December was somewhat less than in previous months, as
industrial firms reduced their flow of new issues. Financial concerns
continued to borrow heavily in long-term debt markets, however.
Offerings of State and local government bonds expanded con-
FOMC Policy Actions
117
traseasonally in December, raising the total for the fourth quarter
almost to the high level of the third quarter. Most of the December
rise was attributable to advance refunding issues.
Net mortgage lending in the fourth quarter appeared to be running
close to the record third-quarter rate. Savings and loan associations
managed to sustain an unusually high level of lending—
notwithstanding their slower deposit inflows—by increasing their
borrowings, particularly from Federal home loan banks. Such
borrowing rose $2.6 billion during the quarter, the largest expansion
in more than 3 years.
In the Committee's discussion of the economic situation, most
members agreed that the staffs projection of the growth rate in real
GNP over the full year 1978 was reasonable. However, there was
some difference of opinion regarding the probable profile of the
expansion during the course of the year. Specifically, a number of
members thought that growth might be faster in the first half of 1978
and slower in the second half than had been projected.
In this connection, it was suggested that in the early part of 1978
production would be stimulated by business efforts to restore
inventories depleted by the surge in sales that had occurred in the
fourth quarter of 1977. It was observed, however, that if production
increased as expected and growth in sales slowed, the consequent
inventory build-up could lead to a need for correction and hence to
slower growth in output later in the year. There was some feeling
also that the proposed reductions in Federal income taxes might
have less stimulative effect in the fourth quarter than expected by
the staff, and it was noted that payroll taxes for social security and
unemployment insurance were scheduled to rise at the beginning of
1979. One member was of the opinion that a number of forces,
including the depreciation of the dollar that had occurred in foreign
exchange markets, would induce a faster rise in prices than the staff
had anticipated and that inflation would tend to slow the expansion
in activity as the year progressed. However, none of the members
who expressed concern about the growth of real GNP late in the
year anticipated that the economy would move into a recession
during 1978.
Other members were more optimistic about the economic outlook. One noted that at this time of the year forecasters almost
invariably expressed more uncertainty about the prospects for the
118
FOMC Policy Actions
second half than for the first half. Another indicated that he
expected the expansion to be sustained by a gradual improvement in
business and consumer confidence. This member and others also
stressed the stimulative effects of the prospective tax reduction, and
one noted that if necessary the reduction could be larger than
presently contemplated.
These differences of view were generally associated with different
expectations for major sectors of the economy. Thus, one member
expressed the opinion that residential construction activity would
remain at a high level during 1978, in part because individuals were
tending to perceive homeownership as an effective hedge against
inflation. At the same time, this member noted that the recent spurt
in consumer spending had been financed in considerable measure by
credit; he did not expect the rapid expansion to continue, and he
thought it would be an unhealthy development if it did. Another
member said he anticipated an appreciable decline in the rate of
housing starts during the year, and a third expressed concern about
the possible consequences for housing activity if thrift institutions
should cut back significantly on new mortgage commitments because of the record volume already outstanding and because of
increased uncertainty about the pace of deposit inflows. The latter
member also doubted that consumer purchases of new automobiles
would be sustained at the levels of 1976 and 1977 for another year, as
projected by the staff, especially in view of the downtrend in sales
that appeared to have been under way since last spring.
With respect to business fixed investment, the results suggested
by the recent Commerce Department survey of business spending
plans for 1978 were described as disappointing. It was also observed,
however, that a more favorable outlook for capital investment was
presented by such indicators as new orders for nondefense capital
goods, construction contracts for commercial and industrial buildings, formation of new businesses, and newly approved capital
appropriations, and that over the years such measures had provided
better indications of future business fixed investment than had
surveys of spending plans. It was noted that the administration's tax
program would include new incentives for business fixed investment, and one member suggested that such investment was likely to
be stimulated by rising rates of capacity utilization, such as those
being forecast for the coming year. However, another member
FOMC Policy Actions
119
offered the hypothesis that the need for new plants in this country
was being reduced by a trend toward remodeling and re-equipping
existing structures and by a tendency for multinational corporations
to rely on their plants abroad for needed capacity.
It was observed during the discussion that the course of business
fixed investment depended on the state of business confidence in
general and on profit expectations in particular. Some members
reported that they had recently detected some deterioration of
business confidence, but others felt that the state of confidence had
remained unchanged or had improved. One member remarked that
businessmen had long been deeply disturbed about the persistence
of inflation, and that recently some who followed monetary developments closely had begun to question the System's determination to slow the rates of growth of the monetary aggregates. One
member observed that the recent behavior of the stock market—
including the low levels to which price/earnings ratios had fallen—
was not indicative of the kind of business confidence that normally
would be accompanied by rising investment. Another member
remarked that low price/earnings ratios probably reflected in part
the realization by investors that reported earnings overstated real
earnings as a result of the use of conventional accounting procedures
in a period of inflation. It also was suggested that in making
investment decisions businessmen were now insisting on shorter
expected "payout" periods than they had earlier because they
perceived the risks to be greater.
Serious concern continued to be expressed about the dollar's
weakness in foreign exchange markets, although it was noted that
the dollar had recovered somewhat over the past 2 weeks. The
observation was made that the conventional theory concerning
depreciation of a currency did not apply to the dollar because of its
special role in international trade and finance. Specifically, it was
suggested that depreciation of the dollar tended to weaken confidence here and abroad and to cause postponement of decisions to
spend or to invest in new facilities; that the counterpart of the
dollar's depreciation—appreciation of foreign currencies—adversely affected exports of other major countries and generated
risks of stagnation or recession in economic activity; and that this
negative impact on aggregate demand abroad could have adverse
effects on the U.S. foreign trade balance that greatly outweighed the
120
FOMC Policy Actions
favorable effects of the improved competitiveness of U.S. products
in markets here and abroad. As at the December meeting, the
observation was made that the position of the dollar would be
strengthened by adoption in this country of an effective energy
program, of a tax policy conducive to business investment here, and
of a more effective attack on inflation, as well as by pursuit abroad
of faster rates of economic growth.
At its meeting in October 1977 the Committee had agreed that
from the third quarter of 1977 to the third quarter of 1978 average
rates of growth in the monetary aggregates within the following
ranges appeared to be consistent with broad economic aims: A/-1, 4
to 6V2 per cent; Af-2, 6V2 to 9 per cent; and M-3, 8 to IOV2 per cent.
The associated range for the rate of growth in commercial bank
credit was 7 to 10 per cent. It had also been agreed that the
longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings. However, no further modification
was made at this meeting.
In the Committee's discussion of policy for the period immediately ahead, a number of members suggested that any significant easing of money market conditions would be undesirable at this
time because of the weakness of the dollar in foreign exchange
markets and—in the view of some—because of the cumulative
growth rates in the monetary aggregates over recent months. Each
of the three members who had dissented from the decision of
January 9 to seek a higher Federal funds rate indicated that he would
not now advocate a rollback since that decision had been implemented and absorbed by the financial markets. At the same time,
there was little sentiment for further firming actions in the coming
inter-meeting period unless the monetary aggregates appeared to be
growing at rapid rates.
Consistent with these views, most members expressed a preference for continuing to give greater weight than usual to money
market conditions in conducting operations in the period until the
next meeting of the Committee. However, a few favored basing
operating decisions primarily on the behavior of the monetary
aggregates, particularly if growth rates appeared to be higher than
desired. While there was general agreement that operations should
be directed initially toward maintaining the current Federal funds
FOMC Policy Actions
121
rate of about 63A per cent, various suggestions were made with
respect to the range in which the funds rate might be varied if the
growth rates in the monetary aggregates appeared to be deviating
markedly from expectations. Thus, some members favored retaining
the present range of 6V2 to 7 per cent, but others were inclined to
raise the lower limit to 65/s or 6% per cent; some in the latter group
also suggested raising the upper limit.
In addition, there were some differences of view with respect to
the specifications for growth in M-\ over the January-February
period, relating to both the width and the level of the range. A
number of members suggested that the range be narrowed from the
spread of 6 percentage points used in the last few directives to one of
5 or 4 points, while others were willing to retain the wider range.
Suggestions for the lower limit of the MA range varied from XVi to
ZVi per cent and those for the upper limit varied from 7 to Wi per
cent. For M-2 the majority of members favored a range of 5 to 9 per
cent, although one advocated a substantial reduction in the lower
limit and another was inclined to reduce both limits slightly.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed
toward maintaining prevailing money market conditions, as represented by the current 63A per cent level of the Federal funds rate.
However, the members agreed that if growth in the aggregates
should appear to approach or move beyond the limits of their
specified ranges, the operational objective for the weekly-average
Federal funds rate should be varied in an orderly fashion within a
range of 6Vi to 7 per cent. It was understood that very strong
evidence of weakness in the monetary aggregates would be required
before operations were directed toward reducing the Federal funds
rate from its current level. For the annual rates of growth inM-1 and
M-2 over the January-February period, the Committee specified
ranges of 2Vi to IV2 per cent and 5 to 9 per cent, respectively. It also
agreed that in assessing the behavior of the aggregates, the Manager
should give approximately equal weight to the behavior of M-1 and
M-2.
The Committee decided to retain in the directive the sentence
calling for account to be taken of "emerging financial market
conditions, including the unsettled conditions in foreign exchange
markets" in the conduct of day-to-day open market operations. As
122
FOMC Policy Actions
already noted, this instruction had been included in the previous
directive in part because of the Committee's view that the nature
and timing of operations might appropriately be influenced by
pressures on the dollar in foreign exchange markets.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth in
real output of goods and services in the fourth quarter was close to the
pace in the third quarter. The dollar value of total retail sales declined
in December, but the gain from the third to the fourth quarter was
substantial. Industrial production expanded somewhat further in
December, although the rise was limited by a strike in coal mining.
Employment increased appreciably, and the unemployment rate
declined from 6.7 per cent to 6.4 per cent. The wholesale price index
for all commodities rose considerably less in December than in the
preceding 2 months, reflecting a much smaller increase in average
prices of farm products and foods. Prices of industrial commodities
advanced at about the average pace in the preceding 2 months. The
index of average hourly earnings advanced slightly faster during 1977
than it had during 1976.
Exchange market pressure on the dollar has continued in recent
weeks. On January 4 it was announced that the Exchange Stabilization Fund would be utilized actively together with the swap network
operated by the Federal Reserve System to help re-establish order in
the foreign exchange markets. On January 6 an increase in Federal
Reserve discount rates from 6 to 6V2 per cent was announced. The
trade-weighted value of the dollar against major foreign currencies
declined about 2Vi per cent further from mid-December to the early
days of January but subsequently recovered about \3A per cent.
Af-1—which had declined slightly in November—rose in December.
Growth in M-2 remained relatively slow, as inflows to banks of time
and savings deposits other than negotiable CD's were sharply curtailed. Inflows to nonbank thrift institutions slowed somewhat
further. Market interest rates edged up in late December, and
rates—particularly for short-term securities—rose substantially
further in the early weeks of January.
FOMC Policy Actions
123
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
At its meeting on October 18, 1977, the Committee agreed that
growth of M-1, Af-2, and Af-3 within ranges of 4 to 6r/i per cent, 6Vz to
9 per cent, and 8 to 10V£ per cent, respectively, from the third quarter
of 1977 to the third quarter of 1978 appears to be consistent with these
objectives. These ranges are subject to reconsideration at any time as
conditions warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a
path reasonably consistent with the longer-run ranges for monetary
aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at about
the current level, so long as Af-1 and Af-2 appear to be growing over
the January-February period at annual rates within ranges of IVi to
IVi per cent and 5 to 9 per cent, respectively. If, giving approximately
equal weight to M-l and Af-2, it appears that growth rates over the
2-month period are approaching or moving beyond the limits of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate shall be modified in an orderly fashion within a
range of 6Vi to 7 per cent. In the conduct of day-to-day operations,
account shall be taken of emerging financial market conditions,
including the unsettled conditions in foreign exchange markets.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Lilly, Mayo, Morris,
Partee, Roos, and Wallich. Votes against this action:
None. Absent and not voting: Mr. Jackson.
2. Authorization for Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the Federal Reserve Bank of New York for
124
FOMC Policy Actions
the System Open Market Account to maintain an over-all open
position in all foreign currencies not exceeding $1.0 billion, unless a
larger position is expressly authorized by the Committee. On
January 6, 1978, the Committee had authorized an open position of
$1.5 billion.
At this meeting the Committee authorized an open position of
$1.75 billion. This action was taken in view of the scale of recent and
potential Federal Reserve operations in the foreign exchange markets undertaken pursuant to the Committee's foreign currency
directive.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Lilly, Mayo, Morris,
Partee, Roos, and Wallich. Votes against this action: None. Absent and not voting: Mr. Jackson.
3. Authorization for Domestic Open Market Operations
At this meeting the Committee amended, effective immediately, the
authorization for domestic open market operations by adding the
following paragraph, designated paragraph 4:
In order to ensure the effective conduct of open market operations,
while assisting in the provision of short-term investments for foreign
and international accounts maintained at the Federal Reserve Bank of
New York, the Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York, (a) for System Open
Market Account, to sell U.S. Government securities to such foreign
and international accounts on the bases set forth in paragraph l(a)
under agreements providing for the resale by such accounts of those
securities within 15 calendar days on terms comparable to those
available on such transactions in the market; and (b) for New York
Bank account, when appropriate, to undertake with dealers, subject
to the conditions imposed on purchases and sales of securities in
paragraph l(c), repurchase agreements in U.S. Government and
agency securities, and to arrange corresponding sale and repurchase
agreements between its own account and foreign and international
accounts maintained at the Bank. Transactions undertaken with such
accounts under the provisions of this paragraph may provide for a
service fee when appropriate.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Gardner, Guffey, Lilly, Mayo, Morris,
FOMC Policy Actions
125
Partee, Roos, and Wallich. Votes against this action:
None. Absent and not voting: Mr. Jackson.
Since mid-1974 the Federal Reserve Bank of New York had made
available to its foreign official accounts a facility for making repurchase agreements (Rp's) involving U.S. Government and Federal
agency securities. The facility not only provided a service for foreign
central banks but also added a useful dimension of flexibility to
System open market operations. In arranging Rp's for foreign
official accounts the New York Bank had—depending on the
System's operating objectives at the moment—either served as an
agent in arranging the transactions with the market or made the
transactions with the System Open Market Account (SOMA).
Arrangements of the former type were not under the jurisdiction of
the Federal Open Market Committee; those of the latter type were
authorized by the Committee under the general authority to buy or
sell U.S. Government or agency securities for SOMA contained in
paragraph l(a) of the authorization for domestic open market
operations.
In May 1977 the New York Bank had learned of an Internal
Revenue Service (IRS) ruling on the treatment of Rp's by a taxpayer
that suggested that a tax liability might be incurred in connection
with income earned by some foreign official accounts on Rp's with
the market. At the same time it did not appear probable that a tax
liability would be incurred in the case where Rp's were arranged
between foreign official accounts and some entity of the Federal
Reserve System. Accordingly, after Committee discussion, the New
York Bank ceased acting as agent for foreign official accounts in
making Rp's with the market, and it requested an IRS determination
of the tax consequences of Rp's made for foreign official accounts
with various entities. The IRS subsequently ruled that income
received by foreign central banks on Rp's made with SOMA, or with
the Federal Reserve Bank of New York acting as a principal, was
exempt from Federal income tax.
In light of that ruling, the Committee amended its authorization
for domestic open market operations to authorize the New York
Bank to arrange foreign official account Rp's with the Bank as a
principal, and to make corresponding Rp's with the market, again
with the Bank acting as principal. It was understood that such
126
FOMC Policy Actions
"back-to-back" arrangements would be undertaken under circumstances similar to those in which, before May 1977, the Bank had
served as agent in arranging foreign official account Rp's with the
market. While the authority for the New York Bank to make foreign
official account Rp's with SOMA had been viewed as contained in
paragraph l(a) of the authorization, for the sake of clarity and
completeness the Committee decided to include language explicitly
authorizing such transactions in the new paragraph 4, along with the
authority for the New York Bank to act as a principal in "back-toback" Rp transactions.
Subsequent to this meeting, on February 15, 1978, Committee
members voted to increase from $3 billion to $4 billion the limit of
changes between Committee meetings in System Account holdings
of U.S. Government and Federal agency securities specified in
paragraph l(a) of the authorization for domestic open market
operations, effective immediately, for the period ending with the
close of business on February 28, 1978.
Votes for this action: Messrs. Burns, Volcker,
Cold well, Gardner, Guffey, Jackson, Mayo, Morris,
Partee, and Roos. Votes against this action: None.
Absent and not voting: Messrs. Lilly and Wallich.
This action was taken on recommendation of the System Account
Manager. The Manager had advised that large-scale sales of Treasury securities since the January meeting—required mainly to
counter the effect of seasonal declines in required reserves and
currency in circulation—had reduced the leeway for further sales to
$780 million, and that it appeared likely that the leeway would
shortly be reduced further, to $300 million or less, as a result of the
completion of an anticipated transaction with a foreign account. The
Manager also noted that the current inter-meeting period had been
lengthened by a change in the date of the next meeting from
February 22 to February 28, and that projections suggested the need
for further reserve-absorbing operations during the interval ending
with the latter date.
FOMC Policy Actions
127
MEETING HELD ON FEBRUARY 28, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that retail sales,
industrial production, and housing starts had been adversely affected in January by unusually severe weather. It appeared, however, that there had been little change in the underlying economic
situation.
In the fourth quarter of 1977, according to estimates of the
Commerce Department, real output of goods and services had
grown at an annual rate of 4.0 per cent, down from a rate of 5.1 per
cent in the third quarter. However, final sales in real terms had
expanded at a considerably faster pace than in the third quarter, and
the rate of business inventory accumulation had slowed sharply. The
rise in average prices, as measured by the fixed-weighted price index
for gross domestic business product, had stepped up somewhat to an
annual rate of 5.5 per cent in the fourth quarter from 5.0 per cent in
the third.
Staff projections for the year 1978, like those prepared just before
the Committee's meeting in mid-January, were based on assumptions that included reductions next fall in Federal income taxes. The
projections continued to suggest that growth in real GNP would be
sustained at a good pace throughout the year, although the over-all
rate was somewhat below that anticipated earlier because of
scaled-down projections for housing starts, auto sales, and total
government purchases of goods and services. It was still expected
that the rise in prices would remain relatively rapid and that the
unemployment rate would decline moderately further over the year.
The latest projections suggested that growth in output would be
less rapid in the first quarter of 1978 than had been expected earlier,
in large part because of the adverse weather, but that the weatherrelated losses would be about made up later. Thus, it was expected
128
FOMC Policy Actions
that growth of consumer spending in real terms—which had been
exceptionally rapid in the fourth quarter of 1977—would slow even
more in the current quarter than had been anticipated and that
expansion in business fixed investment and in residential construction also would fall short of earlier expectations. It was anticipated
that growth in consumer spending would pick up in subsequent
quarters—particularly in the fourth quarter, following the reduction
in personal income taxes assumed to take effect on October 1.
Business fixed investment was still projected to expand moderately
over the remaining quarters of 1978, owing in part to stimulative
modifications of the investment tax credit that were assumed to be
retroactive to the beginning of the year. It was now anticipated,
however, that residential construction activity would begin to edge
down after midyear in response to the less favorable mortgage
market conditions that now appeared to be developing.
In January industrial production declined 0.7 per cent—about as
much as it had risen over the preceding 3 months—as the unusually
severe weather caused widespread absenteeism, reduced workweeks, and disruptions to supplies. Moreover, auto manufacturers
curtailed assemblies in an effort to control dealers' inventories, and
the ongoing strike of mineworkers reduced production of coal
further.
Nonfarm payroll employment continued to expand in January,
and after adjustment for strikes, the gain was in line with the
monthly-average rise during the second half of 1977. Increases were
again sizable in manufacturing, trade, and services. Because of the
unfavorable weather, however, construction employment declined,
and the average workweek of production workers in nonfarm
establishments fell sharply. The unemployment rate edged down to
6.3 per cent from 6.4 per cent in December.
The total value of retail sales declined about 3 per cent in January,
according to the Census Bureau's advance estimate, after having
expanded 5 per cent over the preceding 3 months. Sizable decreases
in January were reported for almost all major categories of stores, at
least in part because of the weather. Unit sales of new domestic
autos declined 10 per cent to the lowest rate since late 1976, when
supplies had been limited by a strike in the auto industry.
Private housing starts fell from an annual rate of 2.2 million units
in December to 1.5 million units in January. Declines occurred in all
FOMC Policy Actions
129
regions of the country and were especially large in areas that had
suffered major storms.
Manufacturers' new orders for nondefense capital goods fell 5 per
cent in January after having risen about 9 per cent in December.
However, the machinery component changed little in January after
an increase of almost 8 per cent in December.
The index of average hourly earnings for private nonfarm production workers rose sharply in January, in part as a result of the
increase in the Federal minimum wage from $2.30 to $2.65 per hour
at the beginning of the year. Increases were especially large in trade
and services, where adjustments in the minimum wage have tended
to have more widespread effects.
The consumer price index for all urban consumers rose 0.8 per
cent in January, almost twice the monthly-average increase in the
second half of 1977. About two-thirds of the rise in January was
attributed to price increases for foods and beverages and for
housing, although prices advanced for all major categories of
expenditures.
The increase in the wholesale price index for January—0.9 per
cent—also was considerably more than the average rise during the
second half of 1977. In January average prices both of farm products
and foods and of industrial commodities advanced substantially.
In foreign exchange markets, after almost a month of calm, the
dollar came under renewed downward pressure around midFebruary, and its trade-weighted value against major foreign currencies declined about \Vi per cent during the second half of the month.
Almost all major currencies rose against the dollar; the largest
appreciations were registered by the Swiss franc and the German
mark.
The U.S. foreign trade deficit increased appreciably in the fourth
quarter of 1977. It appeared that the dock strike, which halted
containerized shipments through Atlantic and Gulf Coast ports
between October 1 and November 29, had depressed recorded
exports more than recorded imports. After allowance for the apparent effects of the strike, the deficit was still slightly larger in the
fourth quarter than in any of the first three quarters of the year. A
deficit of $31 billion (international accounts basis) was estimated for
1977 as a whole, up from $9 billion in 1976.
At U.S. commercial banks, total credit expanded substantially in
130
FOMC Policy Actions
January, after having changed little in December. The January
expansion, which was about in line with the average rate of growth
during the fourth quarter of 1977, was attributable chiefly to a
rebound in loan expansion. Growth in business loans and in loans to
finance security holdings accelerated, and expansion in real estate
and consumer loans apparently remained large. As in earlier
months, banks financed a sizable part of the January increase in total
loans by reducing their holdings of Treasury securities.
For nonfinancial businesses the January pick-up in loan growth
was especially evident at smaller banks. Lending to nonfinancial
businesses also rose somewhat at large banks during January, but it
remained below the pace of late 1977, and these businesses managed
a sizable net run-off of their outstanding commercial paper.
The narrowly defined money supply (M-l) expanded at an annual
rate of 11A per cent in January, but data for early February suggested
a decline from the January level. From the fourth quarter of 1976 to
the fourth quarter of 1977, M-l had grown 7.4 per cent, compared
with 5.6 per cent in 1976 and 4.4 per cent in 1975.1
Growth in M-2 picked up in January to an annual rate of about SlA
per cent—from 5% per cent in December—reflecting some
strengthening in inflows to banks of time and savings deposits other
than negotiable CD's. From the fourth quarter of 1976 to the fourth
quarter of 1977, M-2 had grown 9.6 per cent, compared with 10.9 per
cent in 1976 and 8.3 per cent in 1975.
Deposit growth at nonbank thrift institutions continued to slow in
January, and M-3 expanded at an annual rate of 8 per cent—about
the same as in December. Over the four quarters of 1977, M-3 had
grown 11.6 per cent.
At its January meeting the Committee had decided that operations
in the period immediately ahead should be directed toward maintaining about the prevailing money market conditions, provided that the
monetary aggregates appeared to be growing at approximately the
rates then expected. Specifically, the Committee sought to maintain
the weekly-average Federal funds rate at about 63A per cent, so long
'At the time of this meeting, revision of the measures of the monetary aggregates to
reflect, among other things, new benchmark data for deposits at nonmember banks
had nearly been completed. It was reported at the meeting that, according to tentative
estimates, the benchmark adjustment would raise the 1977 growth rates of M-l and
M-2 by 0.4 and 0.2 of a percentage point, respectively.
FOMC Policy Actions
131
as M-1 and M-2 appeared to be growing over the January-February
period at annual rates within ranges of 2Vi to IVi per cent and 5 to 9
per cent, respectively. The members also agreed that if growth in the
aggregates appeared to be approaching or moving beyond the limits
of their specified ranges, the operational objective for the weeklyaverage Federal funds rate should be varied in an orderly fashion
within a range of 6V2 to 7 per cent. It was understood that very
strong evidence of weakness in the monetary aggregates would be
required before operations were directed toward reducing the Federal funds rate below the 6% per cent level.
Data that became available during the inter-meeting period
suggested that growth in the monetary aggregates over the
January-February period would be well within the specified ranges.
The Manager of the System Open Market Account, therefore,
continued to aim for a Federal funds rate of around 6% per cent.
Over the 6-week inter-meeting period, the funds rate averaged 6.76
per cent, and weekly averages showed only minor deviations from
that level.
Other short-term interest rates also changed little on balance over
the inter-meeting period, even though short-term credit demands
remained relatively strong. Longer-term interest rates showed
mixed changes for the period. Yields on State and local government
bonds declined somewhat further, whereas those on Treasury,
Federal agency, and corporate securities edged higher.
Interest rates on mortgages rose during January, and some
tightening of nonrate terms was reported as well. In order to cover
mortgage takedowns in the face of weakening deposit flows, savings
and loan associations increased their reliance on advances from the
Federal home loan banks and other nondeposit sources of funds.
This contrasted with the typical pattern in January of reductions in
borrowings.
In the Committee's discussion of the economic situation and
prospects, the members agreed that the expansion in activity was
likely to continue throughout 1978. Most members thought that the
staffs GNP projection was reasonable, but two or three members
believed that growth in real GNP would fall somewhat short of the
projected rate. Several members emphasized that the degree of
uncertainty with regard to economic prospects and projections had
been increasing.
132
FOMC Policy Actions
It was observed that at the current stage of this business expansion some deceleration in growth toward a rate that could be
sustained for the longer term would be a desirable development. The
comment was also made that some deceleration would be acceptable
in light of the inflationary pressures in the economy and of recent
developments in the foreign exchange markets.
Considerable concern was expressed that the rate of inflation
might accelerate significantly as the year progressed. The comment
was made that prospects for inflation had been inhibiting business
decisions to invest in fixed capital, and it was suggested that an
acceleration would adversely affect confidence and would dampen
expansion in spending of other kinds. Such price behavior, it was
noted, would pose difficult questions concerning the appropriate
role of monetary policy.
Two members expressed the view that over the year the rate of
unemployment was unlikely to decline very much. Another member
believed that a realistic objective for the unemployment rate now
was considerably higher than it used to be, perhaps as high as 5Vi to
6 per cent.
One of the members who thought that the staffs projection for
real GNP represented the most likely outcome nevertheless cited
certain elements in the situation that could cause growth in output to
fall short of the rates projected. He suggested, first, that the sizable
decline in stock prices over the 6 weeks since the January meeting of
the Committee indicated a continuing lack of confidence in prospects for business activity and profits, which could undermine the
progress of the expansion. Like others, he agreed with the staff
expectation that the economy would rebound from the effects of the
severe weather and the coal strike. Nevertheless, he was concerned
about the possibility that the loss of income because of those
developments, even though temporary, could have enduring effects
on consumer demands and on the general course of the economy.
With respect to the U.S. foreign trade position, he did not see clear
signs of the sort of expansion in activity abroad that would significantly reduce the trade deficit. Another member expressed agreement with this view of prospects for the trade deficit, while a third
was somewhat more optimistic.
One of the members who believed that growth in real GNP would
fall somewhat short of the rate projected by the staff also believed
FOMC Policy Actions
133
that the shortfall would be concentrated in the second half of the
year. In his view, growth in output would be buoyed until midyear
by a rebuilding of inventories as well as by the recovery from the
effects of adverse weather and of the coal strike. However, he
thought that problems would develop later in the year in residential
construction and in some other sectors of the economy. Another
member expressed the view that the staff expectations for housing
starts, even though scaled down since the January meeting, were
still too high.
Several members commented that they agreed with the scaleddown projections for both housing starts and auto sales, and some
noted that for several months they had viewed the staff projections
for those sectors as too high. It was observed that the outlook for
those sectors was still relatively strong and that demands were likely
to be supported by adequate supplies of credit and a willingness of
consumers to assume debt. With respect to housing, the tendency of
consumers to perceive homeownership as a good form of investment
in a period of inflation also was mentioned as a factor likely to
support demand.
It was observed in the discussion that the current business
expansion—now about 3 years old—had developed some serious
imbalances. U.S. merchandise imports were much too high relative
to the behavior of the world economy. Business fixed investment
was low in relation to growth in over-all production, and a few
members expressed doubts of significant improvement during 1978.
State and local governments were running a sizable surplus in their
accounts, thereby draining purchasing power from the private
sector. Outstanding consumer credit was high in relation to personal
income. Wage increases were high in relation both to improvements
in productivity and to the level of unemployment. Corporate profits
were low in relation to personal income and to costs of production.
Prices of common stock were low relative to corporate profits. And
the state of general confidence appeared to be unduly low in relation
to the actual performance of the economy.
One member expressed the view that confidence was being
adversely affected by the large deficit in the Federal budget. He
added that the budget estimates were based on the assumption of
continued moderate growth in economic activity, and that if a
recession should develop the deficit could swell to such a size that it
134
FOMC Policy Actions
might take many years to return to financial stability. Another
member noted that under present fiscal policies the Federal deficit
apparently would remain substantial even if a state of high employment were reached.
At this meeting the Committee reviewed its 12-month ranges for
growth in the monetary aggregates. At its meeting in October 1977,
the Committee had specified the following ranges for growth over
the period from the third quarter of 1977 to the third quarter of 1978:
M-l, 4 to 6V2 per cent; M-2, 6Vi to 9 per cent; and Af-3, 8 to \Wi per
cent. The associated range for growth in commercial bank credit was
7 to 10 per cent. The ranges being considered at this meeting were
for the period from the fourth quarter of 1977 to the fourth quarter of
1978.
In the Committee's discussion of the 12-month ranges, all but one
member expressed a preference for retaining the existing range for
M-l. This member suggested that the upper limit for M-l be reduced
by Vi of a percentage point and the lower limit be raised by a
corresponding amount, yielding a range of 4Vi to 6 per cent. In the
case of the broader aggregates, most members favored no change in
the existing range for M-2 and a reduction of Vi of a percentage point
in the range for Af-3. Two members, however, preferred a reduction
of Vi point in the range for M-2. One of them also suggested a
reduction of 1 point, while the other advocated a reduction of either
1 or Wi points, in the M-3 range.
The nearly unanimous preference of members for retaining the
range of 4 to 6Vi per cent for M-l reflected several considerations.
First, it was observed that any increase in the 6V2 per cent upper
limit of the range could strengthen inflationary expectations, which
already appeared to be intensifying, and could accentuate the
current weakness of the dollar in foreign exchange markets. Second,
because the rate of growth of M-l in 1977—about IV2 per cent—had
significantly exceeded the upper limit of the Committee's earlier
ranges, it was suggested that a decision now to reduce the range
might lack credibility. Third, it was noted that if the actual rate of
growth in M-l during 1978 were to fall within a 4 to 6V2 per cent
range, that would represent a significant slowing from the 1977 rate.
Indeed, one Committee member observed that if—as seemed
likely—some slackening were under way in the processes of financial innovation that recently had been facilitating economies in
FOMC Policy Actions
135
transactions balances, an unchanged rate of growth in M-l could be
interpreted as involving an increase in monetary restraint. Finally, it
was suggested that current uncertainties regarding the economic
outlook militated against an adjustment in the M-l range. While
Committee members found these considerations persuasive, it was
observed in the discussion that further gradual reductions in monetary growth ranges would be needed over time if growth rates
consistent with general price stability were to be achieved.
Several Committee members noted that if during the coming year
M-l growth were to be constrained within a 4 to 6V2 per cent range
and nominal GNP were to expand as fast as economic forecasters
were generally projecting, an appreciable increase in the velocity of
M-l would be required. While they believed that such an increase in
velocity might develop, they indicated that they would be prepared
to accept M-l growth rates that were relatively high with respect to
the range if the increase in velocity fell short of the required amount.
Other members stressed the importance of constraining growth in
M-l within the range specified.
The member who preferred the growth range of AV2 to 6 per cent
for M-l based his recommendation on two considerations. First, by
lowering the upper limit of the range, the Committee would be
providing a further indication of its resolve to resist inflationary
pressures and in the process perhaps help to provide some near-term
support for the dollar. Second, by raising the lower limit of the
range, the Committee might offer some reassurance to those who
had expressed concern that the Federal Reserve might not be
sufficiently alert to the possibility of a softening in the economy later
this year. Other members of the Committee took exception to this
proposal. In addition to the arguments offered against a reduction in
the upper limit of the M-l range already noted, it was suggested that
a narrowing of the range would imply much greater certainty than in
fact existed regarding the precise rate of monetary growth appropriate under present circumstances.
In considering the longer-run growth ranges for M-2 and M-3,
members took note of the sharp reduction in flows of savings to
depositary institutions that had occurred during recent months. It
was suggested that part of the cutback in such inflows might reflect
temporary factors, and that over coming months growth in largedenomination time deposits not subject to interest rate ceilings could
136
FOMC Policy Actions
well expand further, providing some offset to the continued slow
growth expected in other deposits. It was noted that in the past the
large-denomination deposit instruments of the types included in M-2
and M-3 had been issued primarily by banks, but it was suggested
that in the present circumstances thrift institutions might begin to
make greater use of such instruments as a source of funds.
In view of these considerations, most members of the Committee
were inclined to retain the existing range for M-2 and to reduce the
range for M-3 by only Vi of a percentage point. The members
recognized that the attainment over the coming year of growth rates
for M-2 and M-3 within such ranges might require an increase in the
regulatory ceilings on deposit rates. The two members who
suggested some reduction in the M-2 growth range and a reduction
of more than Vi of a percentage point in the M-3 range believed that
under present circumstances the ranges favored by the majority
were higher than those appropriately associated with a 4 to 6V2 per
cent range for M-1.
At the conclusion of its discussion the Committee decided to
retain the existing ranges for M-1 and M-2 and to reduce both the
upper and lower limits of the range for M-3 by V2 of a percentage
point. Thus, the new ranges, which applied to the period from the
fourth quarter of 1977 to the fourth quarter of 1978, were 4 to 6V2 per
cent for M-l, 6V2 to 9 per cent for M-2, and IV2 to 10 per cent for
M-3. The associated range for growth in commercial bank credit
remained 7 to 10 per cent. It was agreed that the longer-run ranges,
as well as the particular aggregates for which such ranges were
specified, would be subject to review and modification at subsequent meetings. It was also understood that short-run factors
might cause growth rates from month to month to fall outside the
ranges contemplated for the year ahead.
The Committee adopted the following ranges for rates of growth in
monetary aggregates for the period from the fourth quarter of 1977 to
the fourth quarter of 1978: M-l, 4 to 6^2 per cent; M-2, 6V4 to 9 per
cent; and M-3, IVi to 10 per cent.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Guffey, Jackson, Mayo, Morris, Partee,
Roos, and Wallich. Votes against this action: None.
Absent and not voting: Mr. Gardner.
FOMC Policy Actions
137
In the Committee's discussion of policy for the period immediately ahead, it was suggested that recent developments in the
foreign exchange markets militated against any marked easing of
money market conditions at this time, and that the uncertainties in
the economic situation militated against any marked firming. All of
the members favored directing initial open market operations during
the coming inter-meeting period toward the objective of maintaining
the Federal funds rate at about the prevailing level of 6% per cent,
and a majority preferred to continue giving greater weight than usual
to money market conditions in the conduct of operations until the
next meeting. With respect to the range in which the funds rate
might be varied if the February-March growth rates in the monetary
aggregates appeared to be deviating markedly from expectations,
most members advocated retention of the 6V2 to 7 per cent range
agreed upon at the January meeting. However, two members
suggested narrowing the range to 6% to 7 per cent, and one proposed
widening it to 6V2 to 11A per cent.
The members did not differ greatly in their preferences for growth
in the monetary aggregates for the February-March period; most
favored ranges of 1 to 6 per cent for M-1 and AV2 to W2 per cent for
M-2. However, a few members were inclined to set the lower limit of
the 2-month range for M-\ at zero, on the grounds that the
acceptance of temporary weakness in the monetary aggregates that
might develop from time to time would improve the chances of
holding average growth over the coming year within the longer-run
range agreed upon earlier in this meeting. One of these members also
suggested that, given the relative volatility of M-l and M-2, a range
for M-2 that was 4 percentage points wide might best be associated
with an M-l range 6 points in width; accordingly, he favored a
2-month range of 0 to 6 per cent for M-1. Another member suggested
that the ranges for both M-1 and M-2 be narrowed to 3 percentage
points, in order to achieve prompter adjustment of the funds rate to
growth rates in the aggregates that were unduly rapid or slow.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should continue to be
directed toward maintaining prevailing money market conditions, as
represented by the current 6% per cent level of the Federal funds
rate. However, the members agreed that if growth in the aggregates
should appear to approach or move beyond the limits of their
138
FOMC Policy Actions
specified ranges, the operational objective for the weekly-average
Federal funds rate should be varied in an orderly fashion within a
range of 6 ^ to 7 per cent. For the annual rates of growth in Af-1 and
Af-2 over the February-March period, the Committee specified
ranges of 1 to 6 per cent and AVi to %Vi per cent, respectively. It was
understood that in assessing the behavior of the aggregates, the
Manager should give approximately equal weight to the behavior of
Af-1 and Af-2. The members also agreed that in the conduct of
day-to-day operations, account should be taken of emerging financial market conditions, including the conditions in foreign exchange
markets.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies
appeared to be developing among the Committee's various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that retail sales,
industrial production, and housing starts were adversely affected in
January by unusually severe weather. It appears, however, that there
has been little change in the underlying economic situation. Employment increased further in January and the unemployment rate edged
down from 6.4 to 6.3 per cent. Both the consumer price index and the
wholesale price index rose substantially. The index of average hourly
earnings advanced sharply, as higher minimum wages became effective at the beginning of the year.
After a period of calm, the dollar came under renewed downward
pressure around mid-February, and its trade-weighted value against
major foreign currencies has declined about \Vi per cent. The Swiss
franc and the German mark have registered the most pronounced
appreciations against the dollar.
Af-1 expanded appreciably in January but declined somewhat in
early February. Growth in Af-2 picked up in January, reflecting some
strengthening in inflows to banks of time and savings deposits other
than negotiable CD's. Inflows to nonbank thrift institutions continued
to slow. Market interest rates have changed little in recent weeks.
In light of the foregoing developments, it is the policy of the Federal
Open Market Committee to foster bank reserve and other financial
conditions that will encourage continued economic expansion and
FOMC Policy Actions
139
help resist inflationary pressures, while contributing to a sustainable
pattern of international transactions.
Growth of M-1, M-2, and A/-3 within ranges of 4 to 6V2 per cent, 6V2
to 9 per cent, and IVi to 10 per cent, respectively, from the fourth
quarter of 1977 to the fourth quarter of 1978 appears to be consistent
with these objectives. These ranges are subject to reconsideration at
any time as conditions warrant.
At this time, the Committee seeks to maintain about the prevailing
money market conditions during the period immediately ahead,
provided that monetary aggregates appear to be growing at approximately the rates currently expected, which are believed to be on a
path reasonably consistent with the longer-run ranges for monetary
aggregates cited in the preceding paragraph. Specifically, the Committee seeks to maintain the weekly-average Federal funds rate at about
the current level, so long as M-l and M-2 appear to be growing over
the February-March period at annual rates within ranges of 1 to 6 per
cent and AV2 to SV2 per cent, respectively. If, giving approximately
equal weight to M-l and M-2, it appears that growth rates over the
2-month period are approaching or moving beyond the limits of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate shall be modified in an orderly fashion within a
range of 6V2 to 7 per cent. In the conduct of day-to-day operations,
account shall be taken of emerging financial market conditions,
including the conditions in foreign exchange markets.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who will
then decide whether the situation calls for supplementary instructions
from the Committee.
Votes for this action: Messrs. Burns, Volcker,
Coldwell, Guffey, Jackson, Mayo, Morris, Partee,
Roos, and Wallich. Votes against this action: None.
Absent and not voting: Mr. Gardner.
Subsequent to the meeting, on March 10, nearly final estimates
indicated that in February M-1 had declined and M-2 had increased
relatively little. For the February-March period staff projections
suggested that the annual rate of growth in M-l would be below the
lower limit of the 1 to 6 per cent range specified by the Committee in
the next-to-last paragraph of the domestic policy directive issued at
the February meeting. Growth in M-2 for the 2-month period was
projected to be close to the lower limit of the Committee's range of
140
FOMC Policy Actions
AV2 to SV2 per cent for that aggregate. It appeared, however, that the
weakness in the aggregates might reflect the prolongation of the coal
strike and the severe winter weather and, therefore, might prove to
be temporary.
During recent weeks the Federal funds rate had averaged about
6% per cent. In light of the behavior of the aggregates, the Manager
would, under normal circumstances, have sought to reduce the
funds rate within its specified range of bVz to 7 per cent.
Against that background, and in view of recent developments in
foreign exchange markets, Chairman Miller recommended at a
telephone conference meeting on March 10 that the Manager be
instructed to continue aiming at a Federal funds rate of 6% per cent
for the time being.
On March 10, 1978, the Committee modified the domestic policy
directive adopted at its meeting of February 28, 1978, to call for open
market operations directed at maintaining the Federal funds rate at
about the prevailing level of 63A per cent for the time being.
Votes for this action: Messrs. Miller, Volcker,
Burns, Coldwell, Eastburn, Jackson, Wallich, Willes, Winn, and Kimbrel. Votes against this action:
None. Absent and not voting: Messrs. Baughman,
Gardner, and Partee. (Mr. Kimbrel voted as alternate
for Mr. Baughman.)
2. Authorization for Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the Federal Reserve Bank of New York for
the System Open Market Account to maintain an over-all open
position in all foreign currencies not exceeding $1.0 billion, unless a
larger position is expressly authorized by the Committee. On
January 17, 1978, the Committee had authorized an open position of
$1.75 billion.
At the meeting on February 28 the Committee authorized an open
position of $2.0 billion. This action was taken in view of the scale of
recent and potential Federal Reserve operations in the foreign
exchange markets undertaken pursuant to the Committee's foreign
currency directive.
FOMC Policy Actions
141
Votes for this action: Messrs. Burns, Volcker,
Cold well, Guffey, Jackson, Mayo, Morris, Partee,
Roos, and Wallich. Votes against this action: None.
Absent and not voting: Mr. Gardner.
On March 10, following the telephone conference held on that
day, Committee members voted to approve a delegation of authority
to Chairman Miller to negotiate an increase in the System's swap
arrangement with the German Federal Bank of an amount up to $2
billion if he determined that the detailed arrangements were satisfactory. The Committee also voted to approve a concurrent amendment
to paragraph 2 of the authorization for foreign currency operations
to raise correspondingly the amount specified there for the swap
arrangement with the German Federal Bank. The Chairman approved an increase of $2 billion on March 11. Accordingly, paragraph 2 of the authorization was amended, effective on that date, to
read as follows:
The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements
("swap" arrangements) for the System Open Market Account for
periods up to a maximum of 12 months with the following foreign
banks, which are among those designated by the Board of Governors
of the Federal Reserve System under Section 214.5 of Regulation N,
Relations with Foreign Banks and Bankers, and with the approval of
the Committee to renew such arrangements on maturity:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
250
1,000
2,000
250
3,000
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
2,000
4,000
3,000
2,000
360
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
500
250
300
1,400
142
FOMC Policy Actions
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs
600
1,250
Votes for this action: Messrs. Miller, Volcker,
Burns, Coldwell, Eastburn, Jackson, Partee, Wallich, Willes, Winn, and Kimbrel. Votes against this
action: None. Absent and not voting: Messrs.
Baughman and Gardner. (Mr. Kimbrel voted as
alternate for Mr. Baughman.)
This action, which enlarged the System's swap network with 14
central banks and the Bank for International Settlements to $22.16
billion, was taken as part of the cooperative effort announced on
March 13 by U.S. Secretary of the Treasury Blumenthal and
Minister Matthoefer of the Federal Republic of Germany.
FOMC Policy Actions
143
MEETING HELD ON MARCH 2 1 , 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth
in real output of goods and services in the first quarter of 1978
had been adversely affected by unusually severe weather and by
the lengthy strike in coal mining but that the underlying economic
situation had changed little. It now appeared that growth in the
current quarter had slowed from the pace in the fourth quarter of
1977, estimated by the Commerce Department to have been at
an annual rate of 3.8 per cent. Stall projections suggested, however,
that the shortfall in growth from the rate expected at the time of
the February meeting would be about made up over the next quarter
or two and that on the average over the four quarters of 1978
output would grow at a good pace.
The rise in average prices—as measured by the fixed-weighted
price index for gross domestic business product—appeared to have
stepped up in the first quarter from the annual rate of 5.4 per cent
estimated for the fourth quarter of 1977, mainly because of large
increases in prices of farm products and foods. It was expected
that over the remaining quarters of 1978 the rate of increase in
prices would be below that of the first quarter but would remain
above that of the fourth quarter of 1977. It was also anticipated
that the unemployment rate would move downward gradually over
the year.
In the first quarter, according to stall estimates, expansion in
final sales in real terms had slowed much more than growth in
output, and the rate of business inventory accumulation had picked
up from the sharply reduced pace in the final quarter of 1977.
Consumer expenditures for goods in real terms—which had grown
at a rapid pace in the fourth quarter—apparently declined in the
first quarter, at least in part because of the severe weather. Moreover, construction activity—public as well as private—was adversely affected by the weather.
144
FOMC Policy Actions
The staff projections for the rest of 1978 suggested that consumer
spending for goods in real terms would rebound in the second
quarter and would continue to grow thereafter—particularly in the
fourth quarter, following the reduction in personal income taxes
assumed to take effect on October 1. It was anticipated that business
fixed investment would expand moderately, owing in part to stimulative modifications of the investment tax credit that were assumed
to be retroactive to the beginning of the year, but that residential
construction would begin to edge down after midyear in response
to the less favorable mortgage market conditions that appeared to
be developing.
In February the index of industrial production rose 0.5 per cent,
recovering more than half of the decline in January that was
attributable in large part to the severe weather and to the coal strike.
Unfavorable weather in some parts of the country continued to
restrict output in February, and the ongoing strike held coal mining
at a reduced level. Dwindling supplies of coal in some areas caused
limitations on industrial use of electric power, but secondary effects
of the strike appeared to have been small.
Nonfarm payroll employment increased considerably further between mid-January and mid-February. Employment in the serviceproducing industries continued to grow at about the average rate
of the second half of 1977. In manufacturing the gain in employment was sizable for the third successive month, and the average
workweek recovered part of the weather-induced decrease of January. As measured by the survey of households, total employment
edged up in February while the labor force changed little, and
the unemployment rate declined 0.2 of a percentage point to 6.1
per cent—1.5 percentage points below a year earlier and the lowest
figure since late 1974.
According to the Census Bureau's advance estimate, total retail
sales in February had recovered only a small portion of the
substantial decline of the month before, at least in part because
of continuing unfavorable weather. Unit sales of new automobiles—domestic and foreign combined—rose 5 per cent, retracing
half of the January drop, and sales rose further in early March.
Private housing starts—which had declined from an annual rate
of 2.20 million units in December to 1.55 million units in January—recovered only to 1.58 million units in February, as adverse
FOMC Policy Actions
145
weather apparently remained a significant inhibiting factor. Regionally, changes from January to February were quite diverse:
Starts rose 43 per cent in the North Central States and 5 per cent
in the West, while they declined 10 per cent in the South and
39 per cent in the Northeast.
The latest Department of Commerce survey of business spending
plans, taken in late January and February, suggested that spending
for plant and equipment would expand 10.9 per cent in 1978,
whereas the survey taken in late November and December had
suggested an increase of 10.1 per cent. However, the increment
of 0.8 of a percentage point reflected a downward revision in the
estimated level of spending for 1977. The expansion in 1977 now
was indicated to have been 12.7 per cent, compared with the
previous estimate of 13.7 per cent.
The index of average hourly earnings for private nonfarm production workers was unchanged in February, after having increased
sharply in January when higher minimum wage rates became
effective. Over the 2-month period the index rose at an annual
rate of 7.6 per cent, about the same as the average rate of increase
during 1977.
The wholesale price index for all commodities rose 1.1 per cent
in February, compared with 0.9 per cent in January and an average
rise of 0.6 per cent in the preceding 3 months. In February the
increase in the index for prices of farm products and processed
foods was more than twice as large as the average for the preceding
4 months. Average prices of industrial commodities continued to
rise at a somewhat faster pace than in the latter part of 1977.
In foreign exchange markets the trade-weighted value of the
dollar against major foreign currencies rose sharply on March 9
and 10 in anticipation of the conclusion of discussions between
the governments of the United States and Germany. In a joint
statement on March 13, 1978, U.S. and German authorities announced that continued forceful action would be taken to counter
disorderly conditions in exchange markets and that close cooperation to that end would be maintained. Included in the cooperative
effort were an increase of $2 billion in the System's swap arrangement with the German Federal Bank, an arrangement for the U.S.
Treasury to sell SDR 600 million (approximately $740 million)
to purchase German marks, and a willingness of the United States
146
FOMC Policy Actions
to draw on its reserve position in the IMF (automatically available
in amounts up to approximately $5 billion) if and as necessary
to acquire additional foreign exchange. The authorities also announced that developments during the first quarter of 1978 would
be particularly important in determining the course of economic
policies in Germany directed toward the objective of noninflationary growth and that in the United States high priority would be
given to swift and resolute action to conserve energy and to develop
new sources. Nevertheless, market participants apparently were
disappointed by the announcements, and the value of the dollar
receded to about its level in the last few days of February.
The U.S. foreign trade deficit remained very large in January.
Interpretation of the data for recent months had been complicated
by the 2-month dock strike that had ended on November 29 and
by changes in the method for compiling the statistics, but it
appeared that imports had continued to rise along with expansion
in economic activity in the United States, while exports had shown
no upward momentum.
At U.S. commercial banks growth in total credit during February
was close to the sizable rate in January and about in line with
the average for 1977. In February bank holdings of Treasury
securities expanded substantially following a series of monthly
declines. However, growth of total loans slowed, reflecting a sharp
contraction in loans to finance holdings of securities. Growth in
real estate and consumer loans apparently slowed a little, while
expansion in business loans remained at about the average pace
in 1977. Large banks significantly expanded their lending to manufacturing companies and to wholesale and retail trade concerns,
but their lending to public utilities declined as the utilities drew
down their inventories of coal.
For nonfinancial businesses the general pattern of short-term
borrowing in February was little changed from that in January.
Continued strong expansion in borrowings from banks was offset
only in part by a further net run-off of outstanding commercial
paper. Utilities accounted for much of the further decline in
outstanding commercial paper issued by nonfinancial businesses.
At this meeting revised measures of the monetary aggregates
incorporating the effects of new benchmark data for deposits at
nonmember banks and revised seasonal factors were available to
FOMC Policy Actions
147
the Committee. These revised data, scheduled for publication on
March 23, indicated that in February, M-l had contracted at an
annual rate of about 1 per cent. On the basis of the revised series,
M-l had grown at an annual rate of about AVA per cent during
the first 2 months of 1978 and about 13A per cent during 1977.
After revisions M-2 had grown at rates of about 4!/2 per cent in
February, 6% per cent over the January-February period, and 9V4
per cent during 1977.
Inflows to commercial banks of the interest-bearing deposits
included in M-2 were about maintained in February, but they
consisted almost entirely of large-denomination time deposits (in
amounts of $100,000 or more) exempt from Regulation Q ceilings
on interest rates. Inflows of time and savings deposits subject to
such ceilings slowed to a low rate, as yields on market instruments
of comparable maturities remained above the ceiling rates throughout the month. To finance credit expansion in the face of the slowing
in over-all inflows of deposits included in M-2, large banks issued
a substantial volume of negotiable CD's and raised a sizable amount
of funds from nondeposit sources.
Deposit growth at nonbank thrift institutions remained slow in
February. Like the savings and smaller time accounts at commercial
banks, deposits at the thrift institutions continued to be adversely
affected by competition from market securities. Only the longestterm deposits at the thrift institutions provided effective yields
above those available on competitive market securities.
At its February meeting the Committee had decided that operations in the period immediately ahead should be directed toward
maintaining about the prevailing money market conditions, provided that the monetary aggregates appeared to be growing at
approximately the rates then expected. Specifically, the Committee
had sought to maintain the weekly-average Federal funds rate
around 63A per cent, so long as M-l and M-2 appeared to be
growing over the February-March period at annual rates within
ranges of 1 to 6 and 4!/2 to 8V2 per cent, respectively. The members
also agreed that if growth in the aggregates appeared to be approaching or moving beyond the limits of their specified ranges,
the operational objective for the weekly-average Federal funds rate
should be varied in an orderly fashion within a range of 6V£ to
7 per cent. It was understood that in assessing the behavior of
148
FOMC Policy Actions
the aggregates, the Manager of the System Open Market Account
should give approximately equal weight to the behavior of M-l
and M-2.
As the inter-meeting period progressed, it became evident that
in February M-l had contracted somewhat and M-2 had increased
relatively little. Staff projections for the February-March period
suggested that M-l would grow at a rate below the lower limit
of the range specified by the Committee and that M-2 would grow
at a rate close to its lower limit. It also appeared, however, that
the weakness in the aggregates might reflect the prolongation of
the coal strike and the severe winter weather and thus would prove
to be temporary. Against this background, and in view of recent
developments in foreign exchange markets, the Committee voted
on March 10 to instruct the Manager to continue aiming at a Federal
funds rate of 63A per cent for the time being. For the full intermeeting period, the funds rate averaged 63A per cent.
Market interest rates in general changed little over the intermeeting period, reflecting the stability in the Federal funds rate
and, apparently, more or less of a balance among developments
affecting the public's expectations concerning monetary policy—
namely, some slowing of the economic expansion and of growth
in the monetary aggregates on one side, and some pick-up in the
rate of increase in prices and continuing uncertainties in foreign
exchange markets on the other. However, Treasury bill rates
declined somewhat, in large part because of demands for bills from
foreign central banks.
Borrowing by the U.S. Treasury remained relatively strong
during the inter-meeting period. In addition to regular debt rollovers, $3.3 billion of securities were auctioned to raise new
money—$3.0 billion of short-term cash-management bills and $300
million of bills added to the regular weekly and monthly auctions.
Incoming data on Treasury receipts and expenditures and on the
cash balance implied, however, that Federal financing through the
first quarter would be significantly smaller than had been suggested
in late January. Borrowing by Federally sponsored credit agencies
rose to $1.6 billion in February from the already expanded volume
of $1.0 billion in January, in large part because of the midquarter
financing of the Federal Home Loan Bank System.
Mortgage lending by private institutions apparently continued
FOMC Policy Actions
149
to slacken in February from the record pace of late 1977. At
commercial banks the increase in mortgage loans was the smallest
in about a year. In January, the latest month for which data were
available, mortgage acquisitions by savings and loan associations
slowed significantly. Also, mortgage lending commitments outstanding at these associations declined for the first time in 3 years.
In the Committee's discussion of the economic situation and
prospects, the members agreed—as they had at other recent meetings—that the expansion in activity was likely to be sustained
throughout 1978. The range of views with respect to the average
rate of growth in real GNP over the four quarters of the year was
not wide. Half of the members present believed that real output
would grow at about the rate projected by the staff; of the remainder, some thought that output would grow somewhat less than
projected, and some thought that it would grow somewhat more.
One of the members who thought that growth in real GNP would
fall somewhat short of the rate projected by the staff believed that
the shortfall would be concentrated in the second half of the year.
In his view, the second-quarter rebound in growth from the
weather-retarded pace in the first quarter might be greater than
projected by the staff, and the magnitude of that rebound—in
conjunction with some acceleration in the rate of inflation—might
generate forces that would adversely affect construction activity
and consumer spending in the second half.
Attention was drawn to the considerable improvement in the
employment situation in recent months. The pace of growth in
payroll employment over the past 6 months was regarded as
indicative of near-term strength in the expansion of output. One
member remarked that the unemployment rate had come close to
the zone that he would characterize as reflecting full employment,
suggesting that there was less time than he had anticipated earlier
for growth in output to diminish toward a rate that could be
sustained for the longer term. However, another member noted
that the substantial decline in the unemployment rate in recent
months—from 6.7 per cent in November to 6.1 per cent in February—reflected in part a sharp deceleration in growth of the civilian
labor force. If, as he suspected, that deceleration proved to be
an aberration in the statistics, the decline in the unemployment
rate might well be reversed to some degree in coming months.
150
FOMC Policy Actions
The Committee members agreed that the rate of price advance
was likely to remain relatively rapid in 1978, and they expressed
a great deal of concern about this prospect. The comment was
made that the pace of increase in prices appeared to be accelerating
in this country while decelerating in European countries. Several
members observed that inflation led to recession, and it was
suggested that the greater the inflation, the worse the ensuing
recession. For that reason, it was suggested, special emphasis
should be given to the Committee's long-standing objective of
helping to resist inflationary pressures while simultaneously encouraging continued economic expansion. It was noted that an
effective program to reduce the rate of inflation had to extend
beyond monetary policy.
At its meeting in February the Committee had agreed that from
the fourth quarter of 1977 to the fourth quarter of 1978 average
rates of growth in the monetary aggregates within the following
ranges appeared to be consistent with broad economic aims: M-l,
4 to 6!/2 per cent; M-2, 6V2 to 9 per cent; and M-3, IV2 to 10
per cent. The associated range for the rate of growth in commercial
bank credit was 7 to 10 per cent. It had also been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
In the Committee's discussion of policy for the period immediately ahead, it was suggested that an easing of money market
conditions would be inappropriate in light of the outlook for prices,
the recent behavior of the dollar in foreign exchange markets, and
the likelihood that the demand for money would strengthen substantially again as growth of nominal GNP picked up. It was also
suggested that a firming of money market conditions in the absence
of actual evidence of excessive growth of the monetary aggregates
would be premature, given the weakness of recent economic
statistics, the still unsettled coal strike, and uncertainty about the
strength of the prospective rebound in economic activity. However,
a number of members favored some firming of money market
conditions during the inter-meeting period with a view to keeping
under control the anticipated pick-up in monetary growth, unless
data for the first 2 weeks of the period suggested that monetary
growth over the March-April period was likely to be significantly
FOMC Policy Actions
151
weaker than expected. There was also some sentiment for a slight
easing if the incoming data suggested unexpected weakness in
monetary growth.
These differences of emphasis notwithstanding, members of the
Committee did not differ greatly in their preferences for operating
specifications for the period immediately ahead, and all favored
a return to basing decisions for open market operations between
meeting dates primarily on the behavior of the monetary aggregates.
In its previous five directives the Committee had called for giving
greater weight than usual to money market conditions in conducting
operations in the period until the next meeting.
For the annual rate of growth in M-1 over the March-April period
most members favored ranges with an upper limit of 8 or 9 per
cent and a lower limit of 4 or 4Vi per cent; one member indicated
a preference for a range of 2 to 7 per cent. For the growth rate
in M-2 over the 2 months, the members' preferences for the upper
limit ranged from 9 to 10 per cent and for the lower limit from
5 to 6 per cent.
All of the members favored directing open market operations
during the coming inter-meeting period initially toward the objective of maintaining the Federal funds rate at about the prevailing
level of 6% per cent. Views differed somewhat with respect to
the degree of leeway for operations during the inter-meeting period
in the event that growth in the aggregates appeared to be deviating
significantly from the midpoints of the specified ranges. Some
members favored retaining the present range of 6V2 to 7 per cent
for the funds rate but others preferred 63A to 714 per cent and
one advocated 63A to 7 per cent. Some who wished to retain the
6!/2 to 7 per cent range suggested an understanding to the effect
that operations would not be directed toward a rate below 63A per
cent before the Committee had had an opportunity for further
consultation.
At the conclusion of the discussion the Committee decided that
growth in M-\ and M-2 over the March-April period at annual
rates within ranges of 4 to 8 per cent and 5Vi to 9 per cent,
respectively, would be appropriate. It was understood that in
assessing the behavior of these aggregates the Manager should
continue to give approximately equal weight to the behavior of
M-l and M-2.
152
FOMC Policy Actions
It was the Committee's judgment that such growth rates were
likely to be associated with a weekly-average Federal funds rate
of about 6% per cent. The members agreed that if growth rates
of the aggregates over the 2-month period appeared to be deviating
significantly from the midpoints of the indicated ranges, the operational objective for the weekly-average Federal funds rate should
be modified in an orderly fashion within a range of 6V2 to 7 per
cent. It was also agreed, however, that a reduction in the rate
below 63A per cent would not be sought until the Committee had
had an opportunity for further consultation.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives. The members also agreed that in the conduct
of day-to-day operations, account should be taken of emerging
financial market conditions, including the conditions in foreign
exchange markets.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in real output of goods and services has been adversely affected
in the current quarter by unusually severe weather and the lengthy
strike in coal mining but that there has been little change in the
underlying economic situation. In February industrial production
recovered much of the decline of the preceding month, and nonfarm
payroll employment increased considerably further. The unemployment rate declined from 6.3 to 6.1 per cent. Retail sales picked
up somewhat from the sharply reduced level of January. The pace
of the rise in prices stepped up in February, reflecting large increases
in farm products and processed foods. The index of average hourly
earnings was unchanged, after having advanced sharply in January
when higher minimum wages became effective.
The trade-weighted value of the dollar against major foreign
currencies rose sharply in anticipation of the U.S.-German announcements on March 13. Subsequently, the dollar declined to
about the level at the end of February. The U.S. trade statistics
reported for January showed a continuing large deficit.
M-l declined and M-2 increased relatively little in February,
apparently in part because of the economic effects of the coal strike
FOMC Policy Actions
153
and the severe weather. Inflows to banks of the interest-bearing
deposits included in M-2 were about maintained, but the inflows
were almost entirely into large-denomination time deposits exempt
from ceilings on interest rates. Inflows to nonbank thrift institutions
remained slow. Market interest rates have changed little in recent
weeks.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will encourage continued economic expansion and help resist inflationary pressures, while contributing to a
sustainable pattern of international transactions.
At its meeting on February 28, 1978, the Committee agreed that
growth of M-l, M-2, and M-3 within ranges of 4 to 6V2 per cent,
6V2 to 9 per cent, and IV2 to 10 per cent, respectively, from the
fourth quarter of 1977 to the fourth quarter of 1978 appears to be
consistent with these objectives. These ranges are subject to reconsideration at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-1 and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the March-April period to be within ranges of 4 to 8 per cent
for M-l and 5J/2 to 9 per cent for M-2. In the judgment of the
Committee such growth rates are likely to be associated with a
weekly-average Federal funds rate of about 6% per cent. If, giving
approximately equal weight to M-l and M-2, it appears that growth
rates over the 2-month period will deviate significantly from the
midpoints of the indicated ranges, the operational objective for the
Federal funds rate shall be modified in an orderly fashion within
a range of 6V2 to 7 per cent. In the conduct of day-to-day operations,
account shall be taken of emerging financial market conditions,
including the conditions in foreign exchange markets.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Messrs. Burns
and Gardner.
154
FOMC Policy Actions
2. Authorization for Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the Federal Reserve Bank of New York, for
the System Open Market Account, to maintain an over-all open
position in all foreign currencies not to exceed $1.0 billion unless
a larger position is expressly authorized by the Committee. On
February 28, 1978, the Committee had authorized an open position
of $2.0 billion.
At this meeting the Committee authorized an open position of
$2.25 billion. This action was taken in view of the scale of recent
and potential Federal Reserve operations in the foreign exchange
markets undertaken pursuant to the Committee's foreign currency
directive.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Messrs. Burns
and Gardner.
3. Procedural Instructions with Respect to Operations
Under the Foreign Currency Documents
Paragraph IB of the procedural instructions with respect to the
conduct of operations under the Committee's foreign currency
authorization and directive instructed the Manager to clear with
the Foreign Currency Subcommittee or, under certain circumstances, with the Chairman of the Committee any transactions that
would result in gross transactions (excluding swap drawings and
repayments) in a single foreign currency exceeding $100 million
on any day or $300 million since the most recent regular meeting
of the Committee.
At this meeting the Committee amended paragraph IB to raise
the levels of gross transactions beyond which clearance is required
to $200 million on any day and to $500 million since the most
recent regular meeting, and to clarify its intention that the measure
of gross transactions used for this purpose should exclude not only
swap drawings and repayments but also purchases and sales of
currencies incidental to such repayments. This action was taken
FOMC Policy Actions
155
to relax the dollar limits on gross transactions, which had on
occasion hampered ongoing operations, and to remove an ambiguity
in the language.
As amended, paragraph IB read as follows:
1. The Manager shall clear with the Subcommittee (or with the
Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
B. Any transaction which would result in gross transactions
(excluding swap drawings and repayments, and purchases and sales
of any currencies incidental to such repayments), in a single foreign
currency exceeding $200 million on any day or $500 million since
the most recent regular meeting of the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Messrs. Burns
and Gardner.
4. Review of Continuing Authorizations
This being the first regular meeting of the Federal Open Market
Committee following the election of new members from the Federal
Reserve Banks to serve for the year beginning March 1, 1978,
the Committee followed its customary practice of reviewing all
of its continuing authorizations and directives. The Committee
reaffirmed the authorization for domestic open market operations,
the authorization for foreign currency operations, and the foreign
currency directive, in the forms in which they were presently
outstanding. The Committee also reaffirmed the procedural instructions with respect to operations under the foreign currency documents not affected by the action described in the preceding section.
Votes for these actions: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against these
actions: None. Absent and not voting: Messrs.
Burns and Gardner.
156
FOMC Policy Actions
In reviewing the authorization for domestic open market operations, the Committee took special note of paragraph 3, which
authorizes the Reserve Banks to engage in the lending of U.S.
Government securities held in the System Open Market Account
under such instructions as the Committee might specify from time
to time. That paragraph had been added to the authorization on
October 7, 1969, on the basis of a judgment by the Committee
that in the existing circumstances such lending of securities was
reasonably necessary to the effective conduct of open market
operations and to the effectuation of open market policies, and
on the understanding that the authorization would be reviewed
periodically. At this meeting the Committee concurred in the
judgment of the Manager that the lending activity in question
remained reasonably necessary and that, accordingly, the authorization should remain in effect subject to periodic review.
5. Agreement to "Warehouse" Currencies for the Exchange
Stabilization Fund (ESF)
At its meeting of January 17-18, 1977, the Committee had agreed
to a suggestion by the Treasury that the Federal Reserve undertake
to "warehouse" foreign currencies held by the ESF—that is, to
make spot purchases of foreign currencies from the ESF and
simultaneously to make forward sales of the same currencies to
the ESF—if that should prove necessary to enable the ESF to deal
with potential liquidity strains. Specifically, the Committee had
agreed that the Federal Reserve would be prepared, if requested
by the Treasury, to warehouse up to $1 Vi billion of eligible foreign
currencies, of which half would be for periods of up to 12 months
and half for periods of up to 6 months. It was noted that the
agreement to warehouse currencies would be subject to review by
the Committee at its organizational meeting each March in connection with the regular review of all outstanding authorizations. At
this meeting the Committee reaffirmed the agreement.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Eastburn, Jackson, Partee, Wallich,
Willes, and Winn. Vote against this action: Mr.
Coldwell. Absent and not voting: Messrs. Burns
and Gardner.
FOMC Policy Actions
157
MEETING HELD ON APRIL 18, 1978
Domestic Policy Directive
The information reviewed at this meeting suggested that growth
in real output of goods and services had been small in the first
quarter of 1978, owing in part to the unusually severe weather
and the lengthy strike in coal mining, but that economic activity
was rebounding in the latter part of the period. Staff projections
suggested that the first-quarter shortfall in growth from the rate
expected earlier would be about made up in the current quarter
and that over the year ahead output would grow at a moderate
pace.
The rise in average prices—as measured by the fixed-weighted
price index for gross domestic business product—appeared to have
stepped up considerably in the first quarter from the annual rate
of 5.4 per cent estimated for the fourth quarter of 1977, reflecting
for the most part reduced supplies of meats and increases in payroll
taxes and in minimum wages at the beginning of the year. The
staff's latest projections of the rise in prices, which were somewhat
higher than those made 4 weeks earlier, suggested that the rate
over the year ahead would remain well above that in the fourth
quarter of 1977. It was also anticipated that the unemployment
rate would move downward gradually over the period.
In the first quarter, according to the latest staff estimates, growth
in real GNP had slowed much more than had been anticipated
a month earlier—mainly because an expected improvement in net
exports of goods and services apparently had failed to develop but
also because adverse weather had impeded residential, business,
and public construction more than had been thought previously.
It was still estimated that consumer expenditures for goods in real
terms, after having grown rapidly in the fourth quarter of 1977,
had declined in the first quarter of 1978. Altogether, final sales
158
FOMC Policy Actions
in real terms had slowed much more than growth in output, and
the rate of business inventory accumulation had picked up from
the sharply reduced pace in the preceding quarter.
The staff projections suggested that consumer spending for goods
in real terms and both private and public construction would
rebound in the second quarter, that the rate of inventory accumulation would increase somewhat further, and that net exports of goods
and services would improve moderately. It was anticipated that
in the remaining two quarters of the year real consumption expenditures and real business fixed investment would expand moderately
but that the foreign trade position would change little and that
residential construction would begin to edge down in response to
the less favorable mortgage market conditions that had been developing recently.
In March the index of industrial production increased 1.4 per
cent, following a rise of 0.3 per cent in February and a decline
of 0.8 per cent in January. Thus, the index for March was about
1 per cent above that for December, although the average for the
first quarter of 1978 was about the same as that for the fourth
quarter of 1977.
Nonfarm payroll employment rose sharply further in March, and
gains were widespread among industry groups. In manufacturing,
the increase was sizable for the fourth successive month, and the
average workweek recovered to the November-December level.
The unemployment rate edged up 0.1 of a percentage point to 6.2
per cent, as the civilian labor force expanded substantially after
having been unchanged in February.
Total retail sales in February, according to revised estimates,
had recovered much more of the January drop than had been
reported earlier, and they expanded substantially further in March.
Nevertheless, total sales were about the same in the first quarter
as in the fourth quarter of 1977. Unit sales of new automobiles,
domestic and foreign combined, rose sharply in March, carrying
the first-quarter total up to the level of each of the two preceding
quarters.
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of about 9 per cent from
December to March, compared with a rate of about 8 per cent
over the preceding 3 months. The acceleration in the first quarter
FOMC Policy Actions
159
resulted in large part from the increase in minimum wages at the
beginning of the year.
The wholesale price index for all commodities rose 1 per cent
in March, the same as in February, reflecting further large increases
in prices of farm products and foods. In February the consumer
price index for all urban consumers had continued to advance at
a faster pace than in the second half of 1977, owing to large
increases in retail prices of foods and in rates for natural gas and
electricity.
The U.S. foreign trade deficit increased significantly in February,
as the value of imports rose sharply while the value of exports
changed little. After the trade statistics had been announced on
March 31, the trade-weighted value of the dollar declined nearly
1 per cent. In the week preceding this meeting, however, the dollar
recovered to about the same level as that 4 weeks earlier.
The rate of expansion in total credit at U.S. commercial banks
during March was close to that in February. Growth in loans,
particularly business loans and real estate loans, accelerated. At
the same time banks reduced their holdings of Treasury securities—resuming the pattern of net liquidation of investments that
had been interrupted by substantial acquisitions of Treasury securities in February. Over the first quarter, total bank credit grew at
an annual rate of about IOV2 per cent, compared with 8V2 per cent
in the second half of 1977. Business loans (net of bankers acceptances) increased in March at an annual rate of 23 per cent,
approaching the rapid pace recorded in the first half of 1974.
Outstanding commercial paper of nonfinancial businesses rose
sharply in March, almost offsetting the sizable decreases in the
preceding 2 months. Public utilities accounted in large part for
both the rise in March and the earlier declines.
The narrowly defined money supply (M-l), which had declined
in February, rose moderately in March, and in the first quarter—on
a quarterly-average basis—it expanded at an annual rate of 5 per
cent. From the first quarter of 1977 to the first quarter of 1978,
M-l grew about 11A per cent.
Inflows to banks of time and savings deposits other than negotiable CD's and inflows of deposits to nonbank thrift institutions
remained slow in March, and growth rates for M-2 and M-3 were
near the reduced rates in February. From the first quarter of 1977
160
FOMC Policy Actions
to the first quarter of 1978, M-2 and M-3 grew about 8V6 and
10V2 per cent, respectively.
At its March meeting the Committee had decided that during
the March-April period growth in M-l and M-2 within ranges of
4 to 8 and 5Vi to 9 per cent, respectively, would be appropriate.
It had judged that these growth rates were likely to be associated
with a weekly-average Federal funds rate of about 63A per cent.
The Committee had agreed that if growth rates in the aggregates
over the 2-month period appeared to be deviating significantly from
the midpoints of the indicated ranges, the operational objective
for the weekly-average Federal funds rate should be modified in
an orderly fashion within a range of 6J/2 to 7 per cent. The members
also agreed, however, that a reduction in the rate below 6% per
cent would not be sought until the Committee had had an opportunity for further consultation.
Projections made on the basis of data that had become available
in the days immediately following the March meeting suggested
that over the March-April period both M-l and M-2 would grow
at rates that were high within their specified ranges. The figures
were regarded as especially tentative, however, since the strength
was concentrated in the part of the period for which growth rates
were projected. Consequently, the Manager of the System Open
Market Account continued to seek a Federal funds rate of about
63A per cent. Data becoming available later in the inter-meeting
period suggested more moderate rates of growth in the monetary
aggregates, and the weekly-average funds rate remained close to
6% per cent throughout the period.
Market interest rates in general were subjected to upward pressure during much of the inter-meeting period, apparently because
of investor concerns about the deterioration in the balance of U.S.
foreign trade, the acceleration of the rise in prices, and the possibility of a surge in monetary growth in April. Most interest
rates—especially longer-term rates—increased somewhat on balance over the period. Recently, however, Treasury bill rates had
declined, and on the day before this meeting the 3-month bill rate
was somewhat below its level just before the March meeting.
Treasury borrowing remained relatively strong during the intermeeting period. In addition to issuing $6.0 billion of short-term,
cash-management bills, the Treasury raised $300 million of new
FOMC Policy Actions
161
money in its regular weekly bill auctions and more than $3 billion
through sales of 2- and 5-year notes. The Treasury also announced
that on April 19, the day after this meeting, it would auction about
$2.2 billion of 2-year notes to refund the same amount of publicly
held notes maturing on April 30. The Treasury was expected to
announce the terms of its mid-May refunding on April 26.
Mortgage lending in March apparently picked up somewhat from
the reduced pace of January and February, but in the first quarter
as a whole the volume was below the peak reached in the fourth
quarter of 1977. In February, the latest month for which data were
available, mortgage commitment activity at nonbank thrift institutions weakened further as these institutions continued to experience
reduced inflows of deposits. Average interest rates on new commitments for conventional home loans at savings and loan associations edged up further during the inter-meeting period to a level
about 35 basis points above that in late December. Yields in the
secondary markets for mortgages also continued upward, rising to
a level 40 to 50 basis points higher than in late December.
In the Committee's discussion of the economic situation, most
members indicated little or no disagreement with the staff projection
of moderate growth in real GNP over the year ahead, following
the current rebound from the slow pace estimated for the first
quarter. However, several members expressed the view that growth
would be stronger in the current quarter than had been projected.
Of these members, two believed that growth would then slow
significantly in the second half of 1978.
Concerning the current rebound in growth, one member thought
that it could be considerably greater than had been projected, owing
to the dynamics of the process of income creation, and that such
additional strength at the current stage of the business expansion
could have adverse consequences. In any case, he saw grounds
for concern in the way the economic situation might be developing.
One of the members who thought that the near-term strength
in activity would give way to very slow growth in the second half
of the year believed that residential construction, and perhaps also
consumer spending, would be weaker in that period than had been
projected. At the same time, he expected the country's foreign
trade position to be stronger than had been projected. The second
member who anticipated a marked slowing of growth later in the
162
FOMC Policy Actions
year felt that such a development would not be undesirable; he
shared the opinion of another member that the unemployment rate
was approaching the level where unused labor resources of many
kinds might be limited. A third member expressed disagreement
with that view of the unemployment situation. He suggested that
it was not widely held and that any tendency for the unemployment
rate to stabilize near its current level was likely to lead to some
sort of stimulative governmental policy measures.
One member commented that output could continue to grow at
a moderate pace without generating unusual pressures because some
slack still existed in the utilization of industrial capacity and of
the labor force. With respect to the latter, he pointed out that a
large number of persons in public service jobs created under Federal
programs were available for other types of employment, even
though they were not counted among the unemployed. He also
noted that business fixed investment in real terms had not yet
recovered to its previous high and that the inventory situation was
favorable. Nevertheless, in his view, growth in over-all output
might be held down if inflationary expectations led to increases
in interest rates—thereby adversely affecting residential construction and business fixed investment—and if the international
economic situation proved to have an adverse influence on the
domestic economy.
Committee members in general were deeply concerned about
price prospects. Views were expressed to the effect that people
in both the public and private sectors appeared as yet not to be
making the sorts of difficult decisions required to reduce the pace
of the rise in prices; that expectations of a high rate of inflation
seemed to be growing and, as a result, actions of businessmen
and consumers might tend to make their expectations self-fulfilling;
that the rate of increase in wage rates might well accelerate if
prices rose at the projected rate or if the labor contract recently
negotiated in the coal industry were viewed as a pattern-setter;
and that individual efforts to profit from inflation could lead to
some speculative activity. The comment was also made that in
the past several weeks the public's attention increasingly had been
focused on the problem of inflation.
It was noted that the current rise in prices was more rapid than
the rate that had been projected early in 1977. Questions were
FOMC Policy Actions
163
raised as to whether the recent acceleration of the rise was attributable primarily to special factors affecting foods and to the depreciation of the dollar in foreign exchange markets or whether it
reflected more general influences, such as the pressures that frequently emerge in the latter phase of a business upswing or the
effect of the rate of monetary growth during 1977. As at other
recent meetings, the observation was made that monetary policy
could be no more than one element in an effective program to
fight inflation.
At this meeting the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. At its meeting in February
1978 the Committee had specified the following ranges for growth
over the period from the fourth quarter of 1977 to the fourth quarter
of 1978: M-l, 4 to 6V4 per cent; M-2, 6x/2 to 9 per cent; and
M-3, IVi to 10 per cent. The associated range for growth in
commercial bank credit was 7 to 10 per cent. The ranges being
considered at this meeting were for the period from the first quarter
of 1978 to the first quarter of 1979.
In the Committee's discussion of the appropriate ranges, the
members were unanimous in favoring retention of the existing range
for M-l. It was suggested that it might be desirable, for technical
reasons, to reduce the ranges for M-2 and M-3—or the range for
M-3 alone. However, that suggestion had little support; most of
the members advocated retaining the existing ranges for all of these
aggregates.
In recognition of the Committee's continuing objective to move
gradually toward longer-run rates of monetary expansion consistent
with general price stability, several members expressed the view
that it was more important at this time to pursue measures that
would hold monetary growth within the existing ranges than it was
to make further reductions in the ranges themselves. In this connection, it was pointed out that since the fourth quarter of 1976
the rate of growth of M-l had exceeded the 6^2 per cent upper
limit of the longer-run range in every quarter except the one just
ended. In view of that record, it was suggested, the Committee
could most effectively demonstrate its adherence to its longer-run
objective and lend support to the administration's anti-inflation
program by succeeding in holding monetary growth within the
existing range.
164
FOMC Policy Actions
The point was stressed that retention of the existing ranges for
the year ahead should be interpreted as constituting a tighter
monetary posture than had been contemplated when the ranges were
adopted in February 1978. It was observed that since then the
prospective rate of inflation had increased—which implied, other
things being equal, that nominal GNP and the associated transactions demand for money would expand more rapidly than had been
anticipated at that time. It was recognized that such an implication
could form the basis of an argument for raising the 12-month range
for M-l, or at least its upper limit. It was suggested, however,
that the ultimate conclusion of such an argument was a monetary
policy that always accommodated the existing rate of inflation and
that could be expected to lead to still higher rates of inflation and
still more rapid monetary growth.
In the discussion of the longer-run ranges for M-2 and M-3,
it was observed that inflows of time and savings deposits to
commercial banks and to nonbank thrift institutions might continue
to be impeded by the margin by which market interest rates
exceeded the Regulation Q ceiling rates on deposits other than
large-denomination CD's. It was suggested, therefore, that a reduction in the range for M-3, and perhaps in the ranges for both
M-2 and M-3, might be viewed as consistent with a retention of
the existing range for M-l. In opposition to this view, it was noted
that commercial banks would probably continue to expand substantially the outstanding volume of large-denomination CD's not
subject to rate ceilings and that the nonbank thrift institutions also
were becoming more aggressive in selling such instruments. It was
recognized, moreover, that the probability of attaining growth rates
for M-2 and M-3 within the existing ranges over the coming year
could be influenced by an increase in the Regulation Q ceilings
on deposit rates.
At the conclusion of its discussion the Committee decided to
retain the existing ranges for the monetary aggregates. Thus, the
ranges for the period from the first quarter of 1978 to the first
quarter of 1979 were 4 to 6V2 per cent for M-l, 6V2 to 9 per
cent for M-2, and IV2 to 10 per cent for M-3. The associated
range for growth in commercial bank credit was set at IV2 to lOVi
per cent. It was agreed that the longer-run ranges, as well as the
particular aggregates for which such ranges were specified, would
FOMC Policy Actions
165
be subject to review and modification at subsequent meetings. It
was also understood that short-run factors might cause growth rates
from month to month to fall outside the ranges anticipated for the
year ahead.
The Committee adopted the following ranges for rates of growth
in monetary aggregates for the period from the first quarter of 1978
to the first quarter of 1979: M-l, 4 to 6]/2 per cent; M-2, 6V2 to
9 per cent; and M-3, IV2 to 10 per cent. The associated range for
bank credit is IV2 to 10!/2 per cent.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Wallich, Willes, and Winn. Votes against
this action: None.
In considering the language of the domestic policy directive to
be adopted at this meeting, Committee members agreed that in
the statement of the Committee's general policy stance in the fourth
paragraph more weight should be given to the objective of resisting
inflationary pressures by citing that objective first. As revised, the
statement said that 4tit is the policy of the Federal Open Market
Committee to foster bank reserve and other financial conditions
that will resist inflationary pressures while encouraging continued
moderate economic expansion and contributing to a sustainable
pattern of international transactions."
In the discussion of policy for the period immediately ahead,
members of the Committee took account of the likelihood that the
demand for money would expand significantly in association with
the current rebound in economic activity and of the early indications
that M-l was growing rapidly in April. All of the members agreed
that operations designed to achieve firmer money market conditions
needed to be undertaken promptly if M-l growth were to be held
to a path reasonably consistent with the Committee's longer-run
range. At the same time the members felt that, pending additional
evidence on the pace of monetary expansion, the degree of firming
sought should be modest.
Although members of the Committee were in general agreement
on objectives for the period immediately ahead, they differed
somewhat in their preferences for operating specifications. For the
annual rate of growth in M-l over the April-May period, most
166
FOMC Policy Actions
members favored ranges of 4 to 8 per cent or 5 to 9 per cent,
but a few expressed a preference for 5Vi to 9Vi per cent. Two
members advocated wider ranges because of the month-to-month
volatility of the measure of monetary growth; one suggested a range
of 4 to. 9 per cent, and the other a range of 2 to 8 per cent. For
M-2 most members advocated ranges of 5lA to 9x/z per cent or
6 to 10 per cent, but there was some sentiment for slightly lower
ranges.
All of the members favored directing open market operations
during the coming inter-meeting period initially toward a Federal
funds rate slightly above the current level of 63A per cent. Views
differed somewhat with respect to the degree of leeway for operations during the inter-meeting period in the event that growth in
the monetary aggregates appeared to be deviating significantly from
the midpoints of the specified ranges. Most members favored a
range for the weekly-average Federal funds rate extending from
6% to 11A or to llh per cent, but there was some sentiment for
a lower limit of 6% per cent. Those advocating a lower limit of
6% per cent suggested that any decline in the weekly-average funds
rate from the current level would be inappropriate, particularly in
view of recent developments in foreign exchange markets. At the
same time several members suggested that if the Committee allowed
for an increase in the funds rate of as much as % of a percentage
point over the inter-meeting period by setting the upper limit of
the range at IV2 per cent, it should also reach an understanding
that operations would not be directed toward achieving a rate above
IVA per cent before the Committee had had an opportunity for
further consultation.
At the conclusion of the discussion the Committee decided that
growth in M-l and M-2 over the April-May period at annual rates
within ranges of 4 to 8% per cent and 5V& to 9XA per cent,
respectively, would be appropriate. It was understood that in
assessing the behavior of these aggregates the Manager should
continue to give approximately equal weight to the behavior of
M-l and M-2.
In the judgment of the Committee such growth rates were likely
to be associated with a weekly-average Federal funds rate slightly
above the current level of 63A per cent. The members agreed that
if growth rates of the aggregates over the 2-month period appeared
FOMC Policy Actions
167
to be deviating significantly from the midpoints of the indicated
ranges, the operational objective for the weekly-average Federal
funds rate should be modified in an orderly fashion within a range
of 6% to IVi per cent. It was also agreed, however, that an increase
in the rate above 1XA per cent would not be sought until the
Committee had had an opportunity for further consultation.
As customary, it was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives. The members also agreed that in the conduct
of day-to-day operations, account should be taken of emerging
financial market conditions, including the conditions in foreign
exchange markets.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in real output of goods and services was small in the first quarter,
owing in part to the unusually severe weather and the lengthy strike
in coal mining, but that economic activity was rebounding in the
latter part of the period. In March industrial production and nonfarm
payroll employment increased sharply further. The unemployment
rate edged up from 6.1 to 6.2 per cent, as the civilian labor force
expanded substantially. Retail sales recovered much more in February than had been reported earlier, and sales rose considerably
further in March. The pace of the rise in wholesale prices remained
rapid, reflecting further large increases in farm products and processed foods. The index of average hourly earnings accelerated in
the first quarter, largely because of the increase in minimum wages
at the beginning of the year.
The trade-weighted value of the dollar against major foreign
currencies declined sharply after the March 31 announcement of
a very large increase in the U.S. foreign trade deficit for February.
But over the past week the dollar has recovered to about its level
of 4 weeks ago.
M-\, which had declined in February, rose moderately in March.
Inflows to banks of time and savings deposits other than negotiable
CD's and inflows to nonbank thrift institutions remained slow. Most
market interest rates, especially longer-term rates, have increased
somewhat on balance in recent weeks.
In light of the foregoing developments, it is the policy of the
168
FOMC Policy Actions
Federal Open Market Committee to foster bank reserve and other
financial conditions that will resist inflationary pressures while
encouraging continued moderate economic expansion and contributing to a sustainable pattern of international transactions.
Growth of M-l, M-2, and M-3 within ranges of 4 to 6V2 per
cent, 6V2 to 9 per cent, and IV2 to 10 per cent, respectively, from
the first quarter of 1978 to the first quarter of 1979 appears to be
consistent with these objectives. The associated range for bank credit
is IV2 to XOVi per cent. These ranges are subject to reconsideration
at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, it expects the annual growth rates
over the April—May period to be within ranges of 4 to SV2 per
cent for M-l and 5Vi to 9V6 per cent for M-2. In the judgment
of the Committee such growth rates are likely to be associated with
a weekly-average Federal funds rate slightly above the current level.
If, giving approximately equal weight to M-l and M-2, it appears
that growth rates over the 2-month period will deviate significantly
from the midpoints of the indicated ranges, the operational objective
for the Federal funds rate shall be modified in an orderly fashion
within a range of 6% to IV2 per cent. In the conduct of day-to-day
operations, account shall be taken of emerging financial market
conditions, including the conditions in foreign exchange markets.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Wallich, Willes, and Winn. Votes against
this action: None.
Subsequent to the meeting, on May 5, a telephone conference
meeting was held to consult about System open market operations,
pursuant to the decision at the April meeting that an increase in
the Federal funds rate above 11A per cent, within the specified
range of 6% to IV2 per cent, would not be sought until the
Committee had had an opportunity for further consultation.
The latest estimates had indicated that M-1 had grown at a very
FOMC Policy Actions
169
rapid pace in April. For the April-May period staff projections
had suggested that the annual rate of growth in M-l would be
well above the upper limit of the range of 4 to 8V2 per cent specified
by the Committee in the next-to-last paragraph of the domestic
policy directive issued at the meeting of April 18. Growth in M-2
for the 2-month period had been projected to be at about the upper
limit of the Committee's range of 5J/2 to 9Vi per cent for that
aggregate. During the preceding week the Federal funds rate had
averaged about 11A per cent, xh of a percentage point above the
level prevailing at the time of the April meeting.
It was reported during the telephone conference that the Commerce Department's preliminary estimates indicated that real GNP
had declined at an annual rate of 0.6 per cent in the first quarter,
a somewhat weaker performance than had been anticipated at the
time of the April meeting, but that real GNP appeared to be rising
more rapidly in the second quarter than the staff had projected
at that time. The behavior of GNP in both quarters was importantly
affected by temporary influences.
The acceleration of growth of nominal GNP in the current quarter
from the reduced pace in the first quarter appeared to be the main
factor explaining the sharp acceleration of monetary growth in
April. Other transitory forces—specifically, mobilization of cash
by the public to make unusually large payments of Federal income
taxes not withheld, somewhat slower processing of tax returns,
and the upsurge in the volume of trading on the stock exchanges—
might also have contributed to the April rate of monetary growth.
In its discussion the Committee agreed that, while the firming
in money market conditions that had been accomplished since the
meeting of April 18 had clearly been appropriate, there was some
question as to whether further firming at this point would be
desirable. Specifically, the Committee concluded that it would be
appropriate to await some further evidence on the economic outlook
and some indication of the extent to which the April surge in M-l
would subside.
At the conclusion of the discussion the Committee directed the
Manager, until further instructed, to seek to maintain the weeklyaverage Federal funds rate at about 1XA per cent, with any deviations
tending to be in the direction of higher rather than lower funds
rates.
170
FOMC Policy Actions
On May 5, 1978, the Committee modified the domestic policy
directive adopted at its meeting of April 18, 1978, to direct the
Desk, until further instructed, to seek to maintain the weeklyaverage Federal funds rate at about the prevailing level of 714 per
cent, with any deviations tending to be in the direction of higher
rather than lower funds rates.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Gardner, Jackson, Partee, Wallich, and
Winn. Votes against this action: Messrs. Black and
Willes. Absent and not voting: Messrs. Coldwell
and Eastburn. (Mr. Black voted as alternate for Mr.
Eastburn.)
Messrs. Black and Willes dissented from this action because
they preferred to make use of the full range that had been specified
for the Federal funds rate. They believed that, given the accelerated
pace of expansion in nominal GNP, growth of both M-\ and M-2
would be subjected to persistent upward pressure throughout the
rest of the second quarter and that a further upward adjustment
in the funds rate at this time would be helpful in moderating such
pressures and, like the firming that had already occurred, would
be regarded as a positive step in resisting inflationary pressures.
FOMC Policy Actions
171
MEETING HELD ON MAY 16, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services was growing at a rapid rate in the current
quarter, after having declined somewhat in the first quarter when
activity was adversely affected by the unusually severe weather
and the lengthy strike in coal mining. The rise in the fixed-weighted
price index for gross domestic business product—which had
stepped up in the first quarter to an annual rate of 6.6 per cent
from 5.4 per cent in the fourth quarter of 1977—appeared to be
still faster in the current quarter.
Staff projections continued to suggest that output would grow
at a moderate pace over the year ahead, although the projected
rate of growth was slightly less than that of a month earlier. It
was expected that real consumption expenditures and business fixed
investment would expand at moderate rates but that residential
construction would decline throughout the period. The projections
also suggested that the rate of increase in prices over the year
ahead would be significantly below the rate in the current quarter
but would remain somewhat above that in the first quarter. It was
also anticipated, as it had been 4 weeks earlier, that the unemployment rate would decline gradually over the period.
In April the index of industrial production increased about 1
per cent to a level about 2lA per cent above that in November,
before activity was adversely affected by the weather and the coal
strike. A significant part of the April increase in the index was
attributable to recovery in output of coal and steel from reduced
levels, but assemblies of autos rose further to an advanced level,
in response to rising sales of domestic models, and production of
business equipment continued to expand.
Nonfarm payroll employment continued to rise at a rapid pace
in April, even after allowance for the return to work of large
numbers of coal miners, and gains again were widespread among
industry groups. The unemployment rate declined 0.2 of a percentage
point to 6.0 per cent.
172
FOMC Policy Actions
Total retail sales expanded substantially further in April to a
level 33A per cent above the monthly average for the first quarter.
Unit sales of new automobiles, already at an advanced rate in
March, edged up further in April.
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of about 9Vi per cent in
April, little changed from the rapid rate of advance during the
first quarter. The wholesale price index for all commodities continued its rapid rise in April, reflecting chiefly further large increases
in prices of farm products and foods. In March the consumer price
index for all urban consumers had continued to advance at a
considerably faster pace than in the second half of 1977, owing
not only to additional large increases in foods but also to sizable
increases in the apparel and housing components.
In foreign exchange markets the trade-weighted value of the
dollar rose about 13A per cent over the inter-meeting period,
recovering to the level that had prevailed at the start of the year.
While appreciating against all major currencies except the Canadian
dollar, the dollar advanced most against the Swiss franc and the
German mark.
The U.S. foreign trade deficit declined considerably in March,
but because it had been at a record level in February, the deficit
in the first quarter as a whole was greater than the large deficit
incurred in the final quarter of 1977. In the first quarter the value
of exports recovered from a fourth-quarter level that had been
somewhat depressed by the dock strike. However, the value of
imports expanded substantially, despite a decline in imports of
petroleum.
The rate of expansion in total bank credit accelerated sharply
in April, reflecting an unusually large increase in security loans
and sizable additions to bank holdings of both U.S. Government
and other securities. Business and real estate loans grew at about
the same pace as in March. Outstanding commercial paper of
nonfinancial businesses rose substantially in April, although by
much less than in March. The sum of business loans (net of bankers
acceptances) and nonfinancial commercial paper grew at an annual
rate of nearly 25 per cent, compared with about 28 per cent in
March.
The narrowly defined money supply (M-l), which had grown
FOMC Policy Actions
173
at an annual rate of 5 per cent in the first quarter on a quarterlyaverage basis, expanded at a rate of 19 per cent in April. The
renewed strength in economic activity increased the demand for
money, but the high rate of monetary growth in April was also
influenced by the public's mobilization of cash for unusually large
payments of Federal income taxes not withheld and by relatively
slow processing of tax returns. The latest weekly data suggested
that growth of M-l would slow substantially in May.
Growth in M-2 and M-3 also accelerated in April but by much
less than growth in M-l because inflows of the interest-bearing
deposits included in the broader aggregates remained slow. Thus,
M-2 and M-3 grew in April at annual rates of about WA and
10 per cent, respectively, compared with about 6V£ and IV2 per
cent in the first quarter.
At its meeting on April 18 the Committee had decided that during
the April-May period growth in M-l and M-2 within ranges of
4 to %lh and 5xh to 9V2 per cent, respectively, would be appropriate,
and it had judged that these growth rates were likely to be associated
with a weekly-average Federal funds rate slightly above the level
of 6% per cent prevailing at that time. The Committee had agreed
that if growth rates in the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of 6% to IV2 per cent. It was also agreed, however, that
an increase in the rate above 11A per cent would not be sought
until the Committee had had an opportunity for further consultation.
In accordance with the Committee's decision, the Manager of
the System Open Market Account began immediately after the April
meeting to seek bank reserve conditions consistent with a firming
of the Federal funds rate to around 7 per cent. As the inter-meeting
period progressed, data becoming available suggested that over the
April-May period M-l would grow at a rate close to or above
the upper limit of the range specified by the Committee and that
M-2 would grow at a rate in the upper part of the range specified
for that aggregate. Therefore, the Manager sought conditions consistent with a Federal funds rate of 1XA per cent, and the rate rose
to about that level in the statement week ending May 3.
In early May estimates indicated that M-l had grown at a very
174
FOMC Policy Actions
rapid pace in April, and staff projections suggested that for the
April-May period, growth in M-l would be well above the upper
limit of its range and growth in M-2 at about its upper limit. On
May 5 the Committee voted to direct the Manager, until further
instructed, to seek to maintain the weekly-average Federal funds
rate at about 11A per cent, with any deviations tending to be in
the direction of higher rather than lower funds rates. At the time
of this meeting the funds rate was in the area of 11A to 7% per
cent.
The rise in the Federal funds rate was accompanied by upward
pressures on interest rates in general. Increases in short-term market
rates ranged from about 20 to 45 basis points and those in longerterm rates from about 10 to 35 basis points. In early May commercial banks raised the rate on loans to prime business borrowers
from 8 to 8!/i per cent.
On May 11 the Board of Governors announced its approval of
actions by directors of all 12 Federal Reserve Banks raising the
discount rate from 6V2 to 7 per cent. In announcing the approval,
the Board stated that the action had been taken in recognition of
increases that had already occurred in other short-term interest rates
and that it would bring the discount rate into closer alignment with
short-term rates generally.
Mortgage lending in April apparently was at about the pace of
the first quarter, which was below the peak reached in the fourth
quarter of 1977. In March, the latest month for which data were
available, mortgage commitments outstanding at savings and loan
associations continued to decline, as new commitments remained
near the reduced rate in February and takedowns of outstanding
commitments picked up. During the inter-meeting period, there
was a further rise both in average interest rates on new commitments
for conventional home loans at those associations and in yields
in the secondary markets for mortgages.
In the Committee's discussion of the economic situation and
outlook, the members generally agreed that real output of goods
and services was growing rapidly in the current quarter, but they
differed on the likely course of activity in succeeding quarters.
Many members concurred with the staff's view that output would
grow at a moderate pace over the year ahead, but some thought
that the pace would be a little faster while others thought that it
FOMC Policy Actions
175
would be a little slower. A few members observed that the surge
in the current quarter could generate forces that would sustain
growth at a fairly rapid pace for a while but might then bring
on a period of adjustment at some point in 1979. However, another
member said he saw no evidence suggesting that such forces were
likely to develop.
To some extent differences of opinion concerning developments
in the period ahead reflected varying assessments of the likely
behavior of consumers. A number of members anticipated relatively
strong consumer demand. One observed that the demand for new
domestic autos would be sustained at fairly high levels by various
new features, including greater fuel efficiency. On the other hand,
one member expressed the view that demands by consumers would
be weakened in the second half of the year by their accumulation
of debt.
It was stressed that consumer spending was particularly difficult
to forecast because of uncertainty concerning consumers' responses
to inflation. One member observed that, in contrast with other recent
episodes of inflation in this country, consumers now appeared to
be more inclined to buy in anticipation of price increases. A second
member suggested that consumers might respond to the current
inflation by expanding credit-financed expenditures for durable
goods while economizing on expenditures for nondurable goods
and services. Another member believed that inflation at the rates
generally expected would have an adverse impact on confidence
sooner or later, causing consumers and others to retrench.
Some differences of opinion were expressed concerning other
sectors as well. Thus, one member thought that housing activity
would be stronger over the year ahead than the staff projections
suggested, but another believed that it would be weaker. The view
was expressed that business fixed investment currently was gaining
strength, but it was also observed that increases in interest rates
might dampen such investment in 1979. With respect to business
inventories, it was suggested that an excessive build-up could
develop in the near future, setting the stage for a subsequent
correction.
Committee members were deeply concerned about the recent
acceleration of inflation and about prospects for prices. Several
expressed the view that the rise was likely to be more rapid than
176
FOMC Policy Actions
projected by the staff. Thus, it was suggested that the supply-related
increase in prices of foods over the remainder of 1978 would exceed
the staff projection and that the effect on the over-all price level
this year would influence the outcome of labor contract negotiations
in 1979. It was also suggested that pressures had begun to develop
on labor resources, particularly skilled labor, and on some types
of capacity. A few members observed that in these circumstances
it would be desirable for growth in real output to diminish in the
second half of this year toward a rate that could be sustained for
the longer term.
At its meeting in April the Committee had agreed that from
the first quarter of 1978 to the first quarter of 1979 average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to
&/i per cent; M-2, 6V2 to 9 per cent; and M-3, IV2 to 10 per
cent. The associated range for the rate of growth in commercial
bank credit was IV2 to 10V2 per cent. It had also been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
Committee members differed somewhat in their judgments concerning the course of policy for the period immediately ahead,
in part because of varying views about the current and prospective
economic situation and in part because of differing judgments about
the appropriate response to the surge of M-l in April. The differences essentially concerned the degree of any further firming
of money market conditions that might be pursued during the next
few weeks. No member advocated an easing of money market
conditions.
Several reasons were advanced for pursuing a very cautious
approach to any further firming at this time, including the fact
that transitory influences had contributed to the April surge in M-1.
It was observed that, despite the surge, the annual rate of growth
of M-l, and also of M-2, over the 3, 6, and 12 months ending
in April had been lower than growth over the four quarters of
1977. It was also noted that a significant degree of firming of money
market conditions had been achieved since the April meeting of
the Committee. Moreover, it was pointed out, the administration's
new tax proposals—which had just been announced—were consid-
FOMC Policy Actions
177
erably less stimulative than the earlier ones, particularly as they
affected the fourth quarter of 1978. It was suggested that further
significant monetary firming at this time might risk provoking
dislocations in financial markets that would contribute eventually
to the onset of a downturn in economic activity. Finally, it was
argued, a very cautious approach would give the Committee time
to evaluate incoming evidence concerning both the underlying
strength of economic activity and the consequences of the firming
that had already been achieved.
In support of a somewhat more restrictive posture, it was suggested that the relatively low rate of growth of M-\ in the first
quarter of 1978 represented an aberration related to the temporary
weakening in the pace of economic activity and that, abstracting
from that aberration, the trend of monetary expansion had accelerated. Views were expressed to the effect that further significant
firming of money market conditions in the coming period in order
to moderate growth of the monetary aggregates would have a
beneficial effect on public confidence; that partly for that reason,
such firming would reduce the chances of a further build-up of
inflationary forces, and that it would increase the chances of
achieving a rate of growth in real output that could be sustained
for the longer term. In this connection, it was suggested that at
times in the past when high levels of resource use had been
approached, lags in the application of monetary restraint had
contributed to bringing on a downturn in economic activity and
to increasing the depth and duration of the downturn. The comment
was made that if further significant action were not taken in the
present circumstances, current monetary policy might be found in
retrospect to have been procyclical.
With respect to operating specifications for the period ahead,
most members preferred ranges of tolerance for the annual rate
of growth in M-l over the May-June period that more or less
encompassed the Committee's longer-run range of 4 to 6V2 per
cent; the preferences centered on 3 to 8 per cent. However, some
members preferred to widen the range by reducing the lower limit,
on the ground that, given the April surge, growth somewhat slower
than 3 per cent could be tolerated for a time and should not form
the basis for an easing of money market conditions. One member,
believing that the upper limit of the 2-month range should not be
178
FOMC Policy Actions
above 6V1 per cent in view of the April surge, favored a range
of 2Vi to 6V2 per cent. For M-2 most members advocated a range
of 4 to 9 per cent, but there was some sentiment for ranges of
both 5 to 9 and 4 to 8 per cent.
All of the members favored directing operations during the
coming inter-meeting period initially toward a Federal funds rate
slightly above the current rate, which was in the area of 11A to
7% per cent. Views differed somewhat with respect to the degree
of leeway for operations during the inter-meeting period in the
event that growth in the monetary aggregates appeared to be
deviating significantly from the midpoints of the specified ranges.
Most members favored a range for the weekly-average Federal
funds rate extending from 11A to 13A per cent, but there was some
sentiment for an upper limit of 8 per cent.
At the conclusion of the discussion the Committee decided that
the ranges of tolerance for the annual rates of growth in M-l and
M-2 over the May-June period should be 3 to 8 and 4 to 9 per
cent, respectively. It was understood that in assessing the behavior
of these aggregates the Manager should continue to give approximately equal weight to the behavior of M-l and M-2.
In the judgment of the Committee such growth rates were likely
to be associated with a weekly-average Federal funds rate slightly
above the current level of 11A to 7% per cent. The members agreed
that if growth rates of the aggregates over the 2-month period
appeared to be deviating significantly from the midpoints of the
indicated ranges, the operational objective for the weekly-average
Federal funds rate should be modified in an orderly fashion within
a range of 11A to 7% per cent.
As is customary, it was understood that the Chairman might
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives. The members also agreed that in the conduct
of day-to-day operations, account should be taken of emerging
financial market conditions.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services is growing at a rapid rate in the current quarter,
FOMC Policy Actions
179
after having declined somewhat in the first quarter when activity
was adversely affected by the unusually severe weather and the
lengthy strike in coal mining. In April retail sales, industrial production, and nonfarm payroll employment increased substantially
further and the unemployment rate declined from 6.2 to 6.0 per
cent. The pace of the rise in wholesale prices remained rapid,
reflecting mainly further large increases in farm products and processed foods. The index of average hourly earnings continued to
advance at about the fast pace that it had on the average during
the first quarter.
The trade-weighted value of the dollar against major foreign
currencies has risen over the past 4 weeks to the level prevailing
at the beginning of the year. The trade deficit in the first quarter
widened substantially from the already large deficit recorded in the
final quarter of 1977.
M-l, which had grown moderately in the first quarter, rose sharply
in April. Growth in M-2 and M-3 also stepped up but much less
than growth in M-1, because inflows of the interest-bearing deposits
included in these aggregates remained slow. Market interest rates
have increased in recent weeks. On May 11 an increase in Federal
Reserve discount rates from 6V2 to 7 per cent was announced.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster bank reserve and other
financial conditions that will resist inflationary pressures while
encouraging continued moderate economic expansion and contributing to a sustainable pattern of international transactions.
At its meeting on April 18, 1978, the Committee agreed that
growth of M-l, M-2, and M-3 within ranges of 4 to 6V& per cent,
6V2 to 9 per cent, and IV2 to 10 per cent, respectively, from the
first quarter of 1978 to the first quarter of 1979 appears to be
consistent with these objectives. The associated range for bank credit
is IV2 to lO1/^ per cent. These ranges are subject to reconsideration
at any time as conditions warrant.
The Committee seeks to encourage near-term rates of growth in
M-l and M-2 on a path believed to be reasonably consistent with
the longer-run ranges for monetary aggregates cited in the preceding
paragraph. Specifically, at present, the ranges of tolerance for the
annual growth rates over the May-June period will be 3 to 8 per
cent for M-l and 4 to 9 per cent for M-2. In the judgment of
the Committee such growth rates are likely to be associated with
a weekly-average Federal funds rate slightly above the current level.
If, giving approximately equal weight to M-l and M-2, it appears
180
FOMC Policy Actions
that growth rates over the 2-month period will deviate significantly
from the midpoints of the indicated ranges, the operational objective
for the Federal funds rate shall be modified in an orderly fashion
within a range of 7lA to 1% per cent. In the conduct of day-to-day
operations, account shall be taken of emerging financial market
conditions.
If it appears during the period before the next meeting that the
operating constraints specified above are proving to be significantly
inconsistent, the Manager is promptly to notify the Chairman who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Wallich, and Winn. Vote against this action:
Mr. Willes.
Mr. Willes dissented from this action because he favored more
vigorous measures to reduce the rate of monetary growth, given
the acceleration of the rate of inflation and its adverse effect on
consumer and business confidence and spending plans. Specifically,
he preferred a range of 2Vi to 6V2 per cent for the annual rate
of growth in M-l over the May-June period and an inter-meeting
range of 11A to 8 per cent for the Federal funds rate.
Subsequent to the meeting, on June 15, revised projections based
on newly available data suggested that M-l would grow in the
May—June period at an annual rate of about IVi per cent, near
the upper limit of the range of tolerance of 3 to 8 per cent specified
in the Committee's directive. M-2 also was projected to grow in
the 2-month period at a IV2 per cent annual rate, but this was
well within the range of 4 to 9 per cent specified for that aggregate.
In general, the strength of the aggregates suggested a need for
Committee consultation, looking toward further instruction to the
Desk. In view of the proximity of the Committee meeting scheduled
for June 20, Chairman Miller recommended that the Desk be
instructed to continue aiming for a Federal funds rate of IV2 per
cent at this time.
On June 16, 1978, the Committee modified the domestic policy
directive adopted at its meeting on May 16, 1978, to instruct the
Desk to continue aiming for a weekly-average Federal funds rate
of IV2 per cent at this time.
FOMC Policy Actions
181
Votes for this action: Messrs. Miller, Baughman,
Coldwell, Eastburn, Gardner, Partee, Wallich,
Willes, Winn, and Timlen. Votes against this action: None. Absent and not voting: Messrs. Volcker
and Jackson. (Mr. Timlen voted as alternate for Mr.
Volcker.)
2. Authorization for Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the Federal Reserve Bank of New York, for
the System Open Market Account, to maintain an over-all open
position in all foreign currencies not to exceed $1.0 billion, unless
a larger position is expressly authorized by the Committee. On
March 21, 1978, the Committee had authorized an open position
of $2.25 billion in view of the scale of recent and potential Federal
Reserve operations in the foreign exchange markets undertaken
pursuant to the Committee's foreign currency directive.
At this meeting the Committee voted to reduce the authorized
open position to $2 billion. This action was taken in view of the
decrease in the open position that had occurred in recent weeks.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Wallich, Willes, and Winn. Votes against
this action: None.
182
FOMC Policy Actions
MEETING HELD ON JUNE 20, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that output
of goods and services had expanded rapidly on the average in the
second quarter, reflecting the economy's rebound in late winter
and early spring from the effects of the unusually severe winter
weather and the lengthy coal strike. More recently, however, the
rate of expansion appeared to have slowed. The rise in average
prices—as measured by the fixed-weighted price index for gross
domestic business product—accelerated markedly in the second
quarter, due in large measure to substantial increases in food prices.
Staff projections continued to suggest moderate expansion in
output over the year ahead. The anticipated rate of growth was
slightly lower than that projected a month earlier, mainly because
the assumptions regarding fiscal policy were modified to reflect
the administration's decision to delay the proposed tax cut from
October 1 to January 1 and to reduce its size. The projected rate
of price advance had been raised slightly from that of a month
earlier, but it was still well below the rate in the second quarter.
The projections also suggested that the unemployment rate would
decline a bit further over the coming year.
Growth in production and employment moderated in May from
the rapid rates of preceding months. Thus, the industrial production
index increased 0.6 per cent, compared with gains of 1.2 and 1.4
per cent in March and April, respectively; and the rise in nonfarm
payroll employment in May was less than one-half the average
increase earlier in the year. In manufacturing, the gain in employment was relatively small and the average workweek declined. The
labor force continued to grow substantially, and the unemployment
rate edged up to 6.1 per cent from 6.0 per cent in April.
Total retail sales were about unchanged in May, following 3
months of exceptionally large gains. Unit sales of new automobiles
FOMC Policy Actions
183
rose slightly further to a new high for the current expansion. It
appeared that some consumers were buying new cars in anticipation
of further price increases.
The latest Department of Commerce survey of business spending
plans, taken in late April and May, suggested that outlays for plant
and equipment would expand 11.2 per cent in 1978; this rate was
marginally above that reported in the February survey. Other indicators of capital spending plans, such as manufacturers' capital appropriations, contracts for commercial and industrial buildings, and
new orders for nondefense capital goods, appeared generally consistent with continued moderate expansion in investment outlays.
The index of average hourly earnings for private nonfarm production workers rose at an annual rate of about 3 per cent in May,
following increases averaging close to 10 per cent in earlier months
of 1978. For the first 5 months of the year the index had increased
at a somewhat faster rate than it had on the average in 1977. The
advance in the wholesale price index for all commodities also
slowed in May, reflecting smaller increases in prices of farm and
food products as of the time of the survey. Later in the month,
however, prices of a number of farm products advanced. In April
the consumer price index for all urban consumers rose at an
accelerated annual rate of nearly 11 per cent, owing to further
large increases in food prices and to higher service costs, especially
those relating to homeownership. In general, prices had increased
considerably faster in early 1978 than during the year 1977.
In foreign exchange markets the trade-weighted value of the
dollar reached a peak for 1978 in late May. Subsequently the dollar
declined by about 2 per cent, but it remained above the low for
the year that had been recorded in early April.
The renewed downward pressure on the dollar appeared to reflect
market concern about the high rate of inflation in the United States
relative to rates in other industrial countries and about the continuation of large deficits in U.S. foreign trade and surpluses in the
trade of Germany and Japan. The deficit in April was about the
same as that in March but lower than the high level of the first
quarter. Both exports and imports rose considerably in April.
The rate of expansion in total bank credit, which had accelerated
sharply in April, slackened somewhat in May but remained above
the average for other recent months. Bank holdings of securities
184
FOMC Policy Actions
changed little, but total loans, led by a surge in business loans,
grew at an exceptional pace. Outstanding commercial paper of
nonfinancial businesses declined slightly in May.
Growth in the narrowly defined money supply (M-l) moderated
in May to an annual rate of about 6!/2 per cent from the extraordinarily rapid rate of 19 per cent in April. Growth in M-2 and
M-3 also slowed in May, reflecting the deceleration in M-l. Inflows
of the interest-bearing deposits included in M-2 generally were
greater than in April as commercial banks issued a substantial
volume of large-denomination time deposits to finance the sharp
increase in business loans. However, inflows of funds into savings
deposits and small-denomination time deposits remained slow both
at banks and at thrift institutions. Preliminary data for the first
part of June suggested that growth in M-1 and M-2 would accelerate
in that month.
At its meeting on May 16 the Committee had decided that the
ranges of tolerance for the annual rates of growth in M-l and M-2
during the May-June period should be 3 to 8 per cent and 4 to
9 per cent, respectively, and it had judged that such growth rates
were likely to be associated with a weekly-average Federal funds
rate slightly above the level of 11A to 73/s per cent prevailing at
that time. The Committee had agreed that if growth rates in the
aggregates over the 2-month period appeared to be deviating significantly from the midpoints of the indicated ranges, the operational
objective for the weekly-average Federal funds rate should be modified in an orderly fashion within a range of 11A to 13A per cent.
In accordance with the Committee's decision, the Manager of
the System Open Market Account began after the May meeting
to seek bank reserve conditions consistent with a firming of the
Federal funds rate to around IVi per cent. Incoming data throughout
most of the inter-meeting period suggested that growth in the
monetary aggregates would be well within the ranges specified by
the Committee, and the Manager continued to seek conditions
consistent with a Federal funds rate of IVi per cent.
Data that became available a few days before this meeting
suggested that M-l would grow in the May-June period at an annual
rate of about IV2 per cent, close to the upper limit of its range.
M-2 also was projected to grow in the 2-month period at a IV2
per cent rate, in the upper half of the range specified for that
FOMC Policy Actions
185
aggregate. These data suggested the need for Committee consultation, and on June 16, in view of the proximity of the meeting
scheduled for June 20, the Committee voted to direct the Manager
to continue for the time being to aim for a Federal funds rate of
IV2 per cent.
Other market interest rates had risen further in recent weeks.
Reflecting not only the rise in the funds rate but also substantial
business credit demands, market rates on short-term securities had
increased from 30 to 60 basis points since mid-May, and commercial banks had raised the rate on loans to prime business borrowers
in two steps from 8V4 to 8% per cent. Yields on long-term securities
rose 5 to 20 basis points over the same period, apparently in
response to the rise in short-term rates and investor concerns about
the prospects for inflation.
Conditions in mortgage markets had continued to tighten recently
as strong demands for credit pressed against reduced availability
of funds at lending institutions. At savings and loan associations,
net mortgage lending activity in April—the latest month for which
data were available—was close to its reduced rate in the weatheraffected first quarter, and mortgage commitments outstanding declined further. During the inter-meeting period there were further
increases in interest rates on new commitments for conventional
home loans at the associations and, in most regions, a tightening
of nonrate terms as well. Yields in the secondary market for home
mortgages also had generally increased in recent weeks.
In the Committee's discussion of the economic situation and
outlook, the members generally agreed that the growth in real
output of goods and services over the coming three quarters would
be substantially slower on the average than it had been in the
unusually strong quarter just ending. However, they still expected
real GNP to grow at a moderate, average rate during the year ending
with the second quarter of 1979. While some members thought
that average growth for that period would probably be at or a little
below the rate projected by the staff, others expected somewhat
faster growth. A majority feared that the rise in prices would be
greater than the staff anticipated. Most members thought that the
unemployment rate at the end of the period would be little changed
from the rates recently prevailing.
With respect to the months immediately ahead, a majority of
186
FOMC Policy Actions
the Committee members thought that the economy was likely to
show more strength than the staff projection suggested. These
members noted that both consumer and business sentiment appeared
to be strong, and they interpreted the latest data on consumer
behavior as evidence that many households were adopting a speculative approach to spending—anticipating needs for housing and
other durables, and in the process adding willingly to already heavy
debt burdens. While these members acknowledged that national
economic data did not yet suggest similar anticipatory spending
on the part of businesses, several noted that many businessmen
appeared to be optimistic about the prospects for their own firms
and industries and that such optimism might soon be reflected in
a step-up in over-all business inventory accumulation and investment outlays. A number of these members expressed concern about
the indications that inflationary expectations were strengthening and
that both business and labor were intensifying their efforts to protect
themselves through price and wage increases.
Two of the members who anticipated relatively strong growth
in the near term thought that the economy was likely to generate
sufficient momentum to maintain a favorable rate of expansion
beyond mid-1979. Others in this group were concerned, however, that
insofar as near-term spending of consumers and businesses embodied
speculative tendencies, the resulting economic distortions might lead
to significantly slower growth in 1979.
Of the Committee members who anticipated less near-term
strength in the economy, some suggested that current business
optimism might well reflect an overemphasis on the sharp rebound
that had occurred in recent months rather than a considered assessment by businessmen of prospects for the future. These members
thought it unlikely that growth in consumer outlays would continue
at the recent rate, and they saw no obvious source of offsetting
strength. They expected outlays for housing to slacken; they noted
that surveys of business investment plans did not reflect much
ebullience; and they thought businessmen would follow a cautious
approach to inventory expansion. Finally, they noted that Federal
fiscal policy would be less stimulative than anticipated earlier in
the year.
Several members of the Committee observed that relatively slow
economic growth would tend to dampen inflationary pressures and
FOMC Policy Actions
187
to bolster the position of the dollar in foreign exchange markets.
One of these members noted that economic activity in major
industrial countries abroad was expected to strengthen, and that
such a development would help to limit any deceleration in the
U.S. expansion. He added that a failure of activity abroad to
strengthen as expected would increase the chances of unsatisfactory
growth in the United States and would create additional problems
with respect to the U.S. current account.
At its meeting in April the Committee had agreed that from
the first quarter of 1978 to the first quarter of 1979 average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to
6V/2 per cent; M-2, 6V2 to 9 per cent; and M-3, IV2 to 10 per
cent. The associated range for the rate of growth in commercial
bank credit was IV2 to XQVi per cent. It had also been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
At this meeting, in discussing policy for the period immediately
ahead, Committee members expressed considerable concern about
recent rates of growth in the monetary aggregates, particularly in
light of the continuing strength of inflationary pressures and expectations. The members agreed that open market operations in the
inter-meeting period should be directed initially toward achieving
slightly firmer money market conditions, and that later in the period
the objectives of operations should depend on incoming data for
M-l and M-2.
As at the preceding meeting, there were differences of view with
respect to the degree of firming that might be undertaken. These
differences were reflected in opinions on such issues as the magnitude and speed of the initial move toward firmer money market
conditions and the amount of leeway—in terms of the inter-meeting
range specified for the Federal funds rate—for further firming later
in the period.
As to the initial move, most members favored seeking an increase
in the Federal funds rate to 73/4 per cent from the prevailing level
of IV2 per cent within a few days after this meeting. However,
one member suggested that this quarter-point increase be achieved
over a somewhat longer period, and another proposed that the initial
188
FOMC Policy Actions
increase be limited to one-eighth of a point. With respect to the
inter-meeting range for the Federal funds rate, most members favored IV2 to 8 per cent, but a number preferred IV2 to SlA per cent.
There was greater diversity of views with respect to the ranges
of tolerance to be specified for the annual rates of growth in M-l
and M-2 in the June-July period. Of the ranges suggested for M-l,
the lowest was 3V£ to 8^2 per cent, and the highest was 6V£ to
lO1/^ per cent; for M-2 the suggestions covered a similar span.
It was noted during the discussion that if the monetary aggregates
accelerated in June, as suggested by early data, growth over the
June-July period at rates near the midpoints of some of the lower
ranges proposed could be achieved only if there were to be a sharp
slowing in July. Some members, who were inclined to stress the
risks to the economy of rapid firming of money market conditions,
saw this circumstance as an argument for specifying relatively high
2-month ranges for M-l and M-2. Other members, who placed
more stress on the importance at this time of limiting growth in
the aggregates for the sake of moderating inflationary pressures
and expectations, thought such firming would be called for if the
growth in the aggregates did not in fact slow sharply.
At the conclusion of the discussion the Committee decided that
the ranges of tolerance for the annual rates of growth over the
June-July period should be 5 to 10 per cent for M-l and 6 to
10 per cent for M-2. The Committee agreed that during the coming
inter-meeting period operations should be directed initially toward
a Federal funds rate of 73A per cent, slightly above the prevailing
level of IV2 per cent. Subsequently, if the 2-month growth rates
of M-l and M-2 appeared to be significantly above or below the
midpoints of the indicated ranges, the objective for the funds rate
was to be raised or lowered in an orderly fashion within a range
of IV2 to 8 per cent. It was understood that in assessing the behavior
of the aggregates the Manager should continue to give approximately equal weight to the behavior of M-l and M-2.
It was also understood that the Chairman might call upon the
Committee to consider the need for supplementary instructions if
the rates of growth in the aggregates appeared to be above the
upper limit or below the lower limit of the indicated ranges at
a time when the objective for the funds rate had already been moved
to the corresponding limit of its range.
FOMC Policy Actions
189
At this meeting the Committee considered certain proposed
modifications in the language customarily employed in the concluding paragraphs of the domestic policy directive. It was noted
that, perhaps because of the manner in which the directive was
worded, the 2-month ranges of tolerance for M-l and M-2 were
subject to misinterpretation as embodying the Committee's shortrun targets for these aggregates, intended to be achieved by appropriate changes in the Federal funds rate. In fact, however, the
Manager could not be expected regularly to achieve 2-month growth
rates in M-l and M-2 within the specified ranges for various
reasons—including the lag between changes in the Federal funds
rate and changes in these growth rates, and the brevity of the period
to which the operational paragraphs of any single directive applied.
It was noted in the discussion that the Committee's objectives
for the monetary aggregates were embodied in the 1-year ranges
established at quarterly intervals, and that the adjustments made
from time to time in the Federal funds rate were intended to increase
the likelihood that the longer-run growth rates would fall within
these ranges. The purpose of the 2-month ranges was to provide
the Manager with an indicator for determining when changes in
the funds rate were appropriate; specifically, the Manager was
expected to adjust the funds rate within its range when the latest
projections of 2-month growth rates in M-l and M-2 deviated
significantly from the midpoints of their ranges (or, if the Committee so indicated in the directive, when the projections for the
aggregates approached or moved beyond the limits of their ranges).
At the May meeting, following a preliminary discussion of this
matter, the Committee had deleted one potentially misleading
phrase from the language previously employed, to the effect that
the Committee "expects" the 2-month growth rates to be within
the indicated ranges. At this meeting the Committee agreed upon
a more thorough revision of the customary language, in an effort
to reduce the chances of misinterpretations.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services has grown rapidly on the average in the current
quarter as activity rebounded from the effects of the unusually severe
winter weather and the lengthy coal strike, but the rate of advance
190
FOMC Policy Actions
most recently appears to be slowing. Following substantial gains
in March and April, increases in industrial production and nonfarm
payroll employment moderated in May and retail sales changed
little. The unemployment rate edged up from 6.0 to 6.1 per cent
in association with a large increase in the civilian labor force.
Average wholesale prices rose somewhat less rapidly in May than
earlier in 1978, reflecting smaller reported increases in farm products
and processed foods. So far this year prices have increased at a
considerably faster rate than they had on average during 1977. The
index of average hourly earnings also has increased at a somewhat
faster pace so far in 1978 than during 1977.
Since the end of May the trade-weighted value of the dollar
against major foreign currencies has declined about 2 per cent, but
it remains above its early-April low. The trade deficit in April was
down somewhat from its very high first-quarter rate.
Growth in M-l moderated in May from the extraordinarily rapid
pace in April, and as a result growth in M-2 and M-3 also slowed.
Inflows of the interest-bearing deposits included in M-2 picked up
somewhat as commercial banks increased their reliance on large-denomination time deposits to finance an unusually sharp increase in
business loans. Market interest rates have risen somewhat further
in recent weeks.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on April
18, 1978, the Committee agreed that these objectives would be
furthered by growth of M-l, M-2, and M-3 from the first quarter
of 1978 to the first quarter of 1979 at rates within ranges of 4
to 6!/2 per cent, 6V2 to 9 per cent, and IV2 to 10 per cent,
respectively. The associated range for bank credit is IV2 to 10V2
per cent. These ranges are subject to reconsideration at any time
as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to developing conditions in financial markets more
generally. During the period until the next regular meeting, System
open market operations shall be directed initially at attaining a
weekly-average Federal funds rate slightly above the current level.
Subsequently, operations shall be directed at maintaining the weekly
Federal funds rate within the range of IV2 to 8 per cent. In deciding
FOMC Policy Actions
191
on his specific objective for the Federal funds rate the Manager
shall be guided mainly by the relationship between the latest estimates of annual rates of growth in the June-July period of M-l
and M-2 and the following ranges of tolerance: 5 to 10 per cent
for M-l and 6 to 10 per cent for M-2. If, giving approximately
equal weight to M-l and M-2, their rates of growth appear to be
significantly above or below the midpoints of the indicated ranges,
the objective for the funds rate shall be raised or lowered in an
orderly fashion within its range.
If the rates of growth in the aggregates appear to be above the
upper limit or below the lower limit of the indicated ranges at a
time when the objective for the funds rate has already been moved
to the corresponding limit of its range, the Manager is promptly
to notify the Chairman who will then decide whether the situation
calls for supplementary instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, and Wallich. Votes against this action:
Messrs. Willes and Winn.
Messrs. Willes and Winn dissented from this action because they
favored more vigorous measures to curb the rate of growth in the
monetary aggregates. Both preferred ranges of tolerance for the
2-month growth rates in M-l and M-2 lower than those approved
by the majority; in addition, Mr. Willes favored an upper limit
for the funds rate range of 8XA per cent.
Mr. Willes, citing strong consumer and business credit demands
at prevailing interest rates, felt that a further rise in short-term
interest rates would not significantly damage economic prospects
and that, to the extent that such a rise tended to moderate inflationary expectations, it would have a positive impact on the economy.
Mr. Winn felt that if the Committee did not act now to assure
a reduction in the rates of growth of the aggregates, an excessively
restrictive policy would be required later on if the Committee's
longer-range objectives were to be achieved.
2. Operations in Federal Agency Securities
At this meeting the Committee discussed its procedures with respect
to open market operations in Federal agency securities. The dis-
192
FOMC Policy Actions
cussion arose because of a potential problem posed by a statutory
requirement that Federal Reserve note liabilities be collateralized
by eligible assets, which included direct obligations of the Treasury
but not Federal agency issues. At times recently, the margin of
actual collateral over that required had been relatively small. The
Board of Governors had proposed legislation that would make
Federal agency issues eligible as collateral, but the Congress had
not yet acted on the proposal.
It was noted that the problem of maintaining sufficient collateral
for Federal Reserve notes could become critical at some point
before the enactment of such legislation if, for example, a need
arose to sell a substantial volume of Treasury securities to absorb
redundant member bank reserves. It was also noted that the problem
would be mitigated by some slowing of the rate of growth in System
holdings of agency securities and a correspondingly larger increase
in holdings of Treasury securities.
Paragraph l(a) of the Committee's authorization for domestic
open market operations authorizes the Federal Reserve Bank of
New York to sell, as well as to buy, Federal agency securities
for the System Open Market Account. Historically, however, sales
of such securities have been quite infrequent. It was the sense of
the Committee that modest sales of agency issues would be appropriate from time to time, but only when market circumstances
permitted and when sales of securities were consistent with the
objectives of open market operations. It was noted in the discussion
that, even apart from the problem of collateral requirements,
occasional sales of agency issues would help enhance the flexibility
of open market operations. The Committee also agreed that the
Desk should reduce somewhat the volume of agency issues it
purchased when supplying reserves, and that occasionally, when
there was a need to absorb reserves, it should redeem maturing
agency issues for cash rather than routinely exchange them for
new issues.
3. Authorization for Foreign Currency Operations
At this meeting the Committee approved a technical amendment
to paragraph ID of the authorization for foreign currency operations, under which the definition contained in the second sentence
FOMC Policy Actions
193
of that paragraph of "over-all open position in all foreign currencies 1 ' is given as "the sum (disregarding signs) of net positions
in individual currencies" rather than as "the sum (disregarding
signs) of open positions in each currency." This change was
approved in the interest of clarity, and to make the language of
this paragraph conform to certain new language concurrently introduced in the procedural instructions governing foreign currency
operations, as described below.
With this amendment, paragraph ID read as follows:
To maintain an over-all open position in all foreign currencies
not exceeding $1.0 billion, unless a larger position is expressly
authorized by the Committee. For this purpose, the over-all open
position in all foreign currencies is defined as the sum (disregarding
signs) of net positions in individual currencies. The net position
in a single foreign currency is defined as holdings of balances in
that currency, plus outstanding contracts for future receipt, minus
outstanding contracts for future delivery of that currency, i.e., as
the sum of these elements with due regard to sign.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner.
Under the first sentence of paragraph ID, which was not affected
by the foregoing amendment, the Federal Reserve Bank of New
York is authorized, for System Open Market Account, to maintain
an over-all open position in all foreign currencies not exceeding
$1.0 billion, unless a larger position is expressly authorized by
the Committee. On March 2 1 , 1978, the Committee had authorized
an open position of $2.25 billion in view of the scale of recent
and potential System operations in foreign currencies. On May 16,
1978, the Committee had reduced this limit to $2.0 billion, in
light of decreases in the System's open position. Against the
background of further decreases in the open position, the Committee reduced the limit to $1.5 billion at this meeting.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner.
194
FOMC Policy Actions
4. Procedural Instructions with Respect to Operations Under
the Foreign Currency Documents
In December 1976 the Committee had adopted certain procedural
instructions for the purpose of clarifying the respective roles of
the Committee, the Foreign Currency Subcommittee designated in
paragraph 6 of the authorization for foreign currency operations,
and the Chairman in providing guidance to the Manager of the
System Open Market Account with respect to proposed or ongoing
foreign currency operations under the authorization and the foreign
currency directive. Paragraph IB of the instructions called for
clearance of any transactions that would result in gross transactions
in a single foreign currency exceeding $100 million on any day
or $300 million since the most recent regular meeting of the
Committee. At its meeting in March 1978 the Committee amended
paragraph IB to increase these dollar limits, which had occasionally
hampered ongoing operations, and to remove an ambiguity in the
language.
At this meeting the Committee decided to discontinue the use
of the concept of gross transactions in the procedural instructions.
In its stead it introduced (a) a clearance requirement formulated
in terms of daily and inter-meeting changes in the System's net
position in a single foreign currency and (b) a requirement for
clearance of any operation that might generate a substantial volume
of trading in a particular currency by the System, regardless of
the effect on the System's net position in that currency. The purpose
of these changes was to improve the effectiveness of the consultation procedure. In addition, for the sake of clarity the word
"transaction" was replaced by the word "operation" wherever
the former had occurred in the instructions.
The two new provisions were identified as paragraphs IB and
1C. Paragraph 1A, which refers to daily and inter-meeting changes
in the System's over-all open position in foreign currencies, was
retained, and the paragraph previously designated 1C, which relates
to swap drawings by foreign central banks, was redesignated ID.
With these changes, the procedural instructions read as follows:
In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the
Authorization for Foreign Currency Operations and the Foreign
FOMC Policy Actions
195
Currency Directive, the Federal Reserve Bank of New York, through
the Manager of the System Open Market Account, shall be guided
by the following procedural understandings with respect to consultations and clearance with the Committee, the Foreign Currency
Subcommittee, and the Chairman of the Committee. All operations
undertaken pursuant to such clearances shall be reported promptly
to the Committee.
1. The Manager shall clear with the Subcommittee (or with the
Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation which would result in a change in the
System's over-all open position in foreign currencies exceeding $100
million on any day or $300 million since the most recent regular
meeting of the Committee.
B. Any operation which would result in a change in the
System's net position in a single foreign currency exceeding $100
million on any day or $300 million since the most recent regular
meeting of the Committee.
C. Any operation which might generate a substantial volume
of trading in a particular currency by the System, even though the
change in the System's net position in that currency might be less
than the limits specified in IB.
D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 per cent of the size
of the swap arrangement.
2. The Manager shall clear with the Committee (or with the
Subcommittee, if the Subcommittee believes that consultation with
the full Committee is not feasible in the time available, or with
the Chairman, if the Chairman believes that consultation with the
Subcommittee is not feasible in the time available):
A. Any operation which would result in a change in the
System's over-all open position in foreign currencies exceeding $500
million since the most recent regular meeting of the Committee.
B. Any swap drawing proposed by a foreign bank exceeding
the larger of (i) $200 million or (ii) 15 per cent of the size of
the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the
Chairman about proposed swap drawings by the System, and about
any operations that are not of a routine character.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
Wallich, Willes, and Winn. Votes against this action: None. Absent and not voting: Mr. Gardner.
196
FOMC Policy Actions
MEETING HELD ON JULY 18, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that growth
in economic activity had slowed in recent months. From the first
to the second quarter, however, real output of goods and services
appeared to have expanded sharply, reflecting the rebound in
activity from the adverse effects of the severe winter and the lengthy
coal strike. The rise in average prices—as measured by the fixedweighted price index for gross domestic business product—accelerated markedly in the second quarter, largely because of substantial
increases in food prices.
The staff continued to project moderate expansion in output from
the second quarter of 1978 through the second quarter of 1979.
The start projections also suggested that the price advance would
remain rapid, although not so rapid as in the second quarter of
1978, and that the unemployment rate would change little from
its current level.
In June the index of industrial production rose an estimated 0.3
per cent, down from 0.6 per cent in May and much below the
substantial gains in March and April. Total nonfarm payroll employment rose considerably in June, but the advance, like May's,
was well below the increases in March and April. In manufacturing,
employment and the average workweek were about unchanged in
June. The over-all unemployment rate fell 0.4 of a percentage point
to 5.7 per cent, its lowest level in nearly 4 years.
Total retail sales changed little in June for the second consecutive
month, following 3 months of exceptionally large gains. Unit sales
of new automobiles remained at a high level.
The advance in the index of average hourly earnings for private
nonfarm production workers moderated in May and June, but it
was somewhat faster over the first half of 1978 than during 1977.
FOMC Policy Actions
197
Average prices of producer goods rose less rapidly in May and
June than earlier in the year, but their increase over the first half
was considerably faster than the pace during 1977. In May the
consumer price index for all urban consumers rose sharply further,
led by rises in food, housing, and energy; over the first 5 months
of the year the annual rate of increase averaged slightly above
10 per cent.
In foreign exchange markets the trade-weighted value of the
dollar against major foreign currencies declined about 2 per cent
further from mid-June to the date of this meeting, reaching its
lowest point so far in 1978. The downward pressure on the dollar
in recent weeks appeared to reflect heightened market concern about
the high rate of inflation in the United States relative to rates abroad
and about the persistence of extremely large current-account surpluses in Japan and Germany and a large deficit in the United
States. In May the U.S. trade deficit was somewhat lower than
its very high average rate in the first 4 months of the year.
The expansion in total credit at U.S. commercial banks slowed
substantially in June from the unusually rapid rates in the preceding
2 months, as growth of business loans decelerated sharply after
a surge in May. Growth of other types of loans moderated as well,
but bank holdings of Treasury securities increased. Outstanding
commercial paper of nonfinancial businesses increased substantially
in June. Nevertheless, expansion of total short-term credit to
nonfinancial businesses by banks and through the paper market was
well below the exceptionally rapid pace earlier in the second
quarter.
Growth of the narrowly defined money supply (M-l) moderated
in May and June from the extraordinarily rapid pace in April, but
growth from the first to the second quarter was at an annual rate
of 9!/2 per cent. Growth in Af-2 and M-3 had been moderate over
recent months. In June inflows of small-denomination time deposits
to banks and to nonbank thrift institutions picked up, following
introduction on the first of the month of a short-term money market
certificate with a ceiling interest rate for new deposits that changes
weekly with the average discount rate on new issues of 6-month
Treasury bills. Preliminary reports indicated relatively strong investor interest in these certificates.
Over the year from the second quarter of 1977 to the second
198
FOMC Policy Actions
quarter of 1978, growth in M-l was about 8 per cent—above the
4 to 6V2 per cent range for that period adopted by the Committee
in July 1977. However, growth in M-2 and in M-3 over the period
was within the ranges for those aggregates adopted at that time:
M-2 expanded by about 8Vi per cent, compared with its range
of 6V2 to 9 per cent; M-3 grew about 10 per cent, compared with
its range of 8 to ICH/2 per cent.
At its meeting on June 20 the Committee had decided on ranges
of tolerance for the annual rates of growth in M-1 and M-2 during
the June-July period of 5 to 10 per cent and 6 to 10 per cent,
respectively. The Committee had agreed that during the coming
inter-meeting period operations should be directed initially toward
a Federal funds rate of 73A per cent, slightly above the prevailing
level of IV2 per cent. Subsequently, if the 2-month growth rates
of M-l and M-2 appeared to be significantly above or below the
midpoints of the indicated ranges, the objective for the funds rate
was to be raised or lowered in an orderly fashion within a range
of IV2 to 8 per cent.
In accordance with the Committee's decision, the Manager of
the System Open Market Account began immediately after the June
meeting to seek bank reserve conditions consistent with a firming
of the Federal funds rate to a weekly average of around 7% per
cent. Incoming data throughout the inter-meeting period suggested
that growth in the monetary aggregates would be well within the
ranges that had been specified by the Committee, and the Manager
continued to seek reserve conditions consistent with a Federal funds
rate averaging about 13A per cent. In the final days of the period
the funds rate fluctuated around a level somewhat above 7% per
cent.
Market interest rates on both long- and short-term securities had
shown further increases since the June meeting of the Committee,
ranging from about Vs to 3/s of a percentage point. In addition,
commercial banks raised the rate on loans to prime business
borrowers from 8% to 9 per cent. Interest rates on new commitments for conventional mortgage loans at savings and loan associations had changed little during the inter-meeting period, while
yields in the secondary market for home mortgages had risen
somewhat further.
On June 30 an increase in Federal Reserve discount rates from
FOMC Policy Actions
199
7 to 1XA per cent was announced by the Board of Governors. The
Board stated that the action was taken in recognition of increases
that had already occurred in other short-term interest rates and that
it would bring the discount rate into closer alignment with shortterm rates generally.
In the Committee's discussion of the economic situation and
outlook, there was general agreement among the members that over
the year ending in the second quarter of 1979 output of goods
and services was most likely to grow at about the moderate pace
projected by the staff. However, a number of the members anticipated a little less growth and a few anticipated a little more.
Despite the consensus that continuing moderate growth in real
GNP was still the most likely development, some members suggested that for a number of reasons—including the high rate of
inflation and developing financial stringencies—the probabilities of
such an outcome were lower than they had seemed to be earlier.
A few members observed that the chances of a decline in output
during the period had increased. In the opinion of one of these
members, the prospects for a gradual slowing of growth in output
toward a rate that might be sustainable for the longer term had
been diminished by the recent rapid decline in the unemployment
rate and by the development of some imbalances in the economy.
Another member expected that consumer buying of houses and
durable goods, which had been stimulated in recent months by
anticipations of further increases in prices, would weaken in the
period immediately ahead. He was concerned, moreover, that
financial strains might develop to the point of bringing on a
downturn in activity, although he did not regard such a development
as inevitable.
Other members of the Committee felt more confident that a
recession would not develop during the four quarters ahead and
that output would grow moderately. One of these members thought
that expectations of further price increases might well sustain
consumer buying—and perhaps business buying, at least to some
extent—during the second half of 1978 and that reductions in
Federal taxes would strengthen demands in the first half of 1979.
Similarly, another member believed that expansive elements in the
economy were sufficient to sustain a moderate growth in output,
and that distortions were not developing to the point that they would
200
FOMC Policy Actions
overcome those expansive influences. In his view, it remained
possible to slow growth to a rate sustainable for the longer term.
Another member agreed that there was still time to achieve such
a slowing of growth, given appropriate Government policies.
All members of the Committee expected a continuation of a rapid
rate of inflation over the period to the second quarter of 1979—in
the view of several members, even more rapid than the pace
projected by the staff. It was observed that in 1979 strong pressures
for large increases in wages would tend to spread throughout the
economy from the many industries ih which new contracts would
be negotiated. It was also noted that minimum wage rates and
social security taxes were scheduled to go up again at the beginning
of the new year, exerting upward pressure on costs and prices.
Most members of the Committee thought that the unemployment
rate a year ahead, in the second quarter of 1979, would be little
changed from the average rate in recent months, which was well
below the level that had been expected earlier. It was suggested
that the rate of participation in the labor force would continue to
rise, in part because of the pressure of inflation on family budgets.
At this meeting the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. At its meeting in April
1978 the Committee had specified the following ranges for the
period from the first quarter of 1978 to the first quarter of 1979:
M-l, 4 to 6Vi per cent; M-2, 6^2 to 9 per cent; and M-3, 7x/2
to 10 per cent. The associated range for growth in commercial
bank credit was llh to IOV2 per cent. The ranges being considered
at this meeting were for the period from the second quarter of
1978 to the second quarter of 1979.
The Committee members differed principally in their preferences
for the 12-month range for M-l: A majority favored retention of
the existing range, while a number favored an increase in its upper
limit. In the case of the broader aggregates, most members expressed a preference for retaining the existing ranges; one member
suggested that the lower limits be reduced by V2 of a percentage
point, yielding ranges of 6 to 9 per cent for M-2 and 7 to 10
per cent for M-3.
An increase in the upper limit of the range for M-l was advocated
on the expectation that, over the coming year, growth of M-l would
have to exceed the 6!/2 per cent upper limit of the existing range,
FOMC Policy Actions
201
as it had over the past year, if strains in the financial markets
were not to be so severe as to threaten an economic downturn.
That expectation was based on the probable rates of inflation and
on the recent behavior of the income velocity of money. In this
connection it was emphasized that the high rate of inflation in
prospect for the quarters immediately ahead was attributable in part
to governmental actions and to some strong forces in the private
sector—including the effects of the depreciation of the dollar—that
were not likely to be moderated appreciably by the stance of
monetary policy. In these circumstances, it was argued, the Committee ought to raise the upper limit of the range for M-l to allow
for a growth rate that—given upward cost pressures on prices—was
more nearly consistent with the generally anticipated rate of growth
in real and nominal GNP for the year ahead and that, consequently,
was more likely to be achieved.
Several arguments were advanced in favor of retaining the
existing range of 4 to 6V2 per cent for M-l. First, M-l growth
in the second quarter—at an annual rate of 9V2 per cent, on a
quarterly-average basis—had exceeded the upper limit of the Committee's range by a considerable margin, so that retention of the
existing range for the year from the second quarter of 1978 to
the second quarter of 1979 would allow for growth considerably
faster than 6I/2 per cent over the five-quarter period beginning the
first quarter of 1978. Second, for a considerable period of time
growth in M-1 on the average had exceeded the range adopted
by the Committee and a reduction of growth to a rate within the
existing range would be an important step toward moderating
inflation. Also, such a reduction would have a positive effect on
the economic outlook.
Moreover, any increase in the range could be misleading: Such
an action, no matter what reasons might be offered for it, was
likely to be interpreted both in this country and abroad as a signal
of a shift in System policy toward less emphasis on fighting
inflation. Since that was not the case, it would be consistent to
retain the existing range, although the rate of growth over the period
might be around the upper limit of the range. The members also
noted that authorization for automatic transfers of funds into
checking accounts from savings deposits at commercial banks was
scheduled to become effective on November 1, 1978, and that
202
FOMC Policy Actions
during a transition period such transfers would tend to reduce the
demand for M-l and increase its income velocity.
With regard to M-2 and M-3, it was observed that growth over
the year ending in the second quarter of 1978 had been within
the Committee's longer-run ranges. One member proposed that in
formulating policy for the period ahead the Committee begin to
increase the emphasis given to M-2 and reduce that given to M-l.
That proposal did not attract support from other members of the
Committee.
At the conclusion of its discussion the Committee decided to
retain the existing ranges for the monetary aggregates. Thus, the
ranges for the period from the second quarter of 1978 to the second
quarter of 1979 were 4 to &h per cent for M-l, 61/2 to 9 per
cent for M-2, and IV2 to 10 per cent for M-3. The associated
range for growth in commercial bank credit was raised to 8!/2 to
11V2 per cent in recognition of the greater share of borrower
demands being directed toward banks. It was agreed that the
longer-run ranges, as well as the particular aggregates for which
longer-run ranges were specified, would be subject to review and
modification at subsequent meetings. It was also understood that
short-run factors might cause growth rates from one month to the
next to fall outside the ranges anticipated for the year ahead.
The Committee adopted the following ranges for rates of growth
in monetary aggregates for the period from the second quarter of
1978 to the second quarter of 1979: M-l, 4 to 6XA per cent; M-2,
6V2 to 9 per cent; and M-3, IV2 to 10 per cent. The associated range
for bank credit is 8V2 to 11 V2 per cent.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Wallich, Willes,
and Winn. Votes against this action: Messrs. Jackson and Partee. Absent and not voting: Mr.
Gardner.
Messrs. Jackson and Partee dissented from this action because
they preferred to raise the upper limit of the range for M-l to
a level more nearly consistent with the anticipated growth in
GNP—Mr. Jackson, to IV2 per cent; Mr. Partee, to 8 per cent.
In the discussion of policy for the period immediately ahead,
the members differed mainly in their views as to whether, and
FOMC Policy Actions
203
to what degree, additional firming in money market conditions
should be sought during the next few weeks for the purpose of
restraining monetary growth in coming months. No sentiment was
expressed for easing money market conditions.
Several members proposed that for the time being operations
be directed toward maintaining the money market conditions currently prevailing. It was argued that, in light of increased uncertainties in the economic outlook, such a "pause" would afford
the Committee an opportunity to evaluate additional evidence on
the current situation and outlook. It was suggested that, coming
on top of the considerable firming in money market conditions over
the past year or so, further significant firming would risk bringing
on a recession. It was also observed that the restraining effects
of the rise in interest rates over the past month had not yet been
fully felt and that any additional firming that might be appropriate
could be achieved at a later time.
On the other hand, a number of members favored a prompt
further firming of money market conditions. Such a course was
needed, it was suggested, to bring growth in M-l within the
Committee's longer-run range. Given the rate of inflation, it was
argued, current levels of interest rates were relatively low and were
much less restrictive in real terms than their nominal levels might
suggest. And the point was made that failure to pursue additional
firming at this time might well create a need for a greater degree
of firming later.
In considering the ranges for the annual rates of growth in the
monetary aggregates to be specified for the July-August period,
the members took account of the indications that growth in M-l
might accelerate in July. Most members preferred ranges of tolerance for growth in M-l over the 2-month period extending from
a lower limit of 4 or 5 per cent to an upper limit of 8 or 9 per
cent. One favored a higher range, from 5 to 10 per cent, and another
a lower range, from 3 to 7 per cent. For Af-2, most members
favored ranges extending from 6 or 1 per cent to 10 or 11 per
cent; one member preferred a range of 5 to 10 per cent.
With respect to the Federal funds rate, most members favored
ranges centered either on 7% per cent, the midpoint of the IV2
to 8 per cent range specified at the June meeting, or on the
somewhat higher level that had developed in the most recent days;
204
FOMC Policy Actions
their proposals included ranges having a lower limit of IV2 per
cent or slightly above, and an upper limit of 8 per cent or slightly
above. However, a number of members advocated a range centered
on 8 per cent and extending from 73A to SlA per cent. A majority
of the members favored giving greater weight than usual to money
market conditions in the conduct of open market operations until
the next meeting.
At the conclusion of the discussion the Committee decided that
operations in the period immediately ahead should be directed
toward maintaining the weekly-average Federal funds rate within
a range of 13A to 8 per cent. The members agreed that, in deciding
on the specific objective for the Federal funds rate, the Manager
should be guided mainly by the relation between the latest estimates
of annual rates of growth in M-l and M-2 over the July-August
period and the following ranges of tolerance: 4 to 8 per cent for
M-l and 6 to 10 per cent for M-2. It was also agreed that if,
giving approximately equal weight to M-l and M-2, their rates
of growth appeared to be close to or beyond the limits of the
indicated ranges, the Manager should raise or lower the objective
for the funds rate in an orderly fashion within its range.
As is customary, it was understood that the Chairman might
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that growth
in economic activity has slowed in recent months. Following substantial gains in March and April, increases in industrial production
and nonfarm payroll employment moderated in May and June and
retail sales changed little. In June, however, the unemployment rate
dropped 0.4 of a percentage point to 5.7 per cent. Average producer
prices rose somewhat less rapidly in May and June than earlier in
1978, but over the first half of this year prices increased at a
considerably faster rate than they had on the average during 1977.
The advance in the index of average hourly earnings also moderated
in May and June but was at a somewhat faster pace over the first
half of 1978 than during 1977.
FOMC Policy Actions
205
Since mid-June the trade-weighted value of the dollar against major
foreign currencies has declined further to its lowest level of the year.
The U.S. trade deficit in May was lower than the very high rate
of the first 4 months of the year.
Growth in M-l moderated in May and June, but reflecting the
extraordinarily rapid pace in April, growth from the first to the second
quarter was relatively high. Growth in M-2 and M-3 has been
moderate over recent months. In June inflows of small-denomination
time deposits to commercial banks and other thrift institutions picked
up, following introduction of the new 6-month certificate. Market
interest rates have risen further in recent weeks. On June 30 an
increase in Federal Reserve discount rates from 7 to 714 per cent
was announced.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. The Committee agreed
that these objectives would be furthered by growth of M-l, M-2,
and M-3 from the second quarter of 1978 to the second quarter of
1979 at rates within ranges of 4 to 6V2 per cent, 6V/2 to 9 per cent,
and IV2 to 10 per cent, respectively. The associated range for bank
credit is 8V2 to 11 V2 per cent. These ranges are subject to reconsideration at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to developing conditions in financial markets more generally. During the period until the next regular meeting, System open
market operations shall be directed at maintaining the weekly-average
Federal funds rate within the range of 7% to 8 per cent. In deciding
on the specific objective for the Federal funds rate the Manager shall
be guided mainly by the relationship between the latest estimates
of annual rates of growth in the July-August period of M-l and
M-2 and the following ranges of tolerance: 4 to 8 per cent for M-l
and 6 to 10 per cent for M-2. If, giving approximately equal weight
to M-1 and M-2, their rates of growth appear to be close to or beyond
the upper or lower limits of the indicated ranges, the objective for
the funds rate shall be raised or lowered in an orderly fashion within
its range.
If the rates of growth in the aggregates appear to be above the
upper limit or below the lower limit of the indicated ranges at a
time when the objective for the funds rate has already been moved
206
FOMC Policy Actions
to the corresponding limit of its range, the Manager is promptly
to notify the Chairman who will then decide whether the situation
calls for supplementary instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Coldwell, Eastburn, Jackson, Partee, and Wallich.
Votes against this action: Messrs. Baughman,
Willes, and Winn. Absent and not voting: Mr.
Gardner.
Messrs. Baughman, Willes, and Winn dissented from this action
because they favored more vigorous measures to curb the rates
of growth in the monetary aggregates. All three preferred a directive
that would have instructed the Manager to direct operations initially
toward an increase in the Federal funds rate to 8 per cent and
that would have provided for a further increase in the rate to a
level of 8V* per cent, if growth in the monetary aggregates over
the July-August period appeared to be strong relative to the
specified ranges. In addition, Mr. Willes favored specifying a
2-month range for MX of 3 to 7 per cent, somewhat lower than
the range agreed upon by the majority.
2. Authorization for Domestic Open Market Operations
Paragraph 2 of the authorization for domestic open market operations authorizes the Federal Reserve Bank of New York (and, under
certain circumstances, other Reserve Banks) to purchase short-term
certificates of indebtedness directly from the Treasury, subject to
certain conditions. This authorization is, in turn, based on a
provision of Section 14(b) of the Federal Reserve Act authorizing
the Federal Reserve Banks to buy and sell obligations of specified
types ''directly from or to the United States," subject to certain
conditions. It was noted at this meeting that, because the statutory
authority in question had expired on April 30, 1978, paragraph
2 of the authorization had been in a state of de facto suspension
since then, and that the paragraph would remain in suspension until
the enactment of expected legislation extending the authority.
FOMC Policy Actions
207
MEETING HELD ON AUGUST 15, 1978
Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services was growing moderately in the current
quarter, although the rate of expansion appeared to be a little below
the average pace in the first two quarters of the year. The rise
in prices—as measured by the fixed-weighted price index for gross
domestic business product—seemed to have slowed appreciably
from the second-quarter rate but was still well above the rise in
other recent quarters.
Start projections for the year ending in the second quarter of
1979 were little changed from a month earlier. They continued
to suggest that output would grow at a moderate pace, with the
unemployment rate projected to decline slightly from its July level.
The rate of inflation was expected to remain rapid but to moderate
considerably from its pace in the second quarter of 1978.
In July the index of industrial production increased an estimated
0.5 per cent, equal to the gains now indicated for May and June
but well below the rapid advances in March and April. Total
nonfarm payroll employment rose in July at close to the May-June
pace, after exceptional gains in March and April. In manufacturing,
employment rose slightly in July while the average workweek
was unchanged. The over-all unemployment rate jumped 0.5 of
a percentage point, following a decline of 0.4 of a percentage point
in June; the July level of 6.2 per cent was about the same as
the average in the first 5 months of the year.
In June, private housing starts exceeded an annual rate of 2
million units for the fourth consecutive month. Starts averaged 2.1
million units in the second quarter, about the same as in the second
half of 1977 and well above the rate for the first quarter of 1978.
Total retail sales changed little in July for the third consecutive
208
FOMC Policy Actions
month following exceptional gains earlier in the year. Unit sales
of new automobiles fell somewhat in July from the very rapid pace
in the second quarter, while dollar sales of other durable goods
rose considerably further.
The index of average hourly earnings for private nonfarm
production workers increased at an annual rate of nearly 10 per
cent in July; over the first 7 months of the year the index had
risen at an annual rate of close to 9 per cent, considerably above
its advance in 1977. The rise in average prices of producer goods
moderated somewhat in July as prices of consumer goods declined
after moving up rapidly in most earlier months of the year. In
June the consumer price index for all urban consumers continued
to rise at a rapid pace; over the first half of the year the index
advanced at an annual rate of more than 10 per cent.
In foreign exchange markets the trade-weighted value of the
dollar had declined nearly 6 per cent further since mid-July to a
level about 10 per cent below the 1978 peak in May. The downward
pressure on the dollar appeared to reflect widespread concern about
the outlook for inflation in the United States and the persistence
of large imbalances in the international payments positions of the
United States and some of its major trading partners. The U.S.
trade deficit, however, had declined in the second quarter from
an extraordinarily high rate in the first quarter.
Following a substantial slowdown in June, the expansion in total
credit at U.S. commercial banks accelerated in July to a pace close
to the unusually rapid growth experienced in April and May.
Expansion in bank loans was very strong in July and included
growth in all major loan categories. Banks also made sizable
additions to their holdings of U.S. Treasury and other securities.
While growth in business loans was above the reduced pace in
June, it remained well below the average rate in the first half of
the year. Outstanding commercial paper of nonfinancial businesses
continued to expand rapidly in July.
Growth of the narrowly defined money supply (M-l) remained
moderate in July. Growth in M-2 and M-3 also continued moderate,
as substantial inflows of funds into large-denomination time deposits at banks and into the new money market certificates at nonbank
thrift institutions were partly offset by weakness in savings and
small-denomination time deposits.
FOMC Policy Actions
209
At its meeting on July 18 the Committee had decided that the
ranges of tolerance for the annual rates of growth in M-l and M-2
during the July-August period should be 4 to 8 per cent and 6
to 10 per cent, respectively. The Committee had agreed that during
the coming inter-meeting period operations should be directed
toward maintaining the weekly-average Federal funds rate within
a range of 73A to 8 per cent. It was also agreed that if, with
approximately equal weight given to M-l and M-2, growth rates
of the aggregates appeared to be close to or beyond the limits
of the indicated ranges, the objective for the funds rate was to
be raised or lowered in an orderly fashion within its specified range.
Following the July 18 meeting the Manager of the System Open
Market Account sought bank reserve conditions consistent with a
weekly-average Federal funds rate somewhat above 73A per cent.
Data that became available throughout the inter-meeting interval
suggested that growth in the monetary aggregates over the JulyAugust period would be well within the Committee's ranges and
the Manager continued to seek conditions consistent with a Federal
funds rate within a range of 73A to 8 per cent. The average rate
during the inter-meeting period was about 1% per cent.
Market interest rates on most short- and long-term securities had
declined 10 to 30 basis points since mid-July. The fall in rates
apparently reflected a shift in expectations that was influenced by
the recent pattern of moderate growth in the monetary aggregates,
a smaller rise in the Federal funds rate than many had anticipated,
and signs of some slowing in economic expansion. Declines in
Treasury bill rates were also encouraged by sizable investments
by foreign central banks of dollars obtained in currency support
operations.
Conditions in mortgage markets, which had tightened significantly during the first half of the year, had stabilized in recent
weeks. Interest rates on new commitments for conventional mortgage loans at savings and loan associations had changed little during
the inter-meeting period, while yields in the secondary market for
home mortgages had declined in line with reductions in most other
market rates.
In the Committee's discussion of the economic situation, there
was general agreement that the outlook for economic activity had
changed little since the July meeting, and that in the year ending
210
FOMC Policy Actions
with the second quarter of 1979 output of goods and services was
most likely to grow at about the moderate pace projected by the
staff. This judgment was qualified by the recognition that the
weakness of the dollar in foreign exchange markets might have
unfavorable repercussions on the domestic economy.
Committee members who differed with the staff economic projection all expected average growth to be a little less than the staff
figure. A few members, while anticipating somewhat greater growth
than the staff was projecting for the last half of 1978, continued
to believe that growth in 1979 would slow more abruptly.
Several members noted that although economic growth had
moderated recently, the pattern of expansion appeared to be well
balanced. In their judgment none of the key economic sectors was
exhibiting either serious sluggishness or unsustainably rapid
growth; there was little evidence of developing capacity constraints
and inventory surpluses were not a problem.
One negative element in this pattern, which seriously concerned
all members of the Committee, was the unexpectedly high recent
rate of inflation in prices and wages and the related possibility
that an appreciable slowing of inflation would prove more difficult
to achieve than previously had been anticipated. It was observed
in this connection that the declining value of the dollar in foreign
exchange markets was contributing significantly to inflation in the
United States. Nearly all the Committee members expected price
increases for the year ahead to be more rapid than the staff was
projecting.
One member suggested that although the economy appeared to
be fairly well balanced by the usual standards, there were potential
problem areas: He identified the heavy reliance of consumers on
credit to finance their spending; growing, if still limited, capacity
constraints and materials shortages; and, of particular concern to
him, the likely inflationary effects of impending wage settlements.
Because of these generally strong inflationary pressures, he thought
the risks of an early end to the expansion had become greater.
Other members of the Committee suggested that an important
change in the outlook since the July meeting was an apparent
stiffening in the resolve of labor leaders to hold out in forthcoming
contract negotiations for sizable wage settlements. One member
also cited apparent efforts by some businessmen to accelerate
FOMC Policy Actions
211
increases in wages and prices because of their concern that controls
might be imposed.
Committee members differed little in their estimates of the likely
unemployment rate in the second quarter of 1979. Those estimates
were all relatively close to the average rate thus far in 1978. It
was suggested that productivity would show little increase over
the projection period.
At its meeting in July the Committee had agreed that from the
second quarter of 1978 to the second quarter of 1979 average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to
6V2 per cent; M-2, 6V2 to 9 per cent; and M-3, IV2 to 10 per
cent. The associated range for the rate of growth in commercial
bank credit was 8V2 to IIV2 per cent. It had also been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
In the discussion of policy for the period immediately ahead,
most members expressed a preference for some slight firming of
money market conditions. Several members emphasized the need
to restrain the expansion of the monetary aggregates, especially
in light of current and prospective inflationary pressures. It was
suggested that an indication at this time of the System's continued
determination to resist inflation would have a favorable impact on
confidence, both in the domestic economy and in foreign exchange
markets. With regard to the latter, the members were seriously
concerned about the weakness of the dollar. They recognized that
interrelated governmental actions would be needed to make
progress in this area.
No sentiment was expressed at this meeting for an easing of
money market conditions. On the other hand, it was suggested
that a sharp move toward restraint under present circumstances
might incur an undue risk of precipitating a recession. Two members preferred to retain current money market conditions for the
time being.
There were only small differences among most Committee
members in their preferences for operating specifications for the
period immediately ahead. They were nearly unanimous in favoring
a return to basing decisions for open market operations between
212
FOMC Policy Actions
meetings primarily on the behavior of the monetary aggregates.
In its previous directive the Committee had called for giving greater
weight than usual to money market conditions.
For the annual rate of growth in M-1 over the August-September
period, most members favored ranges of 4 to 8 per cent or 5 to
9 per cent, but two members also found acceptable a range of
3 to 8 per cent and one preferred a lower range- of 3 to 7 per
cent. For M-2 most members advocated ranges of 6 to 10 per
cent or 6V2 to IOI/2 per cent and one proposed a range of 6 to
11 per cent. One member preferred narrower ranges for both M-l
and M-2 that would be relatively close to the 12-month ranges
adopted by the Committee; for M-l he suggested a range of 5Vz
to IV2 per cent and for M-2 a range of 6V2 to 8x/2 or 9 per cent.
Other members, while preferring wider 2-month ranges, also felt
that those ranges should more or less encompass the 12-month
ranges in order to facilitate achievement of the Committee's objectives.
Most of the members favored directing open market operations
toward a Federal funds rate of about 8 per cent shortly after today's
meeting, but two members urged some delay in order to assess
further information on the monetary aggregates and developments
in foreign exchange markets. One member preferred to continue
aiming initially for a Federal funds rate of around 7% per cent
in light of uncertainties about the economic outlook and the related
performance of the monetary aggregates.
With respect to the inter-meeting range for the Federal funds
rate, all but two members favored 13A to 8V£ per cent; one preferred
8 to 8V4 per cent and another 7% to 8*/2 per cent. The latter member
felt that more leeway should be provided for raising the rate in
the event that the monetary aggregates appeared to be growing
rapidly in relation to the Committee's preferences for the AugustSeptember period. However, a majority of the members indicated
that they did not want to see the Federal funds rate exceed 8V4
per cent without further assessment of new developments and the
opportunity for consultation among the members.
At the conclusion of the discussion the Committee decided that
ranges of tolerance for the annual rates of growth in M-1 and M-2
over the August-September period should be 4 to 8 per cent and
6 to 10 per cent, respectively. With regard to the Federal funds
FOMC Policy Actions
213
rate, the Manager was instructed to seek a rate of around 8 per
cent early in the period following today's meeting. Subsequently,
if the 2-month growth rates of M-l and M-2 appeared to be
significantly above or below the midpoints of the indicated ranges,
the objective for the funds rate was to be raised or lowered in
an orderly fashion within a range of 13A to 8V4 per cent. It was
also agreed that in assessing the behavior of the aggregates, the
Manager should give approximately equal weight to the behavior
of M-l and M-2.
The Committee decided to include in its directive a reference
to developments in foreign exchange markets as well as the usual
reference to conditions in domestic financial markets. The purpose
of the added instruction was to provide the Manager with some
flexibility to adjust the nature and timing of his operations in light
of possible pressures on the dollar in foreign exchange markets.
As is customary, it was understood that the Chairman might
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services is growing moderately in the current quarter,
although the pace is a little less than the average for the first two
quarters of the year. In July retail sales remained at about the
advanced level reached in April. Industrial production and nonfarm
payroll employment continued to expand at lower rates than in the
early spring months. The unemployment rate, which had dropped
0.4 of a percentage point in June, jumped 0.5 of a percentage point
in July to 6.2 per cent, about the average rate in the first 5 months
of the year. Average prices of goods and services have continued
to rise rapidly, although producer prices of foods and foodstuffs
declined in July. The advance in the index of average hourly
earnings has been somewhat faster so far in 1978 than it had been
on the average during 1977.
Since mid-July the trade-weighted value of the dollar against
major foreign currencies has declined sharply further. The U.S. trade
deficit was lower in the second quarter than the very high rate of
the first quarter.
214
FOMC Policy Actions
Growth in M-l remained moderate in July. Inflows of the interest-bearing deposits included in M-2 and M-3 picked up, owing
to substantial flows into large-denomination time deposits at banks
and into the new money market certificates at nonbank thrift institutions. Nevertheless, expansion in the broader aggregates also remained moderate in July. Most market interest rates have declined
appreciably on balance in recent weeks.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on July
18, 1978, the Committee agreed that these objectives would be
furthered by growth of M-l, M-2, and M-3 from the second quarter
of 1978 to the second quarter of 1979 at rates within ranges of
4 to 6!/2 per cent, 6!/2 to 9 per cent, and IVi to 10 per cent,
respectively. The associated range for bank credit is SV2 to WV2
per cent. These ranges are subject to reconsideration at any time
as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to developing conditions in domestic and international
financial markets more generally. Early in the period until the next
regular meeting, System open market operations shall be directed
at attaining a weekly-average Federal funds rate slightly above the
current level. Subsequently, operations shall be directed at maintaining the weekly-average Federal funds rate within the range of
73/4 to 8lA per cent. In deciding on the specific objective for the
Federal funds rate the Manager shall be guided mainly by the
relationship between the latest estimates of annual rates of growth
in the August-September period of M-l and M-2 and the following
ranges of tolerance: 4 to 8 per cent for M-l and 6 to 10 per cent
for M-2. If, giving approximately equal weight to M-l and M-2,
their rates of growth appear to be significantly above or below the
midpoints of the indicated ranges, the objective for the funds rate
shall be raised or lowered in an orderly fashion within its range.
If the rates of growth in the aggregates appear to be above the
upper limit or below the lower limit of the indicated ranges at a
time when the objective for the funds rate has already been moved
to the corresponding limit of its range, the Manager is promptly
to notify the Chairman who will then decide whether the situation
calls for supplementary instructions from the Committee.
FOMC Policy Actions
215
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Wallich, and Winn. Votes against this action:
Messrs. Partee and Willes.
Mr. Partee dissented from this action because he favored a
2-month range of tolerance for growth in M-1 that was somewhat
higher than the range advocated by the majority. He did not believe
that a further move toward firmer money market conditions was
warranted unless monetary expansion proved to be distinctly on
the high side, especially in view of the marked slowing in real
economic growth that now appeared to be in progress.
Mr. Willes dissented because he favored a more vigorous effort
to curb the expansion of the monetary aggregates in light of current
and expected inflationary pressures in the domestic economy and
the weakness of the dollar in foreign exchange markets. He preferred to specify a 2-month range of tolerance for M-l below the
range agreed upon by the majority.
Subsequent to the meeting, on September 8, the Committee held
a telephone conference meeting pursuant to its decision on August
15 to consult further if the rates of growth in the monetary
aggregates appeared to be above or below the limits of the Committee's ranges of tolerance for the August-September period and
the Federal funds rate had already moved to the corresponding
limit of its range. The latest staff projections suggested that M-l
and M-2 would grow at annual rates of 9.0 and 11.3 per cent,
respectively, over the August-September period; the ranges of
tolerance established at the August 15 meeting were 4 to 8 per
cent for M-l and 6 to 10 per cent for M-2. The Manager had
been aiming for a funds rate of about 8!A per cent, the top of
the range that the Committee had specified at its August meeting,
and the average rate in each of the two latest statement weeks
was at about that level.
Against this background, the Committee decided to raise the
upper limit of the range for the Federal funds rate to 8V2 per cent
and to instruct the Manager to aim promptly for a weekly-average
Federal funds rate of about 83/s per cent. It was understood that
the funds rate might be raised to the upper limit of the range if
new data suggested that the aggregates were strengthening further,
216
FOMC Policy Actions
or be reduced slightly if such data suggested significant weakening
from current projections.
On September 8, 1978, the Committee modified the domestic
policy directive adopted at its meeting of August 15, 1978, by
increasing the upper limit of the 13A to 8lA per cent range specified
for the Federal funds rate to 8V2 per cent and by calling for operations
directed at raising the weekly-average Federal funds rate promptly
to 8% per cent.
Votes for this action: Messrs. Miller, Volcker,
Coldwell, Eastburn, Gardner, Jackson, Partee,
Willes, Winn, and Kimbrel. Votes against this
action: None. Absent and not voting: Messrs.
Baughman and Wallich. (Mr. Kimbrel voted as
alternate for Mr. Baughman.)
FOMC Policy Actions
217
MEETING HELD ON SEPTEMBER 19, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that real output
of goods and services had been growing moderately in the current
quarter, but the rate of expansion appeared to be somewhat below
the average annual rate of about 4 per cent estimated by the
Commerce Department for the first two quarters of the year. The
rise in average prices—as measured by the fixed-weight price index
for gross domestic business product—slowed considerably from the
exceptional pace in the second quarter, but the rise was still
relatively rapid.
Staff projections for the period from the current quarter through
the second quarter of 1979 were little changed from those of a
month earlier. They continued to suggest that output would grow
moderately over the period and that the rate of inflation would
be rapid, although considerably below the average pace in the first
two quarters of 1978. The unemployment rate was expected to
change little from its August level.
In August the index of industrial production increased an estimated 0.5 per cent, close to the moderate gains in the preceding
3 months but well below the large increases in March and April.
Nonfarm payroll employment rose further in August, but the gain
was about half the monthly increase in the preceding 3 months.
In manufacturing, employment declined somewhat and the average
workweek continued to change little at a relatively high level. The
unemployment rate fell 0.3 of a percentage point to 5.9 per cent,
a rate slightly below the average in the first 7 months of the year.
Total private housing starts edged down in July. At an annual
rate of nearly 2.1 million units, however, starts were close to the
pace in the second quarter of 1978 and in the second half of 1977.
The latest Department of Commerce survey of business plans,
taken in late July and August, suggested that spending for plant
218
FOMC Policy Actions
and equipment would be 12.3 per cent greater in 1978 than in
1977, a somewhat larger increase than had been indicated 3 months
earlier. Businesses spent more in the second quarter of 1978 than
had been anticipated, and the latest survey still implied less expansion in spending over the second half of the year than over the
first half.
The dollar value of total retail sales rose in August, but the increase
followed a decline now indicated for July; on balance sales had
changed little since April. Unit sales of new automobiles, which had
declined in July, recovered in August almost to the advanced pace
of the second quarter.
The index of average hourly earnings for private nonfarm production workers rose little in August following a substantial increase in July; over the first 8 months of the year the index advanced
at an annual rate of about 8 per cent, somewhat more than it had
during 1977. Declines in prices of food products contributed to
a moderation in the rise of the consumer price index in July and
to a slight reduction in average prices of producer finished goods
in August; both price measures had risen at very rapid rates in
the first half of the year.
The trade-weighted value of the dollar against major foreign
currencies, which had declined sharply in early August, subsequently recovered against a background of uncertain conditions in
exchange markets. The recovery was triggered early in the intermeeting period by expressions of concern by U.S. officials, and
was reinforced by subsequent increases in U.S. short-term interest
rates and the announcement of expanded gold sales by the U.S.
Treasury. However, the dollar weakened in late August, when it
was announced that the U.S. trade deficit had increased sharply
in July, and at the time of this meeting the dollar was somewhat
below its level at the end of July.
After a surge in July, total credit at U.S. commercial banks
expanded at a substantially slower rate in August, mainly because
of large declines in bank holdings of U.S. Treasury securities and
in security loans. Growth in business loans accelerated further but
remained well below the average rate in the first half of 1978.
Outstanding commercial paper of nonfinancial businesses contracted slightly, following a sharp expansion in June and July.
Growth of the narrowly defined money supply (M-l), which had
FOMC Policy Actions
219
been at an average annual rate of about 53A per cent in June and
July, picked up in August to a rate of about 73A per cent, roughly
the same as the average in the first two quarters of the year.1 Weekly
data suggested a further pick-up in September. Inflows of the
interest-bearing deposits included in M-2 and M-3 also accelerated
somewhat in August, reflecting primarily substantial flows of funds
into large-denomination time deposits at banks and into the 6-month
money market certificates at nonbank thrift institutions. As a result,
growth in the broader monetary aggregates was relatively rapid.
At its meeting on August 15 the Committee had decided on
ranges of tolerance for the annual rates of growth in M-1 and M-2
over the August-September period of 4 to 8 per cent and 6 to
10 per cent, respectively. The Committee had agreed that early
in the coming inter-meeting period operations should be directed
toward a Federal funds rate of around 8 per cent. Subsequently,
if the 2-month growth rates of M-l and M-2 appeared to be
significantly above or below the midpoints of the indicated ranges,
the objective for the funds rate was to be raised or lowered in
an orderly fashion within a range of 734 to SlA per cent.
Immediately following the August 15 meeting the Manager of
the System Open Market Account began to seek bank reserve
conditions consistent with an increase in the weekly-average Federal funds rate to around 8 per cent. Later in August, incoming
data suggested that growth in M-l would be at the upper limit
of the range specified by the Committee and that growth in M-2
would be close to the upper limit of its range. Accordingly, the
Manager sought reserve conditions consistent with a further increase in the Federal funds rate to SXA per cent, the upper limit
of the 7% to 8!A per cent range specified for the inter-meeting
period.
In early September, available data suggested that both M-l and
M-2 would grow at rates significantly above the upper limits of
their respective ranges. With the Federal funds rate already at its
upper limit, the Committee decided on September 8, at a telephone
1
Revised measures of the monetary aggregates, reflecting new benchmark data
for deposits at nonmember banks and certain technical adjustments, were available
to the Committee at the time of this meeting and were published on September
21, 1978. On the basis of these revised figures, the annual rate of growth in
M-l was about 83/4 per cent in August and about 8 per cent on the average
in the first two quarters of the year.
220
FOMC Policy Actions
conference meeting, to raise the upper limit of the range for the
Federal funds rate to SV2 per cent and to instruct the Manager
to aim promptly for a weekly-average Federal funds rate of about
83/s per cent. In the days remaining before this meeting the funds
rate fluctuated around 83/s per cent.
The rise in the Federal funds rate during the inter-meeting period
was accompanied by appreciable increases in rates on other shortterm market instruments. Yields on long-term securities, however,
generally edged down. In mid-September commercial banks raised
the rate on loans to prime business borrowers from 9V4 to 9V2
per cent.
On August 18 the Board of Governors announced an increase
in Federal Reserve discount rates from 11A to 7% per cent. In
announcing the increase, the Board stated that the action had been
taken in view of recent disorderly conditions in foreign exchange
markets as well as the continuing serious domestic inflationary
problem.
Conditions in residential mortgage markets, which had tightened
significantly during the first half of the year and then stabilized,
apparently had eased somewhat in recent weeks. Interest rates on
new commitments for conventional home mortgage loans at savings
and loan associations edged down during the inter-meeting interval,
and yields in the secondary mortgage market declined moderately.
In the Committee's discussion of the economic situation and
outlook, the members generally concurred with the staff's view
that real output of goods and services would grow at a moderate
pace over the period from the second quarter of 1978 to the second
quarter of 1979. At the same time, a number of members anticipated
a little less growth than the staff projected and one anticipated
a little more. The observation was made that even a slight shortfall
in growth of output from the rate projected by the staff implied
an upward drift in the unemployment rate.
All members of the Committee expected a continuation of a rapid
rate of inflation over the period to the second quarter of 1979—in
the view of several members, even more rapid than the pace
projected by the staff. As at other recent meetings, it was observed
that in 1979 pressures for large increases in wage rates would be
strong. It was also noted that in the near future the administration
was expected to announce a new anti-inflation program and that
FOMC Policy Actions
221
the way in which such a program was perceived by businessmen
and consumers could have a considerable impact on attitudes and
expectations.
Although the members differed little in their assessments of the
most likely rate of growth in output over the next few quarters,
some of them called attention to elements of potential weakness
or strength in the current situation that could contribute to a different
outcome. One member observed, for example, that the business
expansion, having endured for a long time by historical standards,
was exhibiting some signs of potential weaknesses that were to
be expected at this stage. On the other hand, this member also
saw some indications of a pick-up in business activity in other
industrial countries that might be of sufficient magnitude to raise
demands for U.S. exports significantly—thereby enhancing growth
in output in this country, strengthening the dollar in foreign exchange markets, and contributing generally to improvement in
confidence.
A second member saw little, if any, evidence of the major
cyclical imbalances that characteristically developed during business expansions and brought on downturns in activity. Therefore,
the expansion appeared likely to continue. However, the very high
rate of inflation at present was seen as the main threat to a sustained
expansion.
Another member, noting that a recent survey had pointed to some
deterioration in business assessments of prospects for their own
companies as well as for the economy as a whole, suggested that
business investment spending in 1979—especially for fixed capital,
but also for inventories—could prove to be disappointing. And with
respect to fiscal policy, a member observed that the Federal budget
on the high employment basis had recently swung in the direction
of restraint, and that the stimulative impact of the prospective
reduction in Federal taxes would depend heavily on final decisions
concerning both its composition and its timing.
The one member who anticipated slightly faster growth than the
staff projected for the period through the first half of 1979 expressed
concern about certain developments that could have adverse consequences further in the future. Specifically, the current high rate
of construction of commercial buildings and of apartment houses
could lead to an excessive supply of such facilities and to a
222
FOMC Policy Actions
consequent drop in construction. At about the same time, in this
member's view, a sharp cyclical downswing in credit-financed
buying of certain consumer durable goods might develop.
At its meeting in July the Committee had agreed that from the
second quarter of 1978 to the second quarter of 1979 average rates
of growth in the monetary aggregates within the following ranges
appeared to be consistent with broad economic aims: M-l, 4 to
6V2 per cent; M-2, 6V2 to 9 per cent; and M-3, IVi to 10 per
cent. The associated range for the rate of growth in commercial
bank credit was %Vi to ll 1 ^ per cent. It had also been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
In the discussion of policy for the period immediately ahead,
considerable concern was expressed about recent rates of monetary
growth. It was observed that for an extended period of time M-l
had been growing at rates in excess of the longer-run range adopted
by the Committee and that a slowing of growth was necessary
in pursuit of the Committee's objective of resisting inflationary
pressures while encouraging continued moderate economic expansion. Most members believed that some additional firming in money
market conditions during the next few weeks was needed to help
assure a slowing in growth of money over the months ahead,
although they differed with respect to the degree of firming that
they thought the Committee ought to contemplate.
In this connection, the comment was made that current levels
of interest rates were not exerting as much restraint on credit flows
as might be supposed. Thus, it was observed, interest rates adjusted
for expected rates of inflation were not high and might even be
negative. Moreover, the degree of nonprice rationing of credit,
particularly credit for housing, had been reduced by such structural
changes in the financial system as the introduction of the 6-month
money market certificates.
Two members, stressing the magnitude of the increases in interest
rates that had already occurred, proposed that for the time being
operations be directed toward maintaining the money market conditions currently prevailing. It was argued that, in light of the recent
slowing of the expansion in economic activity and of uncertainties
in the economic outlook, such a "pause" would afford the Com-
FOMC Policy Actions
223
mittee an opportunity to evaluate additional evidence on the current
situation, including the effects of the recent increases in interest
rates. It was observed that, historically, growth in output had never
been held at about its trend rate for very long and that further
increases in interest rates at this time might slow growth to a rate
below trend or might even provoke an actual downturn.
With respect to operating specifications for the period immediately ahead, the most frequently proposed ranges for the annual
rate of growth in M-l over the September-October period were
4 to 8 per cent and 5 to 9 per cent; a narrower range of 6 to
8 per cent was also suggested. A few members proposed somewhat
higher ranges—in at least one case, because the lower ranges in
combination with the strong growth indicated for September implied more of a moderation of growth in October than appeared
likely. One member advocated a lower range. For M-2, the most
common range suggested was 6 to 10 per cent. Some members
advocated somewhat higher ranges, indicating, in a few cases, a
willingness to accept the continuing effects that the introduction
of the 6-month money market certificate was having on expansion
of time deposits at commercial banks.
Most of the members favored directing open market operations
toward an increase in the Federal funds rate to about SVz per cent
shortly after this meeting. In general, these members favored an
inter-meeting range of %lA to 8% per cent, but two of them were
willing to accept, and another advocated, an upper limit of 9 per
cent. One member proposed directing open market operations
toward an increase in the funds rate to 8% per cent early in the
period and setting an inter-meeting range of 8*/2 to 9lA per cent.
And the two members who indicated a preference for maintenance
of the prevailing money market conditions suggested an intermeeting range of 8% to 8V2 per cent.
At the conclusion of the discussion the Committee decided that
ranges of tolerance for the annual rates of growth in M-l and M-2
over the September-October period should be 5 to 9 per cent and
6V2 to \QVi per cent, respectively. With regard to the Federal funds
rate, the Manager was instructed to seek a rate of around 8*/2 per
cent early in the period until the next regular meeting. Subsequently, if the 2-month growth rates of M-l and M-2 appeared
to be significantly above or below the midpoints of the indicated
224
FOMC Policy Actions
ranges, the objective for the funds rate was to be raised or lowered
in an orderly fashion within a range of 8!A to 83A per cent. It
was also agreed that in assessing the behavior of the aggregates,
the Manager should give approximately equal weight to the behavior of M-l and M-2.
As is customary, it was understood that the Chairman might
call upon the Committee to consider the need for supplementary
instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's
various objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services has grown moderately in the current quarter,
although the pace is somewhat below the average for the first two
quarters of the year. In August the dollar value of total retail sales
rose, after having declined in July, but remained close to the level
reached in April. Industrial production continued to expand at about
the moderate pace of the preceding 3 months, and nonfarm payroll
employment rose somewhat further. The unemployment rate declined from 6.2 to 5.9 per cent, slightly below the average rate
in the first 7 months of the year. Since midyear average prices of
goods and services have risen less rapidly than earlier, in large
part because of declines in prices of foods. The advance in the
index of average hourly earnings has been somewhat faster so far
in 1978 than it had been on the average during 1977.
After a sharp decline in early August, the trade-weighted value
of the dollar against major foreign currencies has recovered against
a background of uncertain conditions in exchange markets. In late
August it was announced that the U.S. trade deficit had increased
sharply in July.
Growth in M-l picked up in August to about the average rate
in the first two quarters of the year. Inflows of the interest-bearing
deposits included in M-2 and M-3 also accelerated somewhat, and
expansion in the broader aggregates was relatively rapid. Short-term
market interest rates have risen appreciably since mid-August, but
longer-term rates generally have edged down further. On August
18 an increase in Federal Reserve discount rates from llk to 73/4
per cent was announced.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
FOMC Policy Actions
225
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on July
18, 1978, the Committee agreed that these objectives would be
furthered by growth of M-l, M-2, and M-3 from the second quarter
of 1978 to the second quarter of 1979 at rates within ranges of
4 to 6'/2 per cent, 61/2 to 9 per cent, and IV2 to 10 per cent,
respectively. The associated range for bank credit is 8V2 to 1 1V2
per cent. These ranges are subject to reconsideration at any time
as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to developing conditions in domestic and international
financial markets more generally. Early in the period until the next
regular meeting, System open market operations shall be directed
at attaining a weekly-average Federal funds rate slightly above the
current level. Subsequently, operations shall be directed at maintaining the weekly-average Federal funds rate within the range of
81/* to 8% per cent. In deciding on the specific objective for the
Federal funds rate the Manager shall be guided mainly by the
relationship between the latest estimates of annual rates of growth
in the September-October period of M-l and M-2 and the following
ranges of tolerance: 5 to 9 per cent for M-l and 6V2 to IOV2 per
cent for M-2. If, giving approximately equal weight to M-l and
M-2, their rates of growth appear to be significantly above or below
the midpoints of the indicated ranges, the objective for the funds
rate shall be raised or lowered in an orderly fashion within its range.
If the rates of growth in the aggregates appear to be above the
upper limit or below the lower limit of the indicated ranges at a
time when the objective for the funds rate has already been moved
to the corresponding limit of its range, the Manager is promptly
to notify the Chairman who will then decide whether the situation
calls for supplementary instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Mrs. Teeters, and Mr. Winn. Votes against
this action: Messrs, Wallich and Willes.
Messrs. Wallich and Willes dissented from this action because
they favored more vigorous measures to curb the rates of growth
in the monetary aggregates. They believed that such measures were
226
FOMC Policy Actions
essential to deal with the problem of inflation and that they could
be undertaken without a significant risk of precipitating a recession.
In their view, current levels of interest rates adjusted for expected
rates of inflation were not high.
2. Authorization for Domestic Open Market Operations
At this meeting, Committee members voted to increase from $3
billion to $4 billion the limit on changes between Committee
meetings in System Account holdings of U.S. Government and
Federal agency securities specified in paragraph l(a) of the authorization for domestic open market operations, effective immediately,
for the period ending with the close of business on October 17,
1978.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Mrs. Teeters, Messrs. Wallich, Willes, and
Winn. Votes against this action: None.
This action was taken on the recommendation of the Management
of the System Account. The Management had advised that largescale purchases of Treasury and Federal agency securities over the
coming inter-meeting interval might be needed to counter the effect
on member bank reserves of a projected increase in Treasury
balances at the Reserve Banks arising from corporate tax receipts
in mid-September.
Subsequent to this meeting, on October 10, 1978, the Committee
voted to approve an additional increase of $1 billion, to $5 billion,
in the limit on changes between Committee meetings in U.S.
Government and Federal agency securities specified in paragraph
l(a) of the authorization for domestic open market operations,
effective immediately, for the period ending with the close of
business on October 17, 1978.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Gardner, Jackson,
Partee, Mrs. Teeters, Messrs. Wallich, Willes, and
Winn. Votes against this action: None.
This action was taken on recommendation of the Management
of the System Account. The Management had advised that, even
FOMC Policy Actions
227
though the Committee had voted at its September 19 meeting to
raise the limit from $3 billion to $4 billion, large-scale purchases
of Treasury and Federal agency securities had reduced the leeway
for further purchases during the inter-meeting period to about $335
million. It now appeared likely that additional purchases would
be required as currency in circulation and other factors were
absorbing reserves while Treasury balances continued at a high
level, in part because of purchases of special Treasury securities
by foreign central banks in association with their recent intervention
in the foreign exchange markets.
228
FOMC Policy Actions
MEETING HELD ON OCTOBER 17, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that output
of goods and services had expanded moderately in the third quarter,
but that the rate of growth appeared to be somewhat below the
average annual rate of about 4lA per cent estimated by the Commerce Department for the first two quarters of the year. The rise
in average prices—as measured by the fixed-weight price index
for gross domestic business product—was rapid in the third quarter,
although it was well below the annual rate of about 12 per cent
in the second quarter.
Staff projections for the year ending in the third quarter of 1979
were little changed from those of a month earlier. They continued
to suggest that output of goods and services would grow somewhat
more slowly than over the first three quarters of 1978. The rate
of inflation was expected to remain rapid, although also moderating
a bit from its pace thus far in 1978. The unemployment rate was
projected to change little from its September level.
In September the index of industrial production increased an
estimated 0.5 per cent, close to the average rate of expansion in
the preceding 4 months. Nonfarm payroll employment changed
little in September following relatively small increases in July and
August. In manufacturing, employment was essentially unchanged
in September and the average workweek held steady at an advanced
level. The unemployment rate edged up from 5.9 to 6.0 per cent,
the rate prevailing on the average since the first quarter of the
year.
Total private housing starts declined slightly in August, but they
remained above an annual rate of 2 million units. Sales of new
houses fell for the third consecutive month; however, a surge in
sales of existing dwellings raised total sales of single-family homes
to a new high.
The dollar value of total retail sales was estimated to have
increased considerably in September following the large rise now
FOMC Policy Actions
229
indicated for August. For the third quarter as a whole, however,
the advance in retail sales was substantially below the exceptional
gain in the second quarter. Unit sales of new automobiles fell in
September to an annual rate well below the average pace since
early spring.
Newly revised data suggested that the index of average hourly
earnings of private nonfarm production workers had risen at an
annual rate of 7.9 per cent through September 1978 compared with
an increase of 7.4 per cent for 1977 as a whole. In August, as
in July, the consumer price index rose more moderately than in
most earlier months of the year, as prices of some foods declined
substantially. In September, however, producer prices of food
products turned up sharply and contributed to a marked rise in
prices of producer finished goods. Announcement of a new Government program aimed at moderating increases in prices and wages
was expected to be made shortly after this meeting.
The trade-weighted value of the dollar against major foreign
currencies fell substantially from mid-September to mid-October
in frequently volatile exchange markets. The U.S. trade deficit
declined sharply in August, reversing the pronounced increase in
July; for the 2 months the deficit was close to the rate for the
second quarter and well below the high rate for the first quarter.
The expansion in total credit at U.S. commercial banks, which
had slowed in August, accelerated in September nearly to the pace
experienced on the average in earlier months of the year. Bank
investments and security loans rose in September after having
declined in August, while growth in real estate and business loans
moderated only slightly from the rapid rates recorded in other recent
months. Outstanding commercial paper of nonfinancial businesses
rose somewhat in September following a small decline in August.
Growth in the narrowly defined money supply (M-l) accelerated
further in September to an annual rate of about 14 per cent from
8.5 per cent in August. However, data for early October suggested
a sharply reduced growth rate in the current month. Inflows of
the interest-bearing deposits included in M-2 and M-3 remained
strong in September, and growth in the broader monetary aggregates also accelerated somewhat.
At its meeting on September 19 the Committee had decided on
ranges of tolerance for the annual rates of growth in M-1 and M-2
230
FOMC Policy Actions
during the September-October period of 5 to 9 per cent and 6J/2
to 10^2 per cent, respectively. The Committee had agreed that early
in the coming inter-meeting period operations should be directed
toward a Federal funds rate of around 8V2 per cent, slightly above
the prevailing level of about 8% per cent. Subsequently, if the
2-month growth rates of M-l and M-2 appeared to be significantly
above or below the midpoints of the indicated ranges, the objective
for the funds rate was to be raised or lowered in an orderly fashion
within a range of 8^ to 8% per cent.
Following the September 19 meeting the Manager of the System
Open Market Account began to seek bank reserve conditions
consistent with an increase in the weekly-average Federal funds
rate to around 8V2 per cent. As September progressed, incoming
data suggested that growth in M-1 would be around the upper limit
of the range specified by the Committee and that growth in M-2
would be in the upper portion of its range. Accordingly, the
Manager sought reserve conditions consistent with further increases
in the Federal funds rate, and by late September the rate was around
8% per cent, the upper limit of the inter-meeting range specified
by the Committee. During the first half of October the objective
for the funds rate remained S3A per cent, although on many days
the rate was above or below that level for technical reasons.
A considerable rise in interest rates on most short-term market
instruments was associated with the increase in the Federal funds
rate during the inter-meeting period. Yields on Treasury and corporate bonds also moved somewhat higher, but they remained
below their July peaks. Yields on State and local government bonds
changed little, reflecting in part a markedly reduced volume of
new issues. In late September commercial banks increased the rate
on loans to prime business borrowers from 9Vi to 93A per cent;
in mid-October this rate was raised further to 10 per cent.
The Board of Governors announced an increase in Federal
Reserve Bank discount rates from 13A to 8 per cent on September
22 and a further increase to 8V2 per cent on October 13. Both
actions were taken primarily to bring the discount rate into closer
alignment with other short-term interest rates, but also in recognition of conditions affecting the dollar in foreign exchange markets.
The Board indicated in addition that the increase of V2 percentage
point in mid-October was approved in light of the continued high
FOMC Policy Actions
231
rate of inflation and the recent rapid expansion of the monetary
aggregates.
In the Committee's discussion of the economic situation and
outlook, the members generally agreed that real output of goods
and services was likely to grow moderately over the year ending
in the third quarter of 1979, at a rate about or a little below that
projected by the staff. Given their expectations for output, the
members anticipated that over the period the unemployment rate
would change little from its recent level or would increase somewhat. All members expected that average prices of goods and
services would continue to rise rapidly.
Despite the general agreement that real output was likely to grow
moderately over the next four quarters, some members cited elements in the current situation that could contribute to a downturn
in activity before the end of the period. It was pointed out, for
example, that the current business expansion—now well into its
fourth year—had lasted for a long time by historical standards and
that the dynamics of business fluctuations suggested that a downturn
might well develop sometime within the coming year. Also, business-cycle history provided little encouragement for the expectation
that growth in output could gradually be slowed to a pace more
or less consistent with its long-run potential and with relative
stability in the unemployment rate. Moreover, rapid inflation was
viewed as a serious threat to the sustainability of the expansion
in output, although buying of goods might be buoyed for a time
by anticipation of further price increases.
At the same time, attention was drawn to favorable elements
in the economic situation. Specifically, housing starts and residential construction had been maintained at higher levels than had
been expected earlier, and the outlook for business fixed investment
seemed to have strengthened lately. Altogether, final sales apparently had picked up in recent months while growth in output
had moderated, tending to improve prospects for activity in the
months immediately ahead. Finally, there were grounds for believing that improvement in the net export position would lend strength
to domestic output.
At this meeting the Committee reviewed its 12-month ranges
for growth in the monetary aggregates. At its meeting in July 1978
the Committee had specified the following ranges for the period
232
FOMC Policy Actions
from the second quarter of 1978 to the second quarter of 1979:
M-l, 4 to 6x/2 per cent; Af-2, 61/2 to 9 per cent; and M-3, IVi
to 10 per cent. The associated range for growth in commercial
bank credit was 8*/2 to 1 Wi per cent. The ranges being considered
at this meeting were for the period from the third quarter of 1978
to the third quarter of 1979.
In contemplating ranges for growth of the monetary aggregates
over the year ahead, the Committee faced unusual uncertainties.
First, commercial banks were authorized to introduce an automatic
transfer service (ATS) on November 1, although there was a chance
that introduction would be stayed by court action; and in the closing
days of the session of the Congress just ended, Federally chartered
depositary institutions in New York State were authorized to offer
NOW accounts. ATS would provide for automatic shifts of funds
from interest-earning savings accounts to demand accounts, and
thus would enable customers to hold much lower balances in
demand accounts. This service, therefore, seemed likely to alter
substantially the relationship between growth of M-l and growth
of nominal GNP.
Second, no authoritative information was yet available on the
President's new program to moderate increases in wages and prices,
which was expected to be announced shortly after this meeting.
In the Committee's discussion of longer-run ranges, the point was
stressed that the program would have its greatest potential for
moderating inflationary expectations if it were perceived by the
public as an additional measure in the campaign against inflation
and not as a substitute for fiscal and monetary restraint.
With respect to ATS, a staff analysis had suggested that during
a transition period a significant shift in funds from demand deposits
to savings deposits at commercial banks was almost sure to occur,
but its size was uncertain. Therefore, the rate of growth of M-l
over the year ahead was likely to be lower than otherwise, but
the amount of the reduction could be within a fairly wide range.
Growth of M-2, on the other hand, might be raised marginally,
reflecting minor shifts of deposits from nonbank thrift institutions
to savings accounts at commercial banks. It appeared unlikely that
growth of M-3 would be noticeably affected.
A new measure of money, designated M-l +, had been developed
by the staff to provide background information with regard to the
FOMC Policy Actions
233
behavior of money, particularly the transactions demand for money,
during the transition period. Growth of this aggregate—defined as
M-l plus savings deposits at commercial banks, NOW accounts
at nonbank thrift institutions, and demand deposits at mutual
savings banks—would not be affected by shifts from demand
deposits to savings deposits at commercial banks.
Members of the Committee suggested different approaches to
take account of the uncertainties noted above in setting the longerrun ranges for the aggregates. One proposal was to adopt ranges
for M-l, M-2, and M-3 as before, in the expectation that introduction of ATS would have little effect on growth of the aggregates
in the few months before the Committee would again consider its
longer-run ranges. Under this approach, a supplementary range for
growth in M-l adjusted for estimated effects of ATS and a range
for growth in M-1+ might be indicated as "memorandum items"
for monitoring purposes.
Another proposal was to drop M-l from the list of aggregates,
adopting longer-run ranges only for M-2 and M-3 at this time.
It was suggested, along with this proposal, that additional work
on the concepts and measurement of money be undertaken with
a view to adopting new measures when the Committee next considered its longer-run ranges.
Additional proposals involved retaining M-1 and adopting ranges
for M-l, M-2, and M-3 as before, with specific adjustments to
take account of the special uncertainties. One proposal was to adjust
downward both the upper and the lower limits of the range for
M-l by an estimate of the probable effects of ATS. Another was
to widen the range for M-l, chiefly by reducing the lower limit.
A third was to couple such a widening of the range for M-l with
notation of a supplementary range for M-1 + to aid in evaluating
the behavior of both M-l and M-2.
At the conclusion of the discussion, the Committee decided that
the existing ranges for M-2 and M-3 provided for rates of monetary
growth over the year ahead that were consistent with a moderation
of inflation under the President's program. Thus, the Committee
adopted ranges of 6V2 to 9 per cent for M-2 and IVi to 10 per
cent for M-3 for the period from the third quarter of 1978 to the
third quarter of 1979. The Committee also indicated that it expected
growth of M-l to be within a range of 2 to 6 per cent over that
234
FOMC Policy Actions
period. That range was both lower and wider than the range of
4 to 6V1 per cent that had been adopted in July, in recognition
of the uncertainty concerning the size and speed of the expected
shift of deposits from demand to savings accounts resulting from
the introduction of ATS. The associated range for commercial bank
credit was 8y2 to 11V6 per cent. The Committee also decided that
growth of M-1+ within a range of 5 to IVi per cent appeared
to be generally consistent with the ranges of growth for the other
monetary aggregates.
The Committee adopted the following ranges for rates of growth
in monetary aggregates for the period from the third quarter of 1978
to the third quarter of 1979: M-2, 6V£ to 9 per cent; M-3, IV2
to 10 per cent. M-l was expected to grow within a range of 2
to 6 per cent over the period, depending in part on the speed and
extent of transfers from demand to savings deposits resulting from
the introduction of ATS. The associated range for bank credit is
8x/2 to IP/2 per cent. Growth of M-1+ (M-l plus savings deposits
at commercial banks and NOW accounts) in a range of 5 to IV2
per cent was thought to be generally consistent with the ranges
for the foregoing aggregates.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
and Mrs. Teeters. Votes against this action: Messrs.
Wallich, Willes, and Winn. Absent and not voting:
Mr. Gardner.
Messrs. Wallich, Willes, and Winn dissented from this action
because, with the Committee's longstanding objective of slowing
the rate of inflation in mind, they preferred to specify an upper
limit of less than 6 per cent for the rate of growth of M-l, adjusted
for the estimated effects of ATS. In their view, the upper limit
of 6 per cent, adjusted for ATS, represented an unwarranted
increase from the 6V2 per cent upper limit of the existing (pre-ATS)
range.
In the discussion of policy for the period immediately ahead,
members of the Committee noted that the uncertainties associated
with introduction of ATS would affect growth of the monetary
aggregates in the October-November period—the 2-month period
for which growth ranges were being considered—in much the same
way as they would growth over the year ahead. Specifically, growth
FOMC Policy Actions
235
of M-l over the 2-month period might well be less than otherwise
by a significant but undetermined amount, and growth of M-2 might
be marginally greater.
As in the case of the longer-run ranges, various proposals were
advanced for taking account of the unusual uncertainties. In general, these proposals involved placing less emphasis *m the behavior
of M-l as a guide to operations in the inter-meeting period and
more on the behavior of M-2, rather than the approximately equal
weight that typically had been given to the two aggregates. One
proposal was to drop M-l altogether as an operating guide. Another
was to give primary emphasis to M-2 and to specify only an upper
limit for M-l rather than a range, reflecting a judgment that rapid
growth in M-l would have significance for policy while slow
growth might represent chiefly transfers from demand to savings
accounts because of the introduction of ATS. A third proposal was
to widen the range for M-l, while indicating a range for M-l-fas an aid in evaluating the behavior of the other monetary aggregates. At the same time, most members of the Committee favored
giving greater weight than usual to money market conditions in
the conduct of operations in the period until the next meeting of
the Committee.
In the discussion, concern was expressed about recent rates of
monetary growth, and most members believed that some additional
firming in money market conditions in the period immediately ahead
was needed to help assure a slowing in growth over the months
ahead. They favored directing open market operations toward an
increase in the Federal funds rate to about 9 per cent shortly after
this meeting, with an inter-meeting range of 83A per cent to either
9lA or 9V2 per cent.
Other members believed that for the time being operations should
be directed toward maintaining the money market conditions currently prevailing, as represented by a Federal funds rate of about
8% per cent, because they felt that such a pause was needed to
evaluate the lagged impact of the substantial increases in interest
rates over recent months. These members suggested an inter-meeting range of H3A to 9 per cent.
With respect to the monetary aggregates, a number of members
proposed a range of Vi to 6V£ per cent for the annual rate of growth
in M-l over the October-November period. Those members who
236
FOMC Policy Actions
preferred to specify only an upper limit, rather than a range, for
growth in M-l over the 2-month period suggested limits of 5, 6,
and 7 per cent. For M-2, a range of 5x/2 to 9Vi per cent was proposed
by the largest number of members; one slightly higher and one
slightly lower were also suggested.
At the conclusion of the discussion the Committee agreed to
instruct the Manager to seek a Federal funds rate of around 9 per
cent early in the period before the next regular meeting and
subsequently to maintain the rate within a range of 8% to 9lA per
cent. With regard to the specific objective for the Federal funds
rate within that range, the Committee instructed the Manager to
be guided mainly by a range of tolerance for the annual rate of
growth in M-2 over the October-November period of 5Vi to 9lh
per cent, provided that the rate of growth in M-l over that period
did not exceed 6V2 per cent.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that real output
of goods and services grew moderately in the third quarter, although
the pace was somewhat below the average for the first two quarters
of the year. In September, as in August, the dollar value of total
retail sales rose considerably. Industrial production continued to
expand while nonfarm payroll employment changed little. The
unemployment rate edged up from 5.9 to 6.0 per cent. Average
producer prices of finished goods rose substantially in September,
as prices of foods increased sharply after having declined for 2
months. The advance in the index of average hourly earnings has
been somewhat faster so far in 1978 than it was on the average
during 1977.
The trade-weighted value of the dollar against major foreign
currencies has declined further since mid-September in frequently
volatile exchange markets. The U.S. trade deficit fell sharply in
August, reversing the jump recorded in July; for the 2 months the
deficit was close to the rate for the second quarter.
Growth in M-l, which had been rapid in August, accelerated
in September. Inflows of the interest-bearing deposits included in
M-2 and M-3 remained strong, and expansion in the broader
aggregates also accelerated somewhat. Short-term market interest
rates have risen further in recent weeks; long-term rates also have
increased, but they remain below their July peaks. An increase in
FOMC Policy Actions
237
Federal Reserve discount rates from 1%. to 8 per cent was announced
on September 22; another increase to 8V2 per cent was announced
on October 13.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. In setting ranges for
the monetary aggregates, the Committee recognized the uncertainties
concerning the effects that the November 1 introduction of the
automatic transfer service (ATS) would have on measures of the
money supply, especially M-l. Against that background, the Committee agreed that appropriate monetary and financial conditions
would be furthered by growth of M-2 and M-3 from the third quarter
of 1978 to the third quarter of 1979 within ranges of 6V2 to 9 per
cent and IV2 to 10 per cent, respectively. The narrowly defined
money supply (M-l) was expected to grow within a range of 2
to 6 per cent over the period, depending in part on the speed and
extent of transfers from demand to savings deposits resulting from
the introduction of ATS. The associated range for bank credit is
8!/2 to 11 V2 per cent. Growth of M-l-f (M-l plus savings deposits
at commercial banks and NOW accounts) in a range of 5 to IV2
per cent was thought to be generally consistent with the ranges
of growth for the foregoing aggregates. These ranges are subject
to reconsideration at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to developing conditions in domestic and international
financial markets more generally and to uncertainties associated with
the introduction of ATS. Early in the period before the next regular
meeting, System open market operations shall be directed at attaining a weekly-average Federal funds rate slightly above the current
level. Subsequently, operations shall be directed at maintaining the
weekly-average Federal funds rate within the range of 8% to 9lA
per cent. In deciding on the specific objective for the Federal funds
rate the Manager shall be guided mainly by a range of tolerance
for growth in M-2 over the October-November period of 5!/2 to
9V2 per cent, provided that growth of M-l over that period does
not exceed an annual rate of bx/i per cent.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Jackson, Partee,
238
FOMC Policy Actions
Wallich, and Winn. Votes against this action: Mrs.
Teeters and Mr. Willes. Absent and not voting:
Mr. Gardner.
Mrs. Teeters dissented from this action because she believed
that for the time being operations should be directed toward
maintaining the money market conditions currently prevailing. In
her view, the Committee should wait to evaluate the effects of
the substantial increases in interest rates over recent months before
contemplating additional firming in money market conditions.
Mr. Willes dissented from this action because he believed that
it allowed for unacceptably rapid monetary growth. He preferred
an upper limit of 5 per cent for growth of M-l over the October-November period; with respect to the Federal funds rate, he
favored raising the objective to 9V4 per cent during the inter-meeting
period, barring unforeseen weakness in monetary growth, and
providing leeway to raise the objective to 9x/2 per cent if the
monetary aggregates appeared to be growing more rapidly than
expected.
Subsequent to the meeting, on October 31, the Committee voted
to approve a delegation of authority to Chairman Miller to take
certain actions in implementation of a broad Government program
to strengthen the dollar in foreign exchange markets and thereby
to counter continuing domestic inflationary pressures, if he determined that the arrangements with the U.S. Treasury and with
certain foreign monetary authorities were substantially as contemplated in a consultation among the members of the Committee on
the preceding day.
Early on the morning of November 1 the Treasury and the Federal
Reserve announced measures being taken to implement such a
program. Specifically, the Board of Governors approved (1) an
increase of 1 percentage point, from 8V2 to 9l/z per cent, in the
discount rate at the Federal Reserve Bank of New York, effective
immediately, and (2) establishment of a supplementary reserve
requirement, in addition to the existing reserve requirements on
deposits at member banks, equal to 2 per cent of time deposits
in denominations of $100,000 or more. At the same time the System
announced increases in its reciprocal currency (swap) arrangements
with the central banks of Germany, Japan, and Switzerland by
a total of $7.6 billion, to $15 billion, and activation of the swap
FOMC Policy Actions
239
arrangement with the Bank of Japan. It further stated that the
foreign currencies available under the expanded arrangements
would be used along with foreign currencies available to the
Treasury in a program of forceful intervention in the exchange
markets in coordination with foreign central banks to correct recent
excessive movements in exchange rates.
In a joint Treasury-Federal Reserve statement, other measures
to mobilize key foreign currencies were announced. They included
drawings on the U.S. reserve tranche in the International Monetary
Fund, for part of which activation of the General Arrangements
to Borrow was contemplated; sales of special drawing rights; and
issuance of U.S. Treasury securities denominated in foreign currencies. It was also announced that the Treasury would increase
its sales of gold to at least 1 V2 million ounces monthly beginning
in December.
As part of this program, on October 31 the Federal Open Market
Committee voted to approve a delegation of authority to Chairman
Miller to modify the domestic policy directive by raising the range
for the Federal funds rate to 9V£ to 93A per cent and by instructing
the Manager, in deciding on the specific objective for the rate within
that range, to be guided by developing conditions in domestic and
international financial markets. The Chairman approved the modification of the directive on November 1, effective on that date.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None. Absent and not voting:
Messrs. Gardner and Jackson.
2. Authorization for Foreign Currency Operations
On October 31 the Committee also voted to approve a delegation
of authority to Chairman Miller to negotiate increases in the
System's swap arrangements with the German Federal Bank, the
Bank of Japan, and the Swiss National Bank. In addition, the
Committee voted to approve a concurrent amendment to paragraph
2 of the authorization for foreign currency operations to raise
correspondingly the amounts specified there for the swap arrangements with those central banks.
240
FOMC Policy Actions
On November 1 the Chairman approved increases of $2 billion,
$3 billion, and $2.6 billion in the System's swap arrangements with
the German Federal Bank, the Bank of Japan, and the Swiss
National Bank, respectively. Accordingly paragraph 2 of the authorization was amended, effective on that date, to read as follows:
The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements
("swap" arrangements) for the System Open Market Account for
periods up to a maximum of 12 months with the following foreign
banks, which are among those designated by the Board of Governors
of the Federal Reserve System under Section 214.5 of Regulation
N, Relations with Foreign Banks and Bankers, and with the approval
of the Committee to renew such arrangements on maturity:
Foreign bank
Amount of arrangement
(millions of dollars equivalent)
Austrian National Bank
250
National Bank of Belgium
1,000
Bank of Canada
2,000
National Bank of Denmark
250
Bank of England
3,000
Bank of France
2,000
German Federal Bank
6,000
Bank of Italy
3,000
Bank of Japan
5,000
Bank of Mexico
360
Netherlands Bank
500
Bank of Norway
250
Bank of Sweden
300
Swiss National Bank
4,000
Bank for International Settlements:
Dollars against Swiss francs
600
Dollars against authorized European
currencies other than Swiss francs
1,250
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None. Absent and not voting:
Messrs. Gardner and Jackson.
Paragraph ID of the Committee's authorization for foreign currency operations authorizes the Federal Reserve Bank of New York,
for the System Open Market Account, to maintain an over-all open
position in all foreign currencies not to exceed $1.0 billion, unless
FOMC Policy Actions
241
a larger position is expressly authorized by the Committee. On
June 20, 1978, the Committee had authorized an over-all open
position of $1.5 billion.
On October 27, 1978, the Committee authorized an increase in
this limit to $2 billion in view of the scale of recent and potential
Federal Reserve operations in the foreign exchange markets undertaken pursuant to the Committee's foreign currency directive.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None. Absent and not voting:
Messrs. Gardner and Jackson.
On October 31 the Committee voted to approve a delegation
of authority to Chairman Miller to authorize an open position of
$5 billion. On November 1 the Chairman authorized an open
position of that amount.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None. Absent and not voting:
Messrs. Gardner and Jackson.
3. Authorization for Domestic Open Market Operations
On November 3, 1978, Committee members voted to increase from
$3 billion to $5 billion the limit on changes between Committee
meetings in System Account holdings of U.S. Government and
Federal agency securities specified in paragraph l(a) of the authorization for domestic open market operations, effective immediately,
for the period ending with the close of business on November 21,
1978.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None. Absent and not voting:
Messrs. Gardner and Jackson.
This action was taken on recommendation of the System Account
Manager. The Manager had advised that large-scale sales of Treas-
242
FOMC Policy Actions
ury securities since the October meeting—required mainly to
counter the effect on member bank reserves of a steep decline in
Treasury balances at the Federal Reserve Banks and to accommodate substantial purchases of Treasury bills by foreign central
banks—had reduced the leeway for further sales to $365 million.
It now appeared likely that additional sales would be required as
current projections indicated a need for further reserve-absorbing
operations over the coming weeks.
FOMC Policy Actions
243
MEETING HELD ON NOVEMBER 21, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested that output
of goods and services was continuing to grow at a moderate pace
in the current quarter, following expansion at an annual rate of
3.4 per cent in the third quarter and a somewhat faster rate on
the average over the first two quarters of the year. Average prices,
as measured by the fixed-weight price index for gross domestic
business product, appeared to be continuing their rapid rise, about
in line with the annual rate of IVi per cent estimated for the third
quarter.
Staff projections of growth in output over the year ending in
the third quarter of 1979 had been reduced from those of a month
earlier. They now suggested a further slowing of expansion, in
large part because of a reduction next year in the rise of business
fixed investment and a decline in residential construction activity.
The projections continued to suggest a rapid rise in average prices.
The unemployment rate was expected to increase slightly from its
October level.
In October the index of industrial production rose an estimated
0.5 per cent, the same as in September but somewhat below the
average advance since last winter. Nonfarm payroll employment
rose considerably in October following relatively small advances
during the third quarter. In manufacturing, employment gains were
the largest of the year and the average workweek edged up. The
unemployment rate declined from 6.0 to 5.8 per cent.
Total private housing starts remained above an annual rate of
2 million units in September. However, sales of new units declined
for the fourth consecutive month, and merchant-builder inventories
of unsold single-family homes rose further. Sales of existing
dwellings remained at an advanced level.
The dollar value of total retail sales declined somewhat in
244
FOMC Policy Actions
October following a sizable gain in August and a further advance
in September. On balance, retail sales were modestly above their
April level and slightly above their average in the third quarter.
Unit sales of new automobiles increased in October but were still
lower than in most other months since early spring.
The index of average hourly earnings of private nonfarm production workers increased at an annual rate of about 9 per cent
in October; for the first 10 months of 1978 the advance was at
a rate of 8.4 per cent, about 1 percentage point above the rise
over 1977 as a whole. Total hourly compensation of nonfarm
workers was estimated to have increased at an annual rate of nearly
10 per cent over the first three quarters of the year, about 13A
percentage points faster than in 1977.
Average producer prices of finished goods rose substantially in
October for the second consecutive month, reflecting in part a
further large increase in producer prices of food products. In
September the consumer price index rose at an annual rate of nearly
10 per cent following 2 months of somewhat smaller increases.
On October 24 the Government announced a new program aimed
at moderating increases in prices and wages. The program included
explicit numerical standards for price and wage increases, with
voluntary compliance encouraged by a number of Government
measures; procedures to minimize the inflationary impact of Government regulations; and a restrictive budget policy.
On November 1 a broad Government program was put in place
to strengthen the dollar in foreign exchange markets and thereby
to counter continuing domestic inflationary pressures. As part of
this program the Federal Reserve announced the following actions:
an increase in the discount rate from 8V2 to 9Vz per cent; establishment of a supplementary reserve requirement of 2 per cent against
member bank time deposits in denominations of $100,000 or more;
and increases in its reciprocal currency arrangements with the
central banks of Germany, Japan, and Switzerland, and activation
of the swap arrangement with the Bank of Japan. The U.S. Treasury
announced related measures to mobilize key foreign currencies,
including drawings on the U.S. reserve tranche in the International
Monetary Fund; sales of special drawing rights; and issuance of
foreign-currency-denominated securities. The Treasury also announced an increase in its monthly gold sales. The expanded
FOMC Policy Actions
245
availability of foreign currencies was to be used in a program of
forceful intervention in exchange markets, coordinated with foreign
central banks, to correct recent excessive exchange-rate movements.
In foreign exchange markets the trade-weighted value of the
dollar against major foreign currencies declined substantially further
during the last week of October, following large cumulative losses
over recent months. After the announcement and initial implementation of the new support program on November 1, however, the
dollar rose sharply—to a level somewhat above that in early
October. The U.S. trade deficit in the third quarter was about
unchanged from the second quarter.
In October the expansion of total credit at U.S. commercial banks
slowed slightly from the pace in the third quarter. Bank loans other
than security loans continued to grow rapidly, but bank investments
were reduced somewhat. Outstanding commercial paper of nonfinancial businesses rose considerably in October, after having
changed little on balance during the previous 2 months.
The narrowly defined money supply (M-l) grew at an annual
rate of about 3lA per cent in October, after having expanded at
rates of about 8V2 and 14 per cent in August and September,
respectively; growth in M-2 and M-3 also moderated. Inflows of
the interest-bearing deposits included in the broader aggregates
slowed somewhat, although sales of 6-month money market certificates at both commercial banks and nonbank thrift institutions
expanded sharply.
At its meeting on October 17, the Committee had agreed that
early in the coming inter-meeting period operations should be
directed toward a Federal funds rate of around 9 per cent, slightly
above the rate of 83A per cent then prevailing. Subsequently, the
objective for the Federal funds rate was to be raised or lowered
in an orderly fashion within a range of 8% to 9lA per cent. In
setting a specific objective for the funds rate within that range,
the Manager of the System Open Market Account was to be guided
mainly by a range of tolerance of 5V2 to 9lh per cent for the annual
rate of growth in M-2 over the October-November period, provided
that the rate of growth in M-l over that period did not exceed
6V2 per cent.
Immediately following the October 17 meeting the Manager
began to seek reserve conditions consistent with a weekly average
246
FOMC Policy Actions
Federal funds rate of around 9 per cent. However, because a sizable
short-term need for reserves coincided with temporary market
scarcities of Treasury obligations for collateral behind System
repurchase agreements, Federal funds traded at around 9lA per cent.
As October progressed, the Manager did not take aggressive action
to exert downward pressure on the funds rate, in light of conditions
in foreign exchange markets and of the Committee's related instruction to give due regard to such developments. Accordingly,
Federal funds continued to trade at around 9lA per cent in the days
prior to November 1.
As part of the Government program announced on November
1, the Committee had voted on October 31 to delegate authority
to Chairman Miller to modify the domestic policy directive by
raising the range for the Federal funds rate to 9lA to 93A per cent
and by instructing the Manager, in deciding on the specific objective
for the rate within that range, to be guided by developing conditions
in domestic and international financial markets; the Chairman
approved the modification on November 1. During the first half
of November, the Federal funds rate averaged in the upper half
of that range. For several days immediately following the November 1 announcement, however, the rate was somewhat above
the desired range as the Manager avoided aggressive action to
reduce it during the initial stages of implementation of the new
program.
The rise in the Federal funds rate during the inter-meeting period
was accompanied by substantial increases in yields on most shortterm market instruments. Advances in rates on Treasury bills were
moderated, however, by large investments by foreign central banks
of dollars obtained in currency support operations. Commercial
banks increased the rate on loans to prime business borrowers from
10 per cent to 11 per cent during the period. Yields in bond markets
advanced considerably during the second half of October, but a
large portion of the increase was offset by sizable declines in early
November. In mortgage markets, interest rates moved steadily
higher over the inter-meeting period as demands for real estate
credit remained strong. Residential mortgage lending apparently
increased in October.
In the Committee's discussion of the economic situation and
outlook, most members indicated that over the past month they
FOMC Policy Actions
247
had scaled down their expected rates of growth in real output of
goods and services for the year ending in the third quarter of 1979.
One or two members still anticipated moderate expansion over the
period, but many projected slow growth, and some thought that
a downturn in activity was likely or that the risks of an actual
recession or a growth recession had increased. It was emphasized,
however, that the uncertainties associated with any forecast of real
output had increased significantly.
Most members expected that, over the year ending in the third
quarter of 1979, the unemployment rate either would change little
or would increase from the average level in the third quarter of
1978. All members continued to anticipate a rapid rise in average
prices of goods and services.
The recent rise in short-term interest rates—specifically, its
impact on the cost and possibly on the availability of mortgage
credit—in addition to recent indications of a slowing next year
in the rise of business fixed investment, was cited as one reason
for reducing anticipated rates of growth in real output over the
period ahead. On the other hand, the view was also expressed
that the new program to strengthen the dollar and to counter
inflationary pressures could have favorable effects on expectations,
especially on those for inflation, and thereby could encourage
spending. In this connection, it was noted that long-term bond
yields had declined immediately after the announcement on November 1.
A difference in emphasis also existed with respect to Federal
tax policy. Thus, it was suggested that prospects for sustaining
the expansion in output had been improved by the recent enactment
of reductions in income taxes. But it was also observed that the
reductions would be largely offset by substantial increases in social
security taxes in 1979.
Some skepticism was expressed, as it had been at the October
meeting, that growth in output could be tapered down to a relatively
slow rate without bringing on a recession, especially in view of
the rapid inflation. It was stressed, on the other hand, that economic
conditions in this period differed from those in other business
expansions in ways that made it reasonable to expect a reduction
in the rate of growth and a concomitant decrease in the rate of
inflation without a slide into recession.
248
FOMC Policy Actions
At its meeting in October the Committee had agreed that from
the third quarter of 1978 to the third quarter of 1979 growth of
M-2 and M-3 within ranges of 6l/i to 9 per cent and ll/i to 10
per cent, respectively, appeared to be consistent with broad economic aims. M-l was expected to grow over that period within
a range of 2 to 6 per cent, depending in part on the speed and
extent of transfers from demand to savings deposits resulting from
the introduction of the automatic transfer service (ATS). The
associated range for the rate of growth in commercial bank credit
was 8V2 to IIV2 per cent. The Committee had also decided that
growth of M-1+ within a range of 5 to IV2 per cent appeared
to be generally consistent with the ranges of growth for the other
monetary aggregates. It had been agreed that the longer-run ranges,
as well as the particular aggregates for which such ranges were
specified, would be subject to review and modification at subsequent
meetings.
In the discussion of policy for the period immediately ahead,
the members of the Committee agreed that, in seeking to achieve
bank reserve and money market conditions broadly consistent with
the longer-run ranges for monetary growth cited above, due regard
should be given to the program for supporting the foreign exchange
value of the dollar as well as to developing conditions in domestic
financial markets and to uncertainties associated with the November
1 introduction of ATS. Against that background, the members
differed somewhat in their views as to whether, and to what degree,
additional firming in money market conditions should be sought
during the next few weeks; no sentiment was expressed for easing
money market conditions. As they had at the October meeting,
moreover, most members favored giving greater weight than usual
to money market conditions in the conduct of operations in the
period before the next meeting, although some sentiment was
expressed for a return to basing decisions for open market operations primarily on the behavior of the monetary aggregates.
The members favored directing open market operations early in
the period before the next regular meeting toward maintaining the
weekly-average Federal funds rate at 9% per cent, the upper end
of the 9x/2 to 93A per cent range specified as of November 1, or
slightly higher. With respect to the range in which the funds rate
might be varied if growth in the aggregates appeared to approach
FOMC Policy Actions
249
or move beyond their specified limits, most members favored an
upper limit of 10 per cent for the range; lOVs and 1CMA per cent
were also proposed. Lower limits from 9Vi to 93A per cent were
suggested.
With respect to the monetary aggregates, almost all members
proposed that the Committee take account of the unusual uncertainties associated with the introduction of ATS in the same way
that it had at the October meeting—namely, by giving primary
emphasis to growth of M-2 and by specifying only an upper limit,
rather than a range, for growth of M l . For the annual rate of
growth in M-2 over the November-December period, most members favored a range with a lower limit of 6 per cent and an upper
limit of 9 to 10 per cent. Almost all members proposed 5 or 5!/2
per cent for the ceiling on growth of M-l over the 2-month period.
At the conclusion of the discussion the Committee agreed to
instruct the Manager to seek a Federal funds rate of around 9Vs
per cent early in the period before the next regular meeting and
subsequently to maintain the rate within a narrow band of 93A to
10 per cent. With regard to the specific objective for the rate within
that range, the Committee instructed the Manager to be guided
mainly by a range of tolerance for the annual rate of growth in
M-2 over the November-December period of 6 to 9V2 per cent,
provided that the rate of growth in M-l over that period did not
exceed 5 per cent. It was understood that the Chairman might call
upon the Committee to consider the need for supplementary instructions before the next scheduled meeting if significant inconsistencies appeared to be developing among the Committee's objectives.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the
current quarter real output of goods and services is continuing to
grow moderately. In October industrial production expanded further,
nonfarm payroll employment rose considerably, and the unemployment rate declined from 6.0 to 5.8 per cent. Following 2 months
of gains, the dollar value of total retail sales declined somewhat
to a level slightly above the average in the third quarter. Average
producer prices of finished goods rose substantially in October, as
in September, in part because of further large increases in prices
of foods. The advance in the index of average hourly earnings has
250
FOMC Policy Actions
been somewhat faster so far in 1978 than it was on the average
during 1977. In late October the Government announced a new
program aimed at moderating increases in prices and wages.
On November 1 a broad program to strengthen the dollar in
foreign exchange markets and thereby to counter continuing domestic inflationary pressures was announced. The program included an
increase in Federal Reserve discount rates from 8V2 to 9Vi per cent,
establishment of a supplementary reserve requirement of 2 per cent
against member bank time deposits in denominations of $100,000
or more, increases in Federal Reserve reciprocal currency arrangements with certain central banks, and other measures to mobilize
key foreign currencies.
The trade-weighted value of the dollar against major foreign
currencies declined rapidly during the last week of October, but
following the actions taken to strengthen the dollar, it rose sharply
to a level somewhat above that in early October. The U.S. trade
deficit was about the same in the third quarter as in the second
quarter.
Growth in M-l, which had been rapid in August and September,
slowed markedly in October, and growth in M-2 and M-3 also
moderated. Inflows of the interest-bearing deposits included in the
broader aggregates slowed somewhat, although sales of 6-month
money market certificates at both commercial banks and nonbank
thrift institutions expanded to record levels. Short-term market
interest rates have risen substantially further since mid-October.
Bond rates also have increased on balance, although they have
declined appreciably since November 1; mortgage interest rates have
continued to rise.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on
October 17, 1978, in setting ranges for the monetary aggregates,
the Committee recognized the uncertainties concerning the effects
that the November 1 introduction of the automatic transfer service
(ATS) would have on measures of the money supply, especially
M-l. Against that background, the Committee agreed that appropriate monetary and financial conditions would be furthered by
growth of M-2 and M-3 from the third quarter of 1978 to the third
quarter of 1979 within ranges of 6V^ to 9 per cent and IV2 to 10
per cent, respectively. The narrowly defined money supply (M-l)
was expected to grow within a range of 2 to 6 per cent over the
FOMC Policy Actions
251
period, depending in part on the speed and extent of transfers from
demand to savings deposits resulting from the introduction of ATS.
The associated range for bank credit is SVi to 1 \Vz per cent. Growth
of M-l + (M-l plus savings deposits at commercial banks and NOW
accounts) in a range of 5 to IVi per cent was thought to be generally
consistent with the ranges of growth for the foregoing aggregates.
These ranges are subject to reconsideration at any time as conditions
warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to the program for supporting the foreign exchange value
of the dollar, to developing conditions in domestic financial markets,
and to uncertainties associated with the introduction of ATS. Early
in the period before the next regular meeting, System open market
operations are to be directed at attaining a weekly average Federal
funds rate slightly above the current level. Subsequently, operations
shall be directed at maintaining the weekly average Federal funds
rate within the range of 93A to 10 per cent. In deciding on the
specific objective for the Federal funds rate, the Manager is to be
guided mainly by a range of tolerance for the annual rate of growth
over the November-December period of 6 to 9Vi per cent in M-2,
provided that the rate of growth in M-l does not appear to exceed
5 per cent.
The objective for the funds rate is to be raised or lowered within
its range if the rate of growth of M-2 appears to be close to or
beyond the upper or lower limit of its range. Weight is to be given
to M-l if it appears to be growing at a rate close to or above its
limit.
If the rates of growth in the aggregates appear to be falling outside
the limits of the indicated ranges at a time when the objective for
the funds rate has already been moved to the corresponding limit
of its range, the Manager will promptly notify the Chairman, who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Vo*es for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
Subsequent to the meeting, on December 8, nearly final estimates
indicated that in November M-l had declined and M-2 had ex-
252
FOMC Policy Actions
panded at a slow pace. For the November-December period, staff
projections suggested that the annual rates of growth in M-l and
M-2 would be about lA per cent and 6lA per cent, respectively;
for M-2, the projected rate was close to the lower limit of the
6 to 9V2 per cent range specified by the Committee. During recent
weeks the Federal funds rate had averaged about 9% per cent.
In light of the behavior of the aggregates, the Manager might,
under normal circumstances, have sought to reduce the funds rate
to about the 93A per cent lower limit of its specified range. Given
current circumstances, however, Chairman Miller recommended
that the Manager be instructed to continue to aim for a Federal
funds rate of about 9% per cent during the period before the next
regular meeting of the Committee, unless growth of the aggregates
appeared to weaken significantly further.
On December 8, 1978, the Committee modified the domestic
policy directive adopted at its meeting of November 21, 1978, to
call for open market operations directed at maintaining the Federal
funds rate at about the prevailing level of 97s per cent during the
period before the next meeting unless growth of the aggregates
appeared to weaken significantly further.
Votes for this action: Messrs. Miller, Baughman,
Cold well, Eastburn, Partee, Mrs. Teeters, Messrs.
Wallich, Willes, Winn, and Timlen. Votes against
this action: None. Absent and not voting: Mr.
Volcker. (Mr. Timlen voted as alternate for Mr.
Volcker.)
2. Authorization for Foreign Currency Operations
At its meeting of March 21, 1978, the Committee had reaffirmed
an agreement with the Treasury under which the Federal Reserve
would undertake to "warehouse" foreign currencies held by the
Exchange Stabilization Fund (ESF)—that is, to make spot purchases of foreign currencies from the ESF and simultaneously to
make forward sales of the same currencies at the same exchange
rate to the ESF—if that should prove necessary to enable the ESF
to deal with potential liquidity strains. Specifically, the Committee
had agreed that the Federal Reserve would be prepared, if requested
by the Treasury, to warehouse up to $ 1 ^ billion of eligible foreign
FOMC Policy Actions
253
currencies, of which half would be for periods of up to 12 months
and half for periods of up to 6 months.
On December 14, 1978, the Committee amended paragraph 1A
of the authorization for foreign currency operations to provide for
transactions in foreign currencies directly with the U.S. Treasury
as well as with the ESF. Concurrently, the Committee agreed to
raise the amount of eligible foreign currencies that the Federal
Reserve would be prepared to warehouse to $1% billion at this
time. These actions were taken in view of the first issuance of
Treasury securities denominated in foreign currencies as one of
the measures announced on November 1 in implementation of the
broad program to strengthen the dollar and thereby to counter
continuing domestic inflationary pressures. The Treasury was
scheduled to receive payment of somewhat more than SlVi billion
equivalent of German marks on December 15, 1978.
As amended, paragraph 1A read as follows:
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive and express authorizations by the Committee pursuant thereto,
and in conformity with such procedural instructions as the Committee
may issue from time to time:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the
Gold Reserve Act of 1934, with foreign monetary authorities, with the
Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
Votes for this action: Messrs. Miller, Volcker,
Baughman, Cold well, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
254
FOMC Policy Actions
MEETING HELD ON DECEMBER 19, 1978
1. Domestic Policy Directive
The information reviewed at this meeting suggested greater strength
in economic activity than had been evident at the time of the
Committee's meeting a month earlier; growth in output of goods
and services in the current quarter now appeared to be somewhat
faster than the annual rate of 3.4 per cent indicated for the third
quarter by preliminary estimates of the Commerce Department. The
rise in average prices, as measured by the fixed-weight price index
for gross domestic business product, appeared to be close to the
annual rate of 8.2 per cent estimated for the third quarter.
Staff projections for the year ahead differed little from those
prepared a month earlier. They continued to suggest a gradual
slowing in the growth of economic activity as the year progressed.
The rise in average prices was projected to remain rapid during
1979 and the rate of unemployment to rise marginally.
In November, the index of industrial production advanced an
estimated 0.7 per cent, somewhat more than the gains in the
preceding 2 months but close to the average monthly increase since
the beginning of the year. Nonfarm payroll employment grew
substantially in November for the second consecutive month. In
manufacturing also, a large increase in employment was registered
for the second month in a row and the average workweek rose
somewhat further. The unemployment rate was unchanged at 5.8
per cent, close to its low for the year.
The dollar value of total retail sales expanded substantially in
November and revised data indicated a sizable advance for October
as well. Unit sales of new automobiles declined somewhat in
November.
Total housing starts were at an annual rate of 2.1 million units
in both October and November. Sales of new and existing singlefamily houses rose to new highs in October.
FOMC Policy Actions
255
The latest Department of Commerce survey of business plans,
taken in late October and November, suggested that spending for
plant and equipment would expand at an annual rate of nearly 16
per cent in the current quarter but at the markedly lower rate of
about 8 per cent in the first half of 1979. The survey also indicated
that in 1978 as a whole fixed investment outlays would be 12.7
per cent greater than in 1977. Manufacturers' new orders for
nondefense capital goods advanced sharply in October, following
sizable increases in other recent months.
The index of average hourly earnings of private nonfarm production workers increased at an annual rate of 8.3 per cent over
the first 11 months of 1978, nearly 1 percentage point above the
rise during 1977. Average producer prices of finished goods rose
substantially in November for the third consecutive month despite
more moderate increases in producer prices of food products than
in the two earlier months. In October, the consumer price index
advanced at an annual rate of 9 per cent, and the rate of increase
for the year to date—about 9l/i per cent—was nearly 3 percentage
points above that during 1977.
In foreign exchange markets the trade-weighted value of the
dollar against major foreign currencies fell sharply following the
OPEC announcement on December 17 of a larger-than-anticipated
increase in oil prices for 1979. Over the previous few weeks the
dollar had declined slightly on balance. Nevertheless, at the time
of this meeting it was still about 7 per cent above its low reached
just prior to the November 1 announcement of the new program
to strengthen the dollar. The U.S. trade deficit in October remained
close to the annual rate recorded in the second and third quarters
but well below that in the previous two quarters.
The growth of total.credit at U.S. commercial banks was appreciably slower in November than in September and October. However, bank loans other than security loans continued to expand
rapidly. To finance this expansion banks liquidated a sizable amount
of security holdings and issued a substantial volume of large-denomination time deposits. Outstanding commercial paper of nonfinancial businesses rose considerably in November for the second
consecutive month.
The narrowly defined money supply (M-l) declined at an annual
rate of about AVi per cent in November. The contraction reflected,
256
FOMC Policy Actions
among other things, the shifts of funds from demand deposits to
savings deposits associated with the introduction of the automatic
transfer service (ATS) and effects of the substantial rise in shortterm market interest rates since April. Meanwhile, growth of M-2
and M-3 slackened further. Sales of 6-month money market certificates at commercial banks and nonbank thrift institutions continued
strong in November, but savings deposits and time deposits subject
to interest rate ceilings contracted at commercial banks. Total
inflows of funds to nonbank thrift institutions slowed in November
after growing rapidly in the preceding 3 months; the rate of
expansion was still considerably above that in the first half of the
year. Over the first 11 months of the year, M-l, M-2, and M-3
grew at annual rates of about 714, &VA, and 914 per cent, respectively.
At its meeting on November 21, the Committee had agreed that
early in the inter-meeting period System open market operations
should be directed toward attaining a weekly-average Federal funds
rate of about 97/s per cent, slightly above the level prevailing at
that time. Subsequently, the objective for the Federal funds rate
was to be raised or lowered within the range of 93A to 10 per
cent. In setting a specific objective for the funds rate, the Manager
of the System Open Market Account was to be guided mainly by
a range of tolerance of 6 to 9lh per cent for the annual rate of
growth in M-2 over the November-December period, provided that
the rate of growth in M-l over the same period did not appear
to exceed 5 per cent.
Immediately following the November 21 meeting the Manager
began to seek bank reserve conditions consistent with an increase
in the weekly-average Federal funds rate to around 97s per cent.
Incoming data during the inter-meeting period suggested initially
that growth in M-2 would be well within the range specified by
the Committee and that growth in M-l would be below 5 per cent.
In subsequent weeks, newly available data led to progressively
lower estimates of growth, and by the end of the first week in
December the projections might, under normal circumstances, have
called for a reduction in the objective for the Federal funds rate
to 93A per cent. On December 8, however, the Committee approved
a recommendation by the Chairman to instruct the Manager to
continue aiming for a Federal funds rate of 9Vs per cent during
FOMC Policy Actions
257
the period before the next regular meeting of the Committee, unless
growth of the aggregates should appear to weaken significantly
further.
Most market interest rates rose further during the inter-meeting
period, as financial markets seemed to react to indications of
continued strength in business conditions, added evidence of intense
inflationary pressures, and the OPEC announcement of a large
increase in oil prices. Commercial banks raised the loan rate to
prime business borrowers from 11 per cent to 11 Vi per cent during
the period. In mortgage markets interest rates continued to rise.
In the Committee's discussion of the economic situation and
outlook, most members expressed little or no disagreement with
the staff projection of a gradual slowing of the expansion during
1979 and of a slight rise in the unemployment rate. At the same
time, however, the observation was made that the latest information
provided contradictory indications of underlying trends in economic
activity, and some members commented on the prospects for
alternative courses of activity. The members continued to anticipate
that average prices of goods and services would rise rapidly, and
it was observed that the outlook for inflation had been worsened
by the recent OPEC announcement of a substantial rise in oil prices
during 1979.
With respect to some of the economic information that had
become available recently, it was suggested that the retail sales
and employment statistics—and the apparent rate of growth in GNP
in the current quarter—indicated underlying strength, while the
behavior of the monetary aggregates so far in the fourth quarter
could be symptomatic of current or near-term weakness in demands
for goods and services. Similarly, the latest data on new orders
for nondefense capital goods and on construction contract awards
were strong, but according to the Commerce Department's survey
of business plans, plant and equipment expenditures in the first
half of 1979 would be weak.
Concerning the over-all situation, it was suggested on the one
hand that the current and prospective pace of growth in activity
was too rapid, that output was beginning to press against the limits
of capacity, and that inflationary pressures—which for a long time
had been greater than generally projected—were still increasing.
An alternative appraisal of the latest data was that the strength
258
FOMC Policy Actions
in the current quarter, especially in consumer spending, most likely
was an aberration—similar to others during the past few years—and
that economic activity was remarkably well balanced for the present
stage of the expansion. It was also suggested, however, that the
strength in demands and activity, although possibly persisting for
a quarter or two, might culminate in a recession in the second
half of 1979.
At its meeting in October the Committee had agreed that from
the third quarter of 1978 to the third quarter of 1979 growth of
M-2 and M-3 within ranges of 6*/2 to 9 per cent and IV2 to 10
per cent, respectively, appeared to be consistent with broad economic aims. M-l was expected to grow over that period within
a range of 2 to 6 per cent, depending in part on the speed and
extent of transfers from demand to savings deposits resulting from
the introduction of ATS. The associated range for the rate of growth
in commercial bank credit was 8^2 to 11V2 per cent. The Committee
had also decided that growth of M-l 4- within a range of 5 to 7*/2
per cent appeared to be generally consistent with the ranges of
growth for the other monetary aggregates. It had been agreed that
the longer-run ranges, as well as the particular aggregates for which
such ranges were specified, would be subject to review and modification at subsequent meetings.
In the discussion of policy for the period immediately ahead,
most members of the Committee advocated some additional firming
in money market conditions. A few members preferred to direct
operations toward maintaining the money market conditions currently prevailing. No member recommended an easing in money
market conditions per se, but one suggested that whether money
market conditions were firmed or eased be determined altogether
on the basis of the incoming evidence on the behavior of the
monetary aggregates.
Several reasons were advanced for some additional firming in
money market conditions. Available economic data suggested that
growth of output had not yet been slowed and that inflationary
pressures remained intense. The strength of demands for bank loans
and other credit seemed to provide a more reliable indication of
underlying economic conditions than did the recent weakness of
growth in the monetary aggregates. In any case, it was observed,
weakness in monetary expansion following a long period of strong
FOMC Policy Actions
259
growth could be accepted for a time. Some additional firming in
money market conditions, moreover, would help to maintain public
confidence in the program to moderate inflation and to support the
foreign exchange value of the dollar.
In support of the preference for maintaining prevailing money
market conditions, rather than firming, it was observed that over
the preceding 2 months the Committee had increased monetary
restraint substantially. Because the evidence on current and
prospective economic developments was conflicting, the Committee
ought to pause and evaluate the effects of its recent actions before
contemplating additional firming; if the unexpected shortfall in
monetary expansion persisted, it might contribute to a recession.
The uncertainties in the current situation also provided the grounds
for the proposal to base the Committee's objective for money
market conditions altogether on the incoming evidence on the
behavior of the monetary aggregates: It was suggested that whether
fundamental economic conditions were strong or weak would
inevitably become evident in renewal of rapid monetary expansion
or in continuation of sluggish expansion, leading in either case
to appropriate objectives for money market conditions.
At the conclusion of the discussion the Committee agreed to
instruct the Manager to direct open market operations toward raising
the Federal funds rate to 10 per cent or slightly higher early in
the period before the next regular meeting and subsequently to
maintain the rate within a range of 9% to IOV2 per cent. With
regard to the objective for the rate within that range, the Committee
instructed the Manager to be guided by ranges of tolerance for
the annual rates of growth of M-l and M-2 of 2 to 6 per cent
and 5 to 9 per cent, respectively. Thus, after a 2-month interruption,
the Committee agreed to return to its practice of specifying a range
rather than only an upper limit for M-l and of instructing the
Manager to give approximately equal weight to the behavior of
M-l and M-2 in assessing the behavior of the aggregates; it did
so because recent experience had suggested that the impact of ATS
on the annual rate of growth of M-l could be estimated within
fairly narrow limits. However, the Committee decided that the
Manager should respond more quickly to relatively high than to
relatively low rates of growth in the aggregates. Specifically, the
objective for the funds rate was to be raised in an orderly fashion
260
FOMC Policy Actions
within its range if the 2-month growth rates of M-l and M-2
appeared to be significantly above the midpoints of the indicated
ranges. On the other hand, the objective was to be lowered in
an orderly fashion only if the 2-month growth rates appeared to
be approaching the lower limits of the indicated ranges.
The next regular meeting of the Committee was scheduled for
February 6, 1979, but it was understood that a telephone conference
would be held in mid-January to consider whether supplementary
instructions were needed. It was also understood that the Chairman
would call upon the Committee to consider the need for supplementary instructions if significant inconsistencies appeared to be
developing among the Committee's objectives or if, before midJanuary, the behavior of the monetary aggregates appeared to call
for a reduction in the objective for the Federal funds rate toward
the lower limit of its range.
The following domestic policy directive was issued to the Federal
Reserve Bank of New York:
The information reviewed at this meeting suggests that in the
current quarter real output of goods and services has picked up
somewhat from the rate in the third quarter. In November, as in
October, the dollar value of total retail sales expanded substantially.
Industrial production and nonfarm payroll employment rose considerably further, and the unemployment rate remained at 5.8 per cent.
Over recent months, broad measures of prices and the index of
average hourly earnings have risen rapidly.
The trade-weighted value of the dollar against major foreign
currencies declined sharply following OPEC's announcement on
December 17 of increased oil prices for 1979, after having declined
slightly over the previous few weeks, but it remains substantially
above the low reached just prior to the actions taken on November
1 to strengthen the dollar. The U.S. trade deficit in October was
at about the rate recorded in the second and third quarters.
M-l declined in November, only in part because of shifts of funds
from demand deposits to savings deposits after the introduction of
the automatic transfer service (ATS) at the beginning of the month.
Over the first 11 months of 1978, M-l grew at an annual rate of
about 1XA per cent. Growth of M-2 and M-3 slackened further in
November; they grew at rates of about &lA and 914 per cent,
respectively, over the first 11 months of the year. Inflows of deposits
to nonbank thrift institutions slowed in November, after having
FOMC Policy Actions
261
grown rapidly in the preceding 3 months. Market interest rates in
general have risen further in recent weeks.
In light of the foregoing developments, it is the policy of the
Federal Open Market Committee to foster monetary and financial
conditions that will resist inflationary pressures while encouraging
continued moderate economic expansion and contributing to a sustainable pattern of international transactions. At its meeting on
October 17, 1978, in setting ranges for the monetary aggregates,
the Committee recognized the uncertainties concerning the effects
that the November 1 introduction of ATS would have on measures
of the money supply, especially M-l. Against that background, the
Committee agreed that appropriate monetary and financial conditions
would be furthered by growth of M-2 and M-3 from the third quarter
of 1978 to the third quarter of 1979 within ranges of 6V2 to 9 per
cent and IV2 to 10 per cent, respectively. The narrowly defined
money supply (M-l) was expected to grow within a range of 2
to 6 per cent over the period, depending in part on the speed and
extent of transfers from demand to savings deposits resulting from
the introduction of ATS. The associated range for bank credit is
8V2 to W/i per cent. Growth of M-1+ (M-l plus savings deposits
at commercial banks and NOW accounts) in a range of 5 to IV2
per cent was thought to be generally consistent with the ranges
of growth for the foregoing aggregates. These ranges are subject
to reconsideration at any time as conditions warrant.
In the short run, the Committee seeks to achieve bank reserve
and money market conditions that are broadly consistent with the
longer-run ranges for monetary aggregates cited above, while giving
due regard to the program for supporting the foreign exchange value
of the dollar, to developing conditions in domestic financial markets,
and to uncertainties associated with the introduction of ATS. Early
in the period before the next regular meeting, System open market
operations are to be directed at attaining a weekly average Federal
funds rate slightly above the current level. Subsequently, operations
shall be directed at maintaining the weekly average Federal funds
rate within the range of 9% to \Wi per cent. In deciding on the
specific objective for the Federal funds rate the Manager shall be
guided mainly by the relationship between the latest estimates of
annual rates of growth in the December-January period of M-l and
M-2 and the following ranges of tolerance: 2 to 6 per cent for
M-l and 5 to 9 per cent for M-2. If, giving approximately equal
weight to M-l and M-2, their rates of growth appear to be significantly above the midpoints of the indicated ranges, the objective
for the funds rate shall be raised in an orderly fashion within its
262
FOMC Policy Actions
range; if their rates of growth appear to be approaching the lower
limits of the indicated ranges, the funds rate shall be lowered in
an orderly fashion within its range.
If the rates of growth in the aggregates appear to be falling outside
the limits of the indicated ranges at a time when the objective for
the funds rate has already been moved to the corresponding limit
of its range, the Manager will promptly notify the Chairman, who
will then decide whether the situation calls for supplementary
instructions from the Committee.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Willes, and
Winn. Votes against this action: Mrs. Teeters and
Mr. Wallich.
Mrs. Teeters dissented from this action because she believed
that for the time being open market operations should be directed
toward maintaining the money market conditions currently prevailing. In her view, the Committee should wait to evaluate the effects
of the substantial firming in money market conditions of the past
2 months before contemplating any additional firming.
Mr. Wallich dissented from this action because he favored a
somewhat more restrictive policy posture than that adopted by the
Committee. In his opinion, the underlying economic situation was
still strong and the strength of demands was adding to inflationary
pressures and expectations while interest rates were not high in
real terms and were not exerting strong restraint.
Subsequent to the meeting, on December 29, 1978, projections
of growth in the monetary aggregates suggested that for the December-January period M-2 would grow at an annual rate well
below the lower limit of the 5 to 9 per cent range specified by
the Committee and that M-l would grow at a rate in the lower
portion of its range of 2 to 6 per cent. Since the meeting of the
Committee on December 19 the Manager had been aiming for a
Federal funds rate of about 10 per cent or slightly above, although
Federal funds had been trading at higher levels in response to
exceptional demands for excess bank reserves near the end of the
year. The behavior of the aggregates would have called for a
reduction in the objective for the funds rate toward the 93A per
cent lower limit of its specified range. However, in view of
uncertainties about the interpretation of the behavior of the aggre-
FOMC Policy Actions
263
gates at this time, and against the background of domestic and
international economic and market conditions, Chairman Miller
recommended that the Manager be instructed to continue to aim
for a Federal funds rate of 10 per cent or slightly above, pending
a review of the situation in the telephone conference, tentatively
planned for January 12.
On December 29, 1978, the Committee modified the domestic
policy directive adopted at its meeting of December 19, 1978, to
call for open market operations directed at maintaining the weeklyaverage Federal funds rate at about 10 per cent or slightly above.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
On January 12 the Committee held a telephone conference to
review the situation and to consider whether supplementary instructions were needed. However, no change was made in the
instruction to the Manager to continue to direct open market
operations toward maintaining the weekly-average Federal funds
rate at about 10 per cent or slightly above.
2. Authorization for Foreign Currency Operations
Paragraph ID of the Committee's authorization for foreign currency
operations authorizes the Federal Reserve Bank of New York, for
the System Open Market Account, to maintain an over-all open
position in all foreign currencies not to exceed $1.0 billion, unless
a larger position is expressly authorized by the Committee. On
November 1, 1978, an open position of $5 billion had been
authorized. At the meeting on December 19, 1978, the Committee
authorized an increase in this limit to $8 billion to provide further
flexibility for Federal Reserve operations in the foreign exchange
markets undertaken pursuant to the Committee's foreign currency
directive.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
264
FOMC Policy Actions
Pursuant to an agreement with the Treasury under which the
Federal Reserve would undertake to "warehouse" foreign currencies—that is, to make spot purchases of foreign currencies and
simultaneously to make forward sales of the same currencies at
the same exchange rate—the Committee had agreed on December
14, 1978, to raise the amount that the Federal Reserve would be
prepared to warehouse from $114 billion to $134 billion equivalent
of such foreign currencies. That action had been taken in view
of the impending receipt by the Treasury of somewhat more than
$\l/2 billion dollars equivalent of German marks resulting from
its first issuance of securities denominated in foreign currencies
as one of the measures of the broad program announced on
November 1 to strengthen the dollar.
At this meeting the Committee agreed to raise the amount of
eligible foreign currencies that the Federal Reserve would be
prepared to warehouse to $5 billion. The Committee also agreed
to warehouse such currencies for periods of up to 12 months;
previously the agreement had provided that half of the authorized
amount would be for periods of up to 6 months and half for periods
of 12 months. These actions were taken in view of additional
Treasury offerings of securities denominated in foreign currencies
in prospect for early 1979.
Votes for these actions: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against these actions: None.
3. Authorization for Domestic Open Market Operations
On January 15, 1979, Committee members voted to increase from
$3 billion to $5 billion the limit on changes between Committee
meetings in System Account holdings of U.S. Government and
Federal agency securities specified in paragraph l(a) of the authorization for domestic open market operations, effective immediately,
for the period ending with the close of business on February 6,
1979.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
FOMC Policy Actions
265
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
This action was taken on recommendation of the System Account
Manager. The Manager had advised that large-scale sales of securities since the December meeting—required primarily to counter
the effect on member bank reserves of an unusually and unexpectedly high level of float—had reduced the leeway for further
sales to about $100 million. It appeared likely that additional sales
would be required because current projections indicated a need for
further reserve-absorbing operations over the coming weeks.
Subsequently, Committee members voted to increase the limit
specified in paragraph l(a) by an additional $1 billion, to $6 billion,
effective immediately, for the period ending with the close of
business on February 6, 1979.
Votes for this action: Messrs. Miller, Volcker,
Baughman, Coldwell, Eastburn, Partee, Mrs.
Teeters, Messrs. Wallich, Willes, and Winn. Votes
against this action: None.
This action was taken on recommendation of the Manager. On
January 26 he had advised that, despite the Committee's action
on January 15 to raise the inter-meeting limit to $5 billion, the
leeway available for further sales would be only about $350 million
as of the close of business on January 26. Since January 15,
required reserves had been weaker than had been expected, and
a decline of currency in circulation had provided reserves while
float had remained high.
266
Federal Reserve Operations
in Foreign Currencies
The Federal Reserve, along with the U.S. Treasury, intervened
in foreign exchange markets many times throughout 1978 to counter
disorderly market conditions. As part of the measures announced on
November 1, the System intervened actively to correct disorderly
conditions and limit further the excessive depreciation of the dollar.
In addition, the System at times acquired foreign currencies to repay
swap indebtedness. Gross sales by the System of foreign currencies
during the year totaled $7,315 million equivalent, and gross purchases
totaled $3,304 million equivalent. Most sales of foreign currency occurred in the first and fourth quarters, while purchases were concentrated in the second and third quarters.
The dollar was under downward pressure during most of the
year as the U.S. trade and current accounts continued in large deficit
and U.S. inflation accelerated. Foreign central banks purchased
large amounts of dollars, particularly in the first and fourth quarters when pressure on the dollar was especially severe. From the
end of September 1977 to April 3, 1978, there was a 10 per cent
drop in the dollar's trade-weighted value against 10 major foreign
currencies. During a brief respite in the spring the dollar index rose
by 4 per cent. Then from mid-May to the end of October, the
dollar fell by more than 15 per cent despite some evidence of
improvement in fundamental economic conditions beginning in the
summer. The periods of decline were frequently characterized by
exchange market disorder, as evidenced by wide bid-ask spreads
and large and abrupt variations in exchange rates. On several occasions, the dollar's average value changed by more than 1 per cent
in a day.
As part of a broad program to strengthen the dollar announced
on November 1, the Federal Reserve increased its swap facilities
with the central banks of West Germany, Switzerland, and Japan
by $7.6 billion to a new total of $15 billion. The immediate market
response to the program was a sharp appreciation in the value of
the dollar. Periods of pressure on the dollar after the initiation
Operations in Foreign Currencies
267
of the support package were met with forceful intervention by the
System in German marks, Swiss francs, and Japanese yen, and by
the U.S. Treasury in German marks and Japanese yen.
The Federal Reserve's intervention for the account of the System
in 1978 was conducted mostly in German marks. The System's
gross sales of marks totaled $6,045 million equivalent, $5,356
million of which was financed by swap drawings on the German
Federal Bank with the remainder coming from System balances.
The System's gross purchases of marks totaled $2,274 million
equivalent, most of which was bought during the second and third
quarters in order to repay swap debts or to accumulate mark balances. A total of $1,722 million in mark-denominated swap drawings was repaid during the year.
The System's gross sales of Swiss francs during the year totaled
$1,081 million equivalent. Most of the sales occurred in the fourth
quarter, and most were financed by swap drawings. Gross purchases of Swiss francs totaling $942 million equivalent were made
to repay outstanding swap debts. The purchases included $652
million equivalent that were acquired on a regular basis to repay
Swiss franc liabilities incurred before August 15, 1971. The System
purchased the required Swiss francs directly from the Swiss National
Bank against dollars, German marks, and French francs. After repayments in 1978, there remained Swiss franc liabilities incurred by the
System before August 1971 of $328 million equivalent, valued at the
market exchange rate on December 29, 1978.
The System began operating in Japanese yen on November 1.
Gross sales amounted to $158 million equivalent, nearly all of
which was financed by swap drawings. Gross purchases totaled $57
million equivalent, which were used to liquidate swap debt and to
accumulate a small yen balance.
The System's total outstanding swap debt at the end of the year
was $5,752 million equivalent. The System had losses of $506 million on foreign exchange operations in 1978; that figure includes
realized losses of $297 million and unrealized losses of $209 million resulting from the revaluation of foreign exchange holdings and
outstanding commitments at current exchange rates. Of these
amounts, $264 million and $150 million, respectively, reflect realized
and unrealized losses associated with Swiss franc commitments
268
Operations in Foreign Currencies
Federal Reserve Purchases and Sales (—) of Foreign Currencies, 1978
Millions of dollars equivalent
Currency
German marks...
Swiss francs
Q2
Ql
112
-1,115
162
-69
946
-93
237
-6
Q3
732
-454
192
-155
Japanese yen
French francs....
Total
31
-31
305
-1,215
1,183
-99
924
-609
Q4
Year
484
-4,383
351
2,274
-6,045
942
-1,081
57
-851
57
-158
892
-5,392
-158
31
-31
3,304
-7,315
NOTE. Purchases of $652 million equivalent of Swiss francs to repay pre-1971 swap debt are included.
Of that amount, $195 million was against German marks and $31 million against French francs, which
were acquired simultaneously with the Swiss francs in the market.
entered into before August 15, 1971. The total unrealized net loss
was calculated using market exchange rates of December 29, 1978,
to value the System's foreign currency holdings and foreign currency
commitments; liquidation or payment may actually take place at
exchange rates that differ from these rates. There were no swap
drawings on the Federal Reserve by foreign central banks during
1978.
269
Consumer Affairs
INTRODUCTION
Acting in concert with other Federal regulators of banks and thrift
institutions, the Board of Governors took a number of actions in 1978
supporting and assuring the protection of consumers' rights. Regulations, hearings, and educational efforts for consumers, creditors, and
financial institutions were the main focus of the efforts.
To fulfill its congressional mandate, the Board held nationwide
hearings, offered two sets of proposals, and then issued final regulations implementing the Community Reinvestment Act of 1977.1 It
also proposed regulations for consumer protection under the Electronic Fund Transfer Act. These regulations are described in detail
below.
In two other major actions, the five Federal regulators of financial
institutions issued uniform guidelines for the enforcement of the
Truth in Lending Act and proposed guidelines for the enforcement
of the Equal Credit Opportunity Act, its implementing Regulation B,
and the Fair Housing Act.2
During the year, the Federal Reserve System pursued a broad educational program in connection with the consumer credit protection
laws.
First, in an effort to assist State member banks in complying with
the new Fair Debt Collection Practices Act, the Board issued a fact
sheet and a set of questions and answers describing the responsibilities
of banks under the law. The act makes abusive and deceptive debt
collection practices illegal for those it defines as debt collectors—
generally, anyone who regularly tries, directly or indirectly, to collect
consumer debt for someone else. The Board invited anyone who believes a bank has violated the act to lodge a complaint with the near1
The Federal Reserve Board joined the Comptroller of the Currency, the
Federal Deposit Insurance Corporation (FDIC), and the Federal Home Loan
Bank Board (FHLBB) in issuing common CRA rules, known as the Community Reinvestment Act Regulations (12 C.F.R. Part 228 for the Federal Reserve
System).
2
In these instances the regulators listed in note 1 above were joined by the
National Credit Union Administration.
270
Consumer Affairs
est Federal Reserve Bank or with the Board, and said the Federal
Reserve would follow up on all such complaints (or refer them to the
appropriate Federal regulator if the complaint does not concern a
State member bank). Federal Reserve Bank examiners were given
special instructions to watch for evidence of violations of this act.
Second, the Board published several new pamphlets explaining
consumer rights and protections under Federal consumer credit protection laws and other pamphlets of interest to consumers. These
were: Consumer Handbook to Credit Protection Laws; How to
File a Consumer Credit Complaint; If You Use a Credit Card; Truth
in Leasing; The Equal Credit Opportunity Act and Credit Rights
in Housing; Government in the Sunshine—A Guide to Meetings
of the Board of Governors of the Federal Reserve System; and
Guide to Federal Reserve Regulations. At the end of 1978, 11 consumer education pamphlets were available to the public without
charge.
Demand for the Consumer Handbook, which was published near
the end of 1978, was unusually heavy. The Handbook summarizes
the main provisions of seven major consumer credit protection laws:
Truth in Lending, Truth in Leasing, the Real Estate Settlement
Procedures Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, and the Fair
Credit Billing Act. The Handbook also contains a glossary of technical terms used in credit transactions and in the consumer credit
protection laws and regulations.
The Handbook explains how to shop for the least costly credit,
the meaning of key terms such as finance charge and annual percentage rate, consumer protections under Truth in Leasing and what to
look for when leasing personal property, how to apply for credit, and
the types of information creditors may and may not request in considering credit applications. It explains the "Three C's"—capacity
(to repay), character, and collateral—that creditors rely on in determining creditworthiness. One section deals with discrimination against
women in the granting of credit and summarizes the defenses the
new legislation provides: ". . . you may not be denied credit just
because you are a woman or just because you are married, single,
widowed, divorced or separated." The procedures for determining
whether a consumer has been discriminated against when credit is
denied, and for correcting errors in a credit history, are described, as
Consumer Affairs
271
well as what the consumer can do, under the Fair Credit Billing Act,
when defective merchandise is delivered.
In addition to the Board's efforts, the Federal Reserve Banks have
also been active in advising consumers of their protections and rights.
In 1978 the Federal Reserve Bank of Philadelphia produced a film
on the antidiscrimination provisions of the Equal Credit Opportunity
Act, "To Your Credit," available to all on loan. The Federal Reserve
Bank of San Francisco developed a series of spot TV announcements
highlighting System consumer education pamphlets and citing the
San Francisco Bank as a source of consumer credit protection information.
At the end of the year, plans were being made with professional
educational organizations for the development of teaching aids, study
units, and a curriculum package on the consumer credit laws. In response to the Board's encouragement of the private sector, textbook
publishers have indicated interest in conducting, with the help of Federal consumer offices, programs to inform educational publishers on
changes in consumer laws and regulations and to identify gaps in curriculum materials.
Community Reinvestment Act Regulations
In October 1977, the Congress passed the Community Reinvestment
Act of 1977 as Title VIII of the Housing and Community Development Act of 1977 (12 U.S.C. 2901).
The CRA requires each appropriate Federal financial supervisory
agency to use its authority to encourage the institutions it examines
to help meet the credit needs of the communities in which they are
chartered, consistent with their own safe and sound operation. Further, the act calls for regulators to consider a lender's performance
in helping to meet the credit needs of its community when that lender
applies for a branch, a merger, a charter, or Federal deposit insurance. Past performance may be grounds for denial.
Early in 1978, the Board, the Comptroller, the FDIC, and the
FHLBB decided that the objectives of the CRA could be accomplished more effectively and efficiently if the agencies developed substantively identical regulations and procedures. Also, because of
broad public interest, the agencies felt it would be desirable at the
outset to obtain the views of a wide spectrum of the public and financial institutions. Accordingly, the agencies requested public comment
272
Consumer Affairs
on 26 questions relating to how the agencies could best encourage
the financial institutions they supervise to help meet the credit needs
of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound operation. Public hearings
were held at the Federal Reserve Board in Washington, D.C., and in
Boston, Atlanta, Dallas, Chicago, New York, and San Francisco in
the spring of 1978. The written and oral comments received during
these hearings were extremely helpful to the agencies in developing
the regulations. In addition, on several occasions the Board staff discussed regulatory approaches with the Consumer Advisory Council.
On June 30, 1978, the four agencies published for comment proposed regulations to implement the CRA. Again, the comments that
were received greatly assisted in clarifying the proposed regulations.
On October 10, 1978, the agencies published their final, substantively identical CRA regulations, to be effective November 6.
On November 22, the agencies made public the procedures that
had been developed by an interagency task force for the examination
of financial institutions covered by the CRA. Both the regulations
and the examination procedures emphasize that financial institutions
can use a variety of means to help meet the credit needs of their
local communities and to enhance communication with members of
their communities regarding these needs.
All examinations for consumer affairs compliance of State member
banks conducted by the Federal Reserve Board on or after November
6, 1978, have included an assessment of the performance of the banks
in helping to meet the credit needs of their communities. In addition,
all decisions by the Federal Reserve System since November 6 on
applications covered by the CRA have included an evaluation of an
applicant's performance in helping to meet those credit needs.
The four agencies have also adopted joint minimum procedures
for notifying the public regarding the filing of applications with the
agencies that are covered by the CRA. These procedures became
effective on November 6.
Each Federal Reserve Bank has designated a member of its staff as
a Community Reinvestment Act Officer to assist the public and financial institutions on matters pertaining to the CRA.
The agencies have agreed that an interagency staff task force on
the CRA will continue to monitor the implementation of the regulations and the conduct of examinations, and to guide the public and
Consumer Affairs
273
financial institutions on questions relating to the CRA. The Board
believes that as the agencies gain experience in implementing the
CRA, they will be able to refine their examination procedures and
strengthen their ability to encourage the financial institutions they
supervise to help meet the credit needs of their communities.
In November 1978 the four Federal agencies with CRA enforcement responsibilities announced that they had developed common
procedures for the examination of affected financial institutions under the requirements of the CRA.3
Electronic Funds Transfer Regulations
On December 26, 1978, pursuant to the Electronic Fund Transfer
Act, the Board issued and invited comment on an initial set of regulations relating to sections of the act due to become effective February 8, 1979. These sections limit a consumer's liability for unauthorized use of an EFT card and restrict unsolicited issuance of EFT
cards.
The Board's proposals, pending at the year-end, included a set of
transitional disclosure rules—transitional because restraints on issuance of unsolicited EFT cards were to be effective in February 1979
while other provisions of the act were not to become effective until
May 1980—that required disclosure of the following: consumer liability for unauthorized use of an EFT card; the way to report lost
or stolen cards; the kind of electronic funds transfers the consumer
may make and the charges involved; the circumstances under which
the EFT card issuer will disclose information about the customer's
account to others; the right of the consumer to stop payment on an
EFT transaction and to receive a record of transactions; a summary
of error-resolution procedures or a statement of the lack of such procedures; and a statement of the liability that the financial institution
will assume for failure to make transfers.
Since the EFT Act permits unsolicited issuance of credit cards,
which is prohibited under Truth in Lending, the Board proposed
that the EFT Act should not be regarded as nullifying that prohibition and that Truth in Lending should govern the issuance of combined EFT-credit cards.
3
In accordance with Section 805 of the act, the above paragraphs describe
the steps taken by the Board, in conjunction with the three other financial
supervisory agencies, to develop regulations and procedures to implement the
CRA.
274
Consumer Affairs
The Board proposed that the consumer's liability for unauthorized
use of EFT cards be governed by the kind of transaction—EFT or
credit card—made. Under this proposal and the terms of the EFT
Act, the consumer's liability for an unauthorized EFT shift of funds
out of an account would be $50 if the consumer reported loss of the
card within two business days of learning of it. Under some other
circumstances, losses would be limited to $500; and they would be
unlimited if the consumer failed to report the loss of a card within
60 days.
Early in 1979, Governor Nancy H. Teeters, on behalf of the
Board, suggested to the Congress changes in the EFT, Fair Credit
Billing, and Truth in Lending Acts to coordinate their provisions.
In particular, the Board suggested that maximum consumer liability
for unauthorized use of an EFT card might be limited to $50.
Consumer Advisory Council
During 1978 the Board met four times with its Consumer Advisory
Council. On December 28, William D. Warren, Dean of the School
of Law of the University of California at Los Angeles, was named
Chairman, and Marcia A. Hakala of the University of Nebraska at
Omaha was named Vice Chairman. Dr. Warren succeeded Leonor
K. Sullivan, St. Louis, Missouri, a former member of the Congress
who specialized in the development of consumer credit protection
laws. Mrs. Sullivan had chaired the Council since its inception. The
Board also selected eight new members of the Council from a roster
of hundreds of names submitted at its invitation by the public to
replace members whose terms expired.
The Council advises the Board on its responsibilities in the field
of consumer credit protection laws. It was established in 1976 by
the Congress, at the suggestion of the Board, as a statutory part
of the Federal Reserve System. Members come from all parts of the
Nation and include a broad representation of consumer and creditor
interests.
Reports on Consumer Affairs
Following this introduction are the 1978 reports to the Congress
by the Federal Reserve Board on Truth in Lending and Regulation
Z; Equal Credit Opportunity and Regulation B; and Section 18(f)
Consumer Affairs
275
of the Federal Trade Commission Act (unfair and deceptive practices) and Regulation AA. These reports describe the Federal Reserve's activities during the year in promulgating rules and in securing
compliance under these laws and regulations.
The final guidelines for the enforcement of Truth in Lending and
Regulation Z and compliance guidelines proposed for enforcement
of the Equal Credit Opportunity Act and Regulation B are discussed
in these annual reports, along with other Federal Reserve actions
during 1978 in these fields:
Amendment of Regulation B to define adverse action in a
credit transaction at the point of sale.
A Board proposal to tighten the provisions of Regulation B
to bring arrangers, as well as extenders, of credit within the
scope of the regulation and to eliminate certain exemptions applying to business transactions.
Revision of the Board's procedures for issuing official staff
interpretations under Regulation B and Regulation Z designed
to give greater opportunity for public participation.
The annual report concerning the Board's responsibilities under
Section 18(f) of the FTC Act describes the results of a special
bank survey, growing out of a 1977 survey, which indicated that a
low percentage of banks adequately described the conditions governing their checking accounts and that more than half of the advertised
descriptions of "free" checking accounts were inaccurate. The report
includes a statistical review of the 3,230 complaints against banks
received from the public during 1978 resulting from the Board's
invitation to the public in its Regulation AA. Nearly half of all
complaints were not identifiable under specific consumer credit
laws. These "other" complaints are discussed in the text of the
report. At year-end the Federal Reserve had dealt with 1,489 of these
complaints by referral to other agencies and had completed action in
1,613 cases, leaving 128 still unresolved.
TRUTH IN LENDING
This tenth Annual Report on the Truth in Lending Act (dated January 3, 1979) substantiates the continuing commitment of the Board
of Governors of the Federal Reserve System to provide consumers
276
Consumer Affairs
with meaningful cost disclosures and to promote creditor compliance
with the act. It presents the findings of the 1977 survey of consumer
awareness, which obtained information about the impact of the Truth
in Lending Act on the views of consumers; data supporting the need
for Truth in Lending simplification; and evaluations of the effectiveness of the Fair Credit Billing Act. This report also discusses the
uniform guidelines established jointly by the financial institution regulatory agencies for enforcing Regulation Z, assesses the extent to
which compliance with the act is being achieved, and summarizes the
Board's administration of its functions under the act.
This report does not contain recommendations of the Board for
statutory amendments. Such recommendations, if any, will be made
in the Board's ANNUAL REPORT to the Congress.
Simplification of Truth in Lending
Amendments to the Truth in Lending Act, and interpretations by the
courts, have made compliance increasingly difficult. Also, Regulation
Z, in providing detailed guidance to creditors, has introduced its own
complexity to Truth in Lending. Concerns have arisen about the intelligibility and usefulness of current Truth in Lending disclosures to
the average consumer, as well as about the possibility that excessive
complexity is indirectly increasing the cost of credit to consumers.
In an effort to make the Truth in Lending disclosures more meaningful to consumers and to ease the burden of compliance on creditors, the Board in 1977 proposed to the Senate Committee on Banking, Housing and Urban Affairs a simplified version of the Truth in
Lending Act that would have provided for disclosure of only the most
important credit terms. That same year the Board proposed four
simplifying revisions to Regulation Z concerning itemization of the
finance charge, of the downpayment, and of certain fees to exclude
them from the finance charge, and identification of the method of
computing unearned finance charges upon prepayment. In April 1978
the Board decided to defer final action on these proposals because of
pending congressional efforts to simplify the act. Nearly a month later
the Senate passed a simplification measure, but the Congress in October 1978 adjourned without taking further action.
In June 1978 the Board announced a comprehensive review of
all its regulations, including Regulation Z, to determine whether they
needed modernization or improvement. The style and format of
Consumer Affairs
277
existing regulations are receiving special attention in an attempt to
reduce, subject to legal and regulatory responsibilities, the burden
of compliance. The Federal Reserve Bank of Atlanta was assigned
responsibility for Regulation Z and is expected to submit its recommendations to the Board by the end of 1978. Pending completion of this regulatory review, the Board decided to defer any further
amendments to Regulation Z, except those that are essential. While
the Board still favors legislative simplification, it decided not to postpone further simplification of the regulation.
Information on Effectiveness
Consumer Awareness Survey
The Board recently published an analysis of the results of a survey
of consumer awareness that was conducted in the summer of 1977
by the Survey Research Center of the University of Michigan under
the joint sponsorship of the Board, the Federal Deposit Insurance
Corporation (FDIC), and the Office of the Comptroller of the Currency.4 The survey, which was based on interviews with a nationwide
sample of 2,563 consumers, provided information about consumers'
recognition, comprehension, attitudes, and behavior regarding the
regulation of credit use. Several areas of the survey that are relevant
to the Truth in Lending Act and to Regulation Z are discussed below;
the figures quoted have been revised and are in final form. A comparison of these findings with those of two earlier surveys conducted
for the Board in 1969 and 1970 may be useful in identifying the
effects of the Truth in Lending Act in the past and in suggesting directions that protection of consumer credit use should take.
Awareness of annual percentage rates (APR's). The results of the
1969 and 1970 surveys indicated substantial increases in the awareness of rates by consumers during the first 15 months after the Truth
in Lending Act became effective. As the 1977 survey demonstrates,
awareness has continued to grow, although more slowly, during the
years 1970-77. In 1977, 54.5 per cent of consumers were classified
as aware of APR's on recent credit transactions involving closed-end
credit; 64.7 per cent for retail revolving credit; and 71.3 per cent for
4
Thomas A. Durkin and Gregory Elliehausen, 1977 Consumer Credit Survey
(Board of Governors of the Federal Reserve System, 1978).
278
Consumer Affairs
1. Respondents' Agreement with Observations about Truth in Lending
Disclosure Statements
Observation
Most people read their Truth in
Lending statements carefully
Number
Per cent
Truth in Lending statements are
complicated
Number
Per cent
Some information on the Truth in
Lending statements is not very
useful
Number
Per cent
Total
Agree
Agree
Disagree Disagree
strongly somewhat somewhat strongly
Do not
know
2,563
100.0
201
7.8
501
19.5
839
32.7
789
31.1
224
8.7
2,563
100.0
975
38.0
887
34.6
227
10.8
118
4.6
316
12.3
2,563
100.0
502
19.6
1,007
39.3
401
15.6
139
5.4
514
20.0
bank credit cards—increases of 16.2, 9.2, and 7.9 percentage points,
respectively, since 1970.5
Data supporting simplification. Proponents of simplification in
Truth in Lending contend that the act and its implementing regulation now require too many disclosures, which may actually overwhelm and confuse some borrowers. These observers advocate the
elimination of all unnecessary information from the disclosure statements, leaving only the most meaningful cost disclosures. The 1977
survey questioned consumers about the complexity of Truth in Lending disclosures and gathered data about the credit terms that they
regarded as important.
a. Usefulness of Disclosure Statements. Nearly two-thirds of those
interviewed believed that Truth in Lending statements are not read
carefully, and almost three-quarters agreed that disclosure statements
are complicated (Table 1). Almost 60 per cent of the respondents indicated that some information on the Truth in Lending statements is
not very useful.
Respondents who had less education or lower incomes, who were
50 years of age and older, and who were unaware of APR's or without current closed-end debts were more likely to express no opinions
concerning these three observations (Table 2). Probably, people with
those characteristics are less familiar with the Truth in Lending Act
and have had little or no recent contact with disclosure statements.
5
These findings were discussed in more detail in the Board's ANNUAL RE-
PORT for
1977.
Consumer Affairs
279
Thus, the survey findings tend to support the idea that Truth in
Lending statements present too much information and that streamlined statements might be read more carefully by consumers.
b. Important Credit Terms. As shown by the numbers in Table 3,
over 75 per cent of those surveyed mentioned rate as an important
credit term; of these, over 80 per cent regarded it as the most important disclosure. This result is noteworthy since payment size has been
traditionally viewed as the most significant credit term. In this sur2. Respondents' Agreement with Observations about Truth in Lending
Disclosure Statements, by Characteristics of Respondents
Percentage distribution
Group
Number*
Total
Strongly
Agree
Disagree Strongly Do not
agree somewhat somewhat disagree know
A. Most people read their Truth in Lending statements carefully
All respondents
Education
Some high school or less. .
High school
Some college or more
Age (years')
Under 35
35-49
50 and over
Income (dollars)
Less than 7,500
7,500-12,499
12,500-17,499
17,500 and more
Aware of APR 2 8
Unaware of APR
Those using
closed-end credit
now 4
Those not using closed-end
credit now
2,563
100.0
7.8
19.5
32.7
31.1
8.7
842
781
925
100.0
100.0
100.0
11.9
7.3
4.8
18.4
21.6
19.1
27.9
34.6
35.7
24.9
30.8
37.2
16.9
5.5
3.2
822
612
1,111
100.0
100.0
100.0
7.2
6.2
9.3
22.5
19.4
17.2
33.3
35.1
31.2
32.2
35.4
27.9
4.7
3.8
14.4
565
459
403
793
1,421
100.0
100.0
100.0
100.0
100.0
100.0
10.8
8.5
7.7
4.4
6.3
9.6
19.1
21.1
19.8
19.2
18.8
20.5
27.2
34.0
34.5
35.8
35.7
29.4
24.8
29.2
33.0
36.9
35.2
26.2
18.0
7.2
5.0
3.6
3.9
14.2
100.0
6.3
19.7
33.9
35.0
5.0
9.2
19.4
31.7
27.7
12.0
1,108
1,198
1,365
100.0
B. Truth in Lending statements are complicated
All respondents
Education
Some high school or less. .
High school
Some college or more
Age (years)
Under 35
35-49
50 and over
Income (dollars)
Less than 7,500
7,500-12,499
12,500-17,499
17,500 and more
Aware of APR 2
Unaware of APR *
Those using
closed-end credit
now 4
Those not using closed-end
credit now
2,563
100.0
38.0
34.6
10.8
4.6
12.3
842
781
925
100.0
100.0
100.0
37.6
39.9
37.0
28.6
35.7
39.4
8.1
10.6
13.5
4.4
4.5
5.0
21.2
9.2
5.1
822
612
,111
100.0
100.0
100.0
38.4
39.0
37.1
37.6
36.1
31.8
12.2
13.1
8.5
4.6
5.7
4.0
7.2
6.0
18.6
565
459
403
793
1,421
100.0
100.0
100.0
100.0
100.0
100.0
36.8
41.2
37.5
38.0
41.2
34.5
26.7
36.4
40.4
36.9
35.7
33.3
8.5
8.3
10.4
15.1
12.2
9.4
4.1
3.7
4.5
5.7
4.9
4.0
23.9
10.4
7.2
4.3
6.0
18.9
100.0
39.6
36.8
12.3
100.0
36.7
32.7
9.5
4.5
16.6
1,108
1,198
1,365
280
Consumer Affairs
2.—Continued
Group
Number
Total
Strongly
Agree
Disagree Strongly
agree somewhat somewhat disagree
Do not
know
C. Some information on Truth in Lending statements is not very useful
All respondents
Education
Some high school or less. .
High school
Some college or more
Age (years)
Under 35
35-49
50 and over
Income (dollars')
Less than 7,500
7,500-12,499
12,500-17,499
17,500 and more
Aware of APR 2
Unaware of APR «
Those using closed-end credit
now *
Those not using closed-end
credit now
2,563
100.0
19.6
39.3
15.6
5.4
20.0
842
781
925
100.0
100.0
100.0
21.5
20.4
17.3
32.2
41.6
44.1
11.3
15.7
19.7
5.8
4.9
5.6
29.2
17.4
13.3
822
612
,111
100.0
100.0
100.0
16.2
22.5
20.4
43.8
41.8
34.6
23.0
13.9
11.0
12.3
14.9
28.7
565
459
403
793
1,421
100.0
100.0
100.0
100.0
100.0
100.0
18.8
19.6
19.4
20.2
20.6
18.2
32.0
40.1
45.9
41.9
42.1
36.2
12.6
17.6
15.1
17.9
16.2
15.3
4.7
6.9
5.2
6.4
4.1
4.5
6.4
6.2
4.5
100.0
20.3
42.6
17.0
6.2
13.9
100.0
19.0
36.4
14.4
4.8
25.4
1,108
1,198
1,365
30.3
18.5
15.1
13.6
14.8
25.7
1
A few respondents were excluded in calculating the percentages because their characteristics were
not ascertained.
2
Those responding with rates of 12 per cent or more to a hypothetical question about the annual
percentage rate on a purchase of furniture.
•Those responding with rates below 12 per cent or "do not know" to hypothetical question about
annual percentage rate on purchase of furniture.
* Respondents using credit from institutional sources.
vey, that term ranked second behind rate information by a significant
amount—followed by the dollar amount of finance charge, penalties
for late payment, and the handling of early payoffs.
These findings are significant since they support past legislative
proposals for simplifying Truth in Lending by highlighting on the
disclosure statement the credit terms consistently mentioned by consumers.
Credit-card billing errors. The 1977 survey explored consumers'
knowledge, perceptions, and use of procedures for the resolution of
billing disputes required under the Fair Credit Billing Act.
The overwhelming majority of respondents (82.8 per cent) either
did not know whether any Federal legislation or regulation concerning credit-card billing errors existed or believed that there was none
(Table 4). Even among cardholders who receive frequent notices
about the act and consumers who have experienced a billing error,
only about one in four was aware of the law.
Nearly 15 per cent of all cardholders had experienced at least one
Consumer Affairs
281
3. Automobile Credit Terms Respondent Would Want To Know
Number of responses by rank
Term
First
Credit costs/terms
Interest rates, annual rates
Interest dollars/finance charges
Fees other than interest
Amount of downpayment
Size of monthly payments
Variations in payment size/balloon payments
Length, maturity of contract
Ease of obtaining credit/credit availability.. .
Availability/cost of credit insurance
Whether credit insurance is required
Rebates for prepayment
Handling of penalty for late payments
Willingness to defer payments
Garnishment procedures
Repossession conditions
Willingness to allow cosigning
Credit limit
Other terms /costs
Characteristics of institution
Reputation
Amount/clarity of information given
Who the holder of the contract will be
All other
All else
"Nothing"
"Everything"
Not known or not ascertained
No second, (third), (fourth) response
Total
Second
Third
Most
Fourth important
11
23
15
7
28
5
21
7
30
3
28
30
6
0
10
0
3
17
1,335
0
9
64
58
70
24
26
178
9
202
17
60
17
90
80
29
0
7
1
6
43
18
4
4
3
44
13
6
17
48
19
17
20
20
3
7
10
48
12
8
18
4
3
205
0
0
1
668
0
0
0
0
0
0
1,543
2,277
3
1
402
0
2,563
2,563
2,563
2,563
2.563
1,592
202
28
23
240
4
144
7
11
1
16
10
5
0
2
0
8
29
277
114
65
32
360
12
559
12
84
9
106
83
16
0
11
194
31
9
293
6
79
6
24
1
22
30
9
0
4
0
6
22
billing error during the year prior to the interview. The most frequently cited errors involved incorrect charges, followed by the failure to credit payments or incorrect credits (Table 5). Three-quarters
of the errors involved $100 or less and nearly one-third of these were
less than $10 (Table 6).
The main response of consumers faced with billing errors was complaint to the creditor, and satisfactory outcomes were reported in
most cases (Tables 7 and 8). These findings indicate that even without invoking Federal protection of their billing rights, of which most
are unaware, consumers generally find creditors responsive to billing
problems and complaints.
Inquiry on Rights under the Fair Credit Billing Act
In November 1977 the Board surveyed eight large creditors to determine the extent to which consumers exercise certain rights under
the Fair Credit Billing Act.
282
Consumer Affairs
According to the Board's findings, which were published in May
1978, a substantial number of credit customers questioned their billing statements each month. The increase in the number of inquiries
since the credit billing provisions were incorporated into Regulation
Z is not known, but the proportions of statements questioned ranged
4. Responses to Question about
Existence of Federal Law
Dealing with Credit-Card Billing
Errors
5. Credit-Card Billing Errors by
Type and Card
Errors
Item
Type of respondent
and response
Number
Per cent
All respondents
Yes (there is a law)
No
Do not know
Not ascertained
421
622
1,500
20
16.4
24.3
58.5
.8
Total
2,563
100.0
Cardholders
Yes (there is a law)
No...
Do not know
Not ascertained
Total
373
423
808
5
23.2
26.3
50.2
.3
1.609
100.0
Those who experienced a
billing error
Yes (there is a law)
No
Do not know
Not ascertained
61
66
100
0
26.9
29.1
44.0
*
Total
227
100.0
* Less than 0.5 per cent.
1-10
11-25
26-50
51-100
101-250
251 and more ..
No money involved
Not known or not
ascertained
....
Total
Number
63
59
49
29
19
15
5
22
261
Per cent
Type of error
Charged for another's
purchase
Charged twice, charged
for item not purchased, incorrect
charge
Return item or refund
not credited
Payment not credited
or credited incorrectly
Other
Not ascertained
46
17.6
118
45.2
19
7.3
57
16
5
21.8
6.1
1.9
Total
261
100.0
38
64
14.6
24.5
12
134
4.6
51.3
Type of card
Gasoline
Bank credit
General purpose
(travel and entertainment)
Retail credit
Other or not ascertained
Total
6. Credit-Card Billing Errors by
Dollar Amount
Amount of error (dollars)
Number
13
5.0
261
100.0
7. Consumers' Responses to
Credit-Card Billing Errors
Response
Number
Per cent
Complaint to creditor....
Complaint to attorney....
Complaint to Better
Business Bureau
Paid off debt
Refused to pay
All other
No action taken
Not known or not
ascertained
216
1
81.5
.4
1
3
4
2
27
.4
1.1
1.5
.8
10.2
11
4.2
Total
265
100.0
Per cent
24.1
22.6
18.8
11.1
7.3
5.7
1.9
8.4
100.0
Consumer Affairs
283
8. Responses to Questions on Credit-Card Billing
Response
Number
Was the error corrected to your satisfaction?
Yes
No
Not known or not ascertained
206
24
4
Total
Per cent
234
88.0
10.3
1.7
100.0
Are there any billing practices of credit-card companies that you
would like to see changed?
Yes
.
No
Not known or not ascertained
326
1,247
36
20.3
77.5
2.2
Total
1.609
100.0
from less than 1 per cent to somewhat more than 6 per cent for the
eight reporting creditors. While only a few of these inquiries followed
the formal procedures provided by Regulation Z, most of the companies reported treating informal questions just as they do the formal
ones.
Uniform Guidelines for Enforcing Regulation Z
The Board and four other agencies that enforce the act for financial
institutions—the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank
Board (FHLBB), and the National Credit Union Administration
(NCUA)—have agreed on uniform enforcement guidelines for the
Truth in Lending Act and Regulation Z. The guidelines are expected
to go into effect by the end of 1978.
The guidelines, which were first issued for public comment in October 1977, are intended to provide standard criteria for the enforcement of the Truth in Lending Act when violations are discovered in
examinations of financial institutions, and to emphasize to creditors
the need for compliance. Reimbursement to individual consumers will
be required for five types of violations resulting in payment of charges
higher than those disclosed under the act. To correct the two most
important violations, that remedy will be applied when the disclosed
APR understates the true cost of credit by more than one-eighth of 1
percentage point, and when the disclosed finance charge understates
the true charge by more than $100 or 1 per cent of the true charge,
whichever is lower. Reimbursement will normally not be required for
overcharges of less than $1 per individual account.
284
Consumer Affairs
Compliance
During the past year the Federal Reserve System and other Federal
enforcement agencies continued to promote compliance with the act
and regulation through a variety of methods. Many compliance
programs feature specialized examinations conducted by examiners
extensively trained in consumer law and regulations. By year-end
Federal Reserve examiners had conducted approximately 800 such
examinations under comprehensive procedures adopted by the Board
in early 1977. This practice emphasizes to bank personnel the Board's
commitment to achieving compliance with the consumer regulations.
In 1978 the education of examiners remained a high priority
among the agencies enforcing the act by means of an examination
process. The Comptroller of the Currency, for example, held six
2-week schools to train 300 of its examiners in consumer regulations,
and joined the FDIC and the Board in conducting a 1-week seminar
for supervisors and senior examiners. In addition to a training program, the NCUA distributed specially programmed calculators to all
examiners, which, it reports, have greatly aided the examination
function.
Most of the enforcement agencies and the appropriate offices of
the exempt States—Connecticut, Maine, Massachusetts, Oklahoma,
and Wyoming—have mechanisms for resolving consumer complaints.
In the first 9 months of 1978, the Federal Reserve System received
381 consumer complaints relating to the act and regulation; of these,
82 involved State member banks. By far the two largest categories of
complaints concerned fair credit billing and disclosure—a pattern
also noted by the FDIC, the Comptroller, and the NCUA. During
1978, 67 complaints about State member banks warranted investigation by the Federal Reserve System; in 38 cases (57 per cent) the
matter was resolved in favor of the consumer.
In view of increased enforcement activities, especially the adoption
of uniform enforcement guidelines for Regulation Z, the staff of the
Board's Division of Consumer Affairs has undertaken an extensive
review of provisions relating to the computation and disclosure of the
APR. The regulation currently permits numerous computation methods that often produce varying APR's and finance charges on a given
transaction. The Board will publish for comment alternative solutions
to the problems identified.
As part of its enforcement function under the Consumer Leasing
Consumer Affairs
285
Act, the Federal Trade Commission (FTC) surveyed 17 of the largest
automobile lessors during the past year. An unexpected finding was
that many of the lessors restrict their activities to commercial leasing.
The Commission also recently began several preliminary investigations of consumer lessors for possible advertising violations.
The agencies and exempt States responsible for enforcing the
Truth in Lending Act have reported varying assessments of the extent
to which creditors are complying with the act's requirements. Several
Federal agencies, including the FHLBB, and all of the exempt States
found a high level of creditor compliance with the substantive provisions of the act and noted that most violations are nonsubstantive.
Authorities from the exempt States of Massachusetts and Connecticut
believe that the vast majority of creditors subject to their jurisdiction
have a basic understanding of the law, attempt to conform to statutory and regulatory requirements, and fall short only when applying
the more technical concepts. The FTC, while reporting apparently
high substantial compliance, nonetheless initiated in September 1978
an industrywide investigation to better determine whether creditors
are correctly disclosing to consumers the actual cost of credit and
otherwise complying with the act.
The Comptroller of the Currency reported that the proportion of
national banks not complying with the act has remained substantially
the same as in 1977 when approximately 88 per cent were in violation, most of which was technical, and pointed out that since October
1976, national banks have made voluntary reimbursements approximating $2.5 million. Three other agencies reported significant increases in 1978 in the number of violations found. The per cent of
examination reports reviewed by the FDIC that indicated apparent
violations jumped from 36.2 per cent in 1977 to 81.6 per cent in
1978. Reasons frequently cited for noncompliance include misunderstanding the law, clerical error, oversight, and carelessness. The
Board estimates that 85 per cent of State member banks are still not
fully complying with Regulation Z—an increase of 13 percentage
points since 1977; while the NCUA reports that the proportion of
Federal credit unions that were not complying more than doubled in
1978, from 27 per cent a year earlier to 59 per cent. Again, for both
kinds of institutions, most violations were nonsubstantive. All three
agencies attribute the increase in reported violations to better training
of their staffs and improved examination techniques rather than to
286
Consumer Affairs
a higher incidence of noncompliance. However, the NCUA believes
that unique characteristics of credit unions continue to hinder enforcement efforts. Their cooperative nature, their prevalent use of
payroll deductions, and their reliance on volunteers, it is felt, all
create serious problems.
Thus, the 1978 examination reports of the Comptroller of the
Currency, the FDIC, the Board, and the NCUA revealed high proportions of institutions still not fully complying with Regulation Z.
However, this continued discovery of relatively high numbers of violations does not necessarily represent a deteriorating incidence of
creditor compliance. Instead, it is thought that recently expanded
formal training of examiners, development of more thorough and intensive examination procedures, and increased over-all efficiency of
the examination staffs have all contributed to an improved ability to
detect violations that may have been overlooked in the past.
During 1978 the FDIC, the FHLBB, and Oklahoma, an exempt
State, all issued cease-and-desist orders. In addition, the FDIC referred four cases to the Department of Justice for possible criminal
prosecution.
In 1977 the FTC instituted five civil penalty cases under a pilot
enforcement program concerning the advertising requirements of
Regulation Z. Since that time all five cases have been settled; civil
penalties of $10,000 were assessed in four cases and $15,000 in the
remaining case. The Commission is currently considering application
of this enforcement mechanism to other types of Truth in Lending
violations. During 1978 the FTC entered or provisionally accepted
ten consent orders, obtained one final order, and issued one complaint. A variety of both Truth in Lending issues and types of creditors were involved.
Each enforcement agency and exempt State has estimated the annual cost of its compliance effort in connection with the Truth in
Lending Act. While these figures are not strictly comparable, the
total estimated expenditures for the nine Federal enforcement agencies exceeded $8.5 million in 1978, with the largest expenditures reported by the FDIC, the Comptroller of the Currency, and the Board.
The five exempt States reported combined expenditures in excess of
$1 million. Several agencies also anticipated substantial increases in
their expenditures in 1979 due to the adoption of the uniform guidelines for enforcing Regulation Z.
Consumer Affairs
287
Legislative Recommendations
Although the Board is not making legislative recommendations in this
report, several of the other Federal enforcement agencies have suggestions for amending the Truth in Lending Act. The Federal Trade
Commission cited four problem areas needing special congressional
attention: the increasing use of open-end credit disclosures in what
would traditionally have been other than open-end credit transactions; unfair or deceptive insurance sales practices; obstacles to the
right of rescission; and the forfeiture of credit balances. In addition,
the FTC has urged the Congress to permit enforcement of Regulation
Z as if it were a trade regulation rule; to minimize civil liabilities for
"technical" violations; to extend the statute of limitations in civil actions; to codify the right to raise Truth in Lending claims as a recoupment after the statute of limitations has run; and to provide for earlier
disclosure.
Suggestions from other agencies include eliminating the special exceptions from the general rule on what constitutes a finance charge;
simplifying disclosures; permitting a tolerance of one-eighth percentage point for the APR; instructing the Board to issue model forms;
exempting lending activities of farm credit institutions and agricultural loans from the act; and restricting rescission rights to indirect
paper and home solicitation sales.
Consumer Advisory Council
Established in 1976 to advise the Board on consumer-related matters,
the Consumer Advisory Council includes representatives of both consumers and creditors. During 1978 its discussions and suggestions in
the area of Truth in Lending focused primarily on the uniform enforcement guidelines proposed by the five Federal financial institution regulatory agencies and proposals for simplifying the disclosure
requirements under the Truth in Lending Act and Regulation Z.
In addition, the Council reviewed the efforts of the Federal Reserve Banks in examining and achieving member bank compliance
and explored the role the Board should take in consumer education.
Throughout the year the Council was briefed on legislative and regulatory developments and provided the Board with helpful advice. In
December 1978 it recommended that the Board ask the Congress
to exempt agricultural credit from the requirements of the act.
288
Consumer Affairs
Administrative Functions
Amendments and Interpretations of Regulation Z
Descriptive billing of nonsale transactions. In January 1978 the
Board revised the provision of Regulation Z that specifies the date to
be used on descriptive billing statements to identify certain nonsale
credit transactions such as cash-advance check transactions. This
amendment, which became effective March 28, 1978, permits a creditor to use the date on which a transaction is debited to the customer's
account in lieu of the date on which the transaction occurred or the
date appearing on the check or other credit instrument.
The amendment, prompted by the operational difficulties experienced by creditors in ascertaining the transaction date or the date
appearing on the credit document, is intended to facilitate compliance
with the descriptive billing provisions of Regulation Z.
However, the debiting date, if used, must be identified as such on
the descriptive billing statement. In addition, a creditor using the date
of debiting must, as an added protection to the customer, treat a subsequent inquiry about the transaction as if it were an inquiry about a
billing error and as an erroneous billing under the provisions of the
Fair Credit Billing Act, and the creditor must supply documentary
evidence of the transaction to the customer, without charge, whether
or not it is requested. Furthermore, any finance charge or other
charge imposed as a result of the use of the debiting date must be
credited to the customer's account if such an inquiry is made.
Revised procedures for issuance of official staff interpretations. In
April 1978 the Board amended Regulation Z to revise the procedure
for issuing official staff interpretations. Under this new procedure,
official staff interpretations are issued with an effective date 30 days
after publication in the Federal Register, which enables the public to
review them before they become effective and permits interested
parties to request the opportunity for public comment. If a request is
received, the effective date of the interpretation is suspended and its
text republished for public comment together with the letter requesting a comment period or a summary of the arguments presented in
such a letter. After the comments are reviewed, a final interpretation
is issued.
Preservation of evidence of compliance. In May 1978 the Board
amended Regulation Z to change its record-retention requirements for
creditors under the jurisdiction of the Comptroller of the Currency,
Consumer Affairs
289
the FDIC, the FHLBB, the Board, and the NCUA. Previously, all
creditors had been permitted to dispose of records demonstrating
compliance with Regulation Z 2 years after the date when disclosures
were required to be made. This amendment, however, requires creditors and lessors subject to the five agencies to retain any credittransaction records in their possession, even those in which more than
2 years have elapsed from the required disclosures.
This action was taken to avoid the destruction of records evidencing violations that would be subject to reimbursement under the uniform guidelines for enforcement of Regulation Z proposed by the five
agencies in October 1977. Once the guidelines are in effect, creditors
may dispose of records more than 2 years old after those records
have been examined and found to be in compliance.
Rescission in open-end credit. In June 1978 the Board amended
Regulation Z to create an exception to the right of rescission for individual transactions under certain open-end credit accounts secured
by interests in consumers' homes. In lieu of notification of the right
to cancel each individual transaction under such accounts, creditors
must provide specified disclosures of a customer's rights at certain
times: upon the opening of the account; prior to any increase in the
credit limit; at the time a security interest in a home is added to an
existing open-end credit arrangement; prior to any change in the
terms of the account; and annually. Under the amendment, creditors
may not change the terms of such accounts without allowing customers to pay off the balance according to the existing terms. However, if customers refuse the change in terms, creditors need not extend further credit on the accounts. The Board has also issued an
interpretation (Section 226.904 of Regulation Z) that provides
three sample disclosure notices that creditors may use to achieve compliance with certain of the amendment's requirements.
The major effect of this ruling is to facilitate the offering of credit
plans that enable consumers to tap their largest illiquid asset—the
equity in their homes—and, by controlling the payments, to minimize
the amount of finance charge paid. In October 1978 the Board received from the FTC and Senators William Proxmire and Donald W.
Riegle, Jr., requests to reconsider this ruling under which, it was felt,
consumers might be tempted to overextend themselves and risk losing
their homes. In a November letter to the two senators, Chairman
Miller, while reiterating the Board's position that these accounts offer
major benefits for consumers, promised to monitor developments
290
Consumer Affairs
closely. In addition, the Chairman indicated that a revision to the
amendment, whereby creditors offering such open-end accounts
would have to submit a notification of intent to the Board, was under
consideration in an effort to aid the Board's monitoring activity. Consumers Union has filed a suit in the U.S. District Court for the District of Columbia asking that the court declare the amendment void.
Disclosure of schedule of variable payments. In August 1978 the
Board amended Section 226.8(a) of Regulation Z to permit the disclosure of a complete payment schedule on as many pages as necessary in any transaction in which the payment amounts vary. Previously, all disclosures had to appear on one side of a single page. This
alternative provides flexibility for creditors in a simple disclosure
format, while insuring that customers receive meaningful information
about their credit transactions.
Expansion of provision on minor irregularities. In August 1978
the Board amended an interpretation (Section 226.503 of Regulation
Z) to facilitate the computation of APR's in long-term credit transactions involving irregular payment amounts, such as graduated-payment
mortgages. This amendment permits first-payment periods of up to
62 days to be treated as if they were regular when calculating APR's
on all transactions that have a scheduled term of 10 years or more
and that are payable monthly, whether or not the monthly instalments are equal. This action permitted use of APR tables prepared
by HUD for homes bought under its FHA graduated-payment mortgage program.
Disclosure of interest reduction. In August 1978 the Board proposed for comment an interpretation providing that in cases in which
the interest rate on a time deposit securing a loan must be reduced in
order to comply with State and Federal laws, such a reduction must
be disclosed under Truth in Lending. Although the amount of the
interest reduction would not need to be disclosed as part of the finance charge, the creditor would have to disclose the loss of interest.
The comment period ended September 29, 1978.
State Exemptions
No new exemptions from the requirements of Chapter 2 of the Truth
in Lending Act were granted to States in 1978, but one existing exemption was expanded. In October 1978 the Board approved an application by Massachusetts to expand the State's existing exemption
to include Federal credit unions. This expansion was granted after
Consumer Affairs
291
an enforcement agreement was entered into between the Massachusetts Commissioner of Banks and the NCUA. The arrangement
authorizes the Commissioner to examine Federal credit unions in the
State for compliance with Massachusetts' Truth in Lending law and
thereby ensures uniform enforcement of the State's law.
In May 1978 the Board adopted a supplement to Regulation Z
(Supplement VI) setting out the procedures to be followed by a State
seeking an exemption under Chapter 5 of the act (Consumer Leases)
or a Board determination regarding whether a State law is inconsistent with the Consumer Leasing Act.
Education
An important aspect of the enforcement function is education. In
1978 the agencies responsible for Truth in Lending initiated a variety
of educational activities designed for both consumers and creditors.
Consumer-oriented efforts included speeches and presentations as
well as the publication of explanatory brochures. The Board's Consumer Handbook to Credit Protection Laws is a comprehensive compilation of information about consumers' rights under credit laws and
regulations. It is expected to be available for distribution by the end
of 1978. During the year the Board also developed a pamphlet explaining what a consumer should do when experiencing a problem
with a bank, which includes a complaint form addressed to the
Federal Reserve. The Comptroller of the Currency and the FDIC
have issued similar pamphlets for complaints about their respective
institutions. The FTC has been developing a pocket-size Credit
Shopping Guide in both English and Spanish that includes general
information on shopping for credit and three sets of APR tables to
facilitate cost comparison in transactions such as automobile, mobile
home, and mortgage loans.
Efforts to familiarize creditors with the provisions of the act and
regulation range from general guidance in individual cases to the
more formalized Federal Reserve System program of advisory visits
to State member banks and national banks. In the past year, over 450
such visits, generally lasting from Vi day to Wi days, were made by
System staff. Several new publications have been developed for creditors in 1978. The Federal Reserve Bank of New York has published
Consumer Regulations Checklist, which highlights provisions of consumer regulations that have been identified by examiners as warranting closer attention by lenders. The NCUA issued the looseleaf
292
Consumer Affairs
Manual of Laws Affecting Federal Credit Unions and provided a free
copy to all 13,000 Federal credit unions, and the Office of the State
Examiner in Wyoming developed a looseleaf booklet that provides
guidance to all Wyoming creditors on a variety of problems. The staff
of the FHLBB attempts to monitor for accuracy information relating
to Truth in Lending that is disseminated by the various national
trade organizations.
EQUAL CREDIT OPPORTUNITY
The third Annual Report on the Equal Credit Opportunity Act
(ECOA) describes the enforcement of the act and Regulation B by
the Board of Governors of the Federal Reserve System and the other
Federal enforcement agencies. It presents the findings of a major
survey of consumers, which gathered information about consumer
perceptions, and a smaller inquiry of creditors, which sought data
on the use by consumers of consumer credit legislation. This report
also discusses the uniform guidelines proposed jointly by the financial
regulatory agencies for enforcing Regulation B, assesses the extent
to which compliance with the act is being achieved, and outlines the
Board's administration of its functions under the act.
This report does not contain recommendations of the Board for
statutory amendments. Such recommendations, if any, will be made
in the Board's ANNUAL REPORT to the Congress.
Special Civil Rights Enforcement Efforts
A preliminary review by the Board's staff at the end of 1977 of the
special consumer affairs enforcement program that was established
earlier in that year showed that although examinations frequently
revealed procedural violations, they had not been as successful in
uncovering evidence of banks engaging in substantive violations of
Regulation B and the Fair Housing Act. The question arose whether
existing procedures and training were adequate to enable examiners
to detect unlawful discrimination readily.
To supplement research conducted by the staff on this question,
the Board engaged a consultant to study the Board's procedures and
materials for enforcing the ECOA and Fair Housing Act and to
make recommendations for changes. The consultant's report, which
was published in May 1978, suggested a redirection of emphasis
in the System's enforcement efforts with respect to credit discrimina
Consumer Affairs
293
tion. On the basis of this report and independent research, a task
force of Board and Reserve Bank staff redrafted examiner manuals
and examination procedures for Regulation B and the Fair Housing
Act. In light of the field test results, the manuals and procedures
are being revised. The staff expects to present the revised civil rights
enforcement program to the Board early in 1979.
Meanwhile, in August 1978 the Division of Consumer Affairs
augmented its compliance staff by designating three members of its
legal staff as civil rights specialists. These persons, in conjunction
with the compliance staff, were primarily responsible for drafting new
examiner manuals and examination procedures. Each Federal Reserve Bank also appointed a member of its staff to assume primary
civil rights responsibilities.
The Board's civil rights specialists conferred with the staff of the
Department of Justice on recent developments in civil rights enforcement, and in September 1978 the Board's staff arranged for the
Department of Justice to conduct a special 1-day seminar for all
staff in the Division of Consumer Affairs and for the Reserve Bank
civil rights specialists. The Board also conducted a 3-day training
seminar for 12 examiners and 8 Board staff members on the subject
of civil rights enforcement.
Three other Federal agencies reported special activities in the
area of civil rights. The Federal Deposit Insurance Corporation
(FDIC) established a Civil Rights Branch within its Office of Consumer Affairs and Civil Rights to provide leadership in administering
the FDIC's enforcement of civil rights laws and regulations. The
Federal Home Loan Bank Board (FHLBB) adopted a new Nondiscrimination Regulation effective July 1, 1978, which enhances
Regulation B by prohibiting discrimination in housing lending on
all of the bases prohibited by the ECOA as well as on two additional
bases—age and location of the dwelling. The Federal Trade Commission (FTC) commissioned a report concerning discrimination in
real estate finance, which reviews the FTC's enforcement options
and provides recommendations about litigation strategies and possible
rulemaking proceedings.
Compliance
During the past year the Federal Reserve System and other Federal
enforcement agencies continued to enforce the Equal Credit Oppor-
294
Consumer Affairs
tunity Act and Regulation B through a variety of methods. This
section summarizes the compliance activities in 1978 of the Federal
Reserve System and the compliance reports of the other Federal
enforcement agencies.
Many compliance efforts feature specialized examinations conducted by examiners versed in consumer law and regulations. In
the past year Federal Reserve System examiners have conducted
special examinations of approximately 800 State member banks to
determine compliance with consumer credit regulations, including
equal credit opportunity.
Training of examiners remains a major activity among those agencies that enforce the act by means of an examination process. The
Comptroller of the Currency, for example, held six 2-week schools
to train 300 of its examiners in consumer regulations, and joined the
FDIC and the Board in conducting a 1-week seminar for supervisors
and senior examiners.
Most of the enforcement agencies handle consumer complaints
by investigating creditors and resolving complaints. During the first
10 months of 1978 the Federal Reserve System received 304 complaints relating to the act or Regulation B against State member
banks. Of these, 260 charged unfair denial, termination, or change
in terms of credit. Over half of these (138 complaints) claimed
discrimination on a basis the act does not define as discriminatory,
such as credit history, level of income, and length of employment.
On the other hand, 28 complainants felt that marital status or sex
was the reason for the creditor's adverse action, 11 charged discrimination because of age, and 11 because of race, color, or national
origin.
With respect to the 304 complaints regarding State member banks,
168 investigations have been completed, 60 are still under investigation, and 76 were handled by furnishing information or an explanation. In the 168 completed investigations, the bank was found to
be legally correct in 139 cases (in 36 of which it nevertheless reached
an accommodation with the complainant); to have made an error,
which has since been corrected, in 19 cases; to be in possible violation in 8 cases, 7 of which have since been resolved and 1 of which
remains unresolved. In two cases, the credit applicant was in error.
For this same 10-month period, the Office of the Comptroller reported 625 consumer complaints received, 280 of which alleged
discrimination on the basis of sex or marital status. In addition, 58
Consumer Affairs
295
complainants felt that they had been discriminated against due to
race, color, or national origin; 30 cited age as the perceived reason
for denial; and 16 charged discrimination due to receipt of public
assistance and 2 because of religion.
The FHLBB noted 211 complaints received during this period.
Over 25 per cent of these (56 complaints) alleged discrimination
on the basis of sex or marital status and nearly 25 per cent more
(52 complaints) charged redlining. Complainants also charged discrimination due to race, color, or national origin in 34 cases, age in
16 cases, and religion in 1 case.
During fiscal year 1978 the FDIC reported receiving 215 complaints and 17 inquiries concerning equal credit opportunity. Of
these, approximately 30 per cent involved the notice of adverse
action, 28 per cent alleged discrimination on the basis of sex or
marital status, and 8 per cent cited race or age.
The National Credit Union Administration (NCUA) stated that
during this same period it received 91 complaints about discrimination, the largest number of which (30 complaints) alleged discrimination on the basis of race, color, or national origin. Sex or marital
status was considered the reason for discrimination in 20 instances,
age in 4 instances, and receipt of public assistance in 3 instances.
During fiscal year 1978 the Federal Trade Commission responded
to over 11,000 consumers with complaints or inquiries pertaining
to the ECOA, an increase of approximately 4,000 from 1977. The
FTC staff stated that it continues to rely heavily on information
provided by consumers in identifying suspected violators of the act
for ECOA enforcement actions. For this reason, the FTC staff is
developing a computerized system—similar to those currently used
by the Board, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Federal Home Loan Bank Board, and
the National Credit Union Administration—to aid in the retrieval of
information about consumer complaints.
The Farm Credit Administration (FCA) reported receipt of 7
complaints of discrimination on the basis of race, color, or national
origin, and 5 on the basis of sex or marital status. No complaints
involving farm credit lending institutions are known to have resulted
in litigation. However, the Department of Justice is investigating,
under the ECOA, practices of a Federal Land Bank and a Federal
Land Bank Association due to a complaint that the FCA explored.
The Civil Aeronautics Board (CAB) reported that it received
296
Consumer Affairs
approximately 150 complaints from the public involving the ECOA
and Regulation B. The CAB indicated that virtually all of these
complaints have been processed informally by contacting the carrier
or supplying information to the complainant, and that several major
investigations of consumer credit practices in the airline industry
have been initiated as a result of the complaints.
During fiscal year 1978, 44 complaints of discrimination based on
race, national origin, or sex were made against Small Business
Administration (SBA) program offices and recipients, but SBA
investigations found no violations.
Neither the Securities and Exchange Commission nor the Agricultural Marketing Service (Packers and Stockyards) received complaints alleging discrimination under the ECOA during 1978.
The agencies responsible for enforcing the Equal Credit Opportunity Act have reported varying assessments of the extent to which
creditors are complying with the act. During the past year, two
agencies noted substantial increases in levels of creditor noncompliance. NCUA's preliminary results show that 63 per cent of the
credit unions examined were not in compliance, more than double
the 28 per cent for 1977. Many of the violations involved noncomplying forms. Similarly, the proportion of FDIC examination reports
indicating apparent violations rose from 26.6 per cent in fiscal year
1977 to 51.3 per cent in fiscal year 1978. These reported violations
related primarily to failures to provide notifications in the event of
adverse action and improper requests for the signature of a spouse.
Both agencies attributed the reports of increased noncompliance
to the additional staff training and improved examination techniques
that followed special emphasis on civil rights enforcement.
Since many creditors supervised by the NCUA were found to be
using improper forms, the NCUA has developed a set of model loan
application forms written in plain English and designed to meet the
special needs of credit unions. After the forms are reviewed, their
optional use by credit unions should result in a decrease in this kind
of violation.
From July 1977 through June 1978, 89 per cent of national banks
examined by the Comptroller of the Currency were found to
be in violation of the regulation compared with 97 per cent during
the previous report period. Patterns of substantive violations of the
regulation were reported for 66 per cent of banks examined. Roughly
two-thirds of these involved requests for and subsequent considera
Consumer Affairs
297
tion of certain prohibited information with regard to applicants, and
30 per cent concerned requests for signature of a spouse or other
person. When a national bank is alleged to be discriminating on a
prohibited basis, the Comptroller conducts a special investigation.
Such an investigation, which may be triggered by a consumer complaint or by preliminary evidence discovered in the examination,
entails use of a larger sample of loan files and provides for a detailed
review of appraisal practices and other data.
The Comptroller's office said it believes that substantial compliance with the act is achieved by national banks after such a consumer examination and the required corrective action is taken. It
noted the following three enforcement problems: the lack of uniform
guidelines for required corrective action for banks found to be in
violation; the difficulty of detecting illegal discouragement of credit
applications by a review of loan application files; and the lack of
written lending policies in banks, which can be overcome only partially by interviews with loan officers and bank management.
The Federal Reserve System's first round of special consumer
examinations revealed approximately 78 per cent of State member
banks in noncompliance with the regulation. Of those banks undergoing a second consumer examination, 28 per cent repeated violations
previously cited although 73 per cent continued to have violations
of one kind or another. The overwhelming majority of violations
continue to relate to the use of noncomplying application forms,
while other frequent violations involve the notification requirements
of Regulation B and failure to request information for monitoring
purposes.
The Federal Home Loan Bank Board reported that violations were
found in 53 per cent of institutions examined from July 1977 through
June 1978. Major concentrations of violations concerned improper
requests for information on marital status, failure to notify about
adverse action, and failure to obtain monitoring information.
The FHLBB said that enforcement of the ECOA was complicated
by the difficulty of identifying and correcting practices that are
neutral on their face but have the effect of discriminating against a
protected class. The legal theory under which such practices are
identified holds that practices having a greater negative impact on
some protected classes may, if not justified by business necessity, be
illegal because of their discriminatory effect, even though they are
not intentionally discriminatory and are applied equally to all credit
298
Consumer Affairs
applicants. The FHLBB further indicated that, without clearer
standards and guidance from the Congress or the courts, determinations as to how business necessity and discrimination relate to mortgage lending will remain extremely difficult to make.
The Federal Trade Commission stated that the level of compliance
with the ECOA varies greatly among creditors subject to its jurisdiction. Although many violations are apparently confined to narrow
segments of an industry, certain unlawful practices appear to occur
more frequently. Such practices include requesting information about
an applicant's spouse, and obtaining the signature of the spouse or
other person on a promissory note; disregarding or treating less
favorably income derived from sources other than employment, such
as alimony, child support, pension, and public assistance payments;
relying on ZIP codes as criteria of creditworthiness; misusing the
Statement of Credit Denial, Termination, or Change sample form in
Regulation B; failing to disclose that sensitive factors, such as age,
are considered by the creditor; and providing vague, rather than
specific, reasons for rejecting applicants.
The FTC described four enforcement problems encountered in
fiscal year 1978 as significant: failure of creditors to provide the
principal specific reasons for adverse action; difficulties in detecting
and remedying racial steering in real estate financing; difficulties in
documenting business credit discrimination; and difficulties in dealing
with discriminatory telephone and mail solicitation techniques.
During the past year the FTC issued two final Commission Interpretations of the Fair Credit Reporting Act, designed to reconcile
the goals of that statute with the goals of the ECOA. Interpretation
600.7 facilitates access to credit by women while preserving the
privacy of their spouses. Interpretation 600.8 permits creditors to
obtain reports on the nonapplicant spouse in certain circumstances.
These interpretations are statements of FTC enforcement policy for
all creditors subject to FTC jurisdiction.
The agencies enforcing the ECOA and Regulation B reported that
they have taken the following formal administrative actions: During
fiscal year 1978 the FDIC initiated one cease-and-desist order, made
final four previously issued orders, and terminated three outstanding
orders. In the same period, the FTC accepted one consent order and
obtained one consent judgment. The FHLBB and the CAB each
issued one cease-and-desist order during 1978.
Each enforcement agency, with the exception of the Securities and
Consumer Affairs
299
Exchange Commission (SEC) and the Interstate Commerce Commission (ICC), submitted a cost estimate of its compliance effort in
connection with the Equal Credit Opportunity Act. While these
figures are not strictly comparable, the total estimated expenditure
was approximately $7.6 million in 1978.
Legislative Recommendations
Although the Board is not making legislative recommendations in
this report, two of the other enforcement agencies made suggestions
for amending the Equal Credit Opportunity Act. The Small Business
Administration requested that the Congress transfer to it (from the
FTC) the responsibility for monitoring Regulation B and the ECOA
in its programs. SBA said it believes that would avoid duplicative
administrative hearings when certain violations are alleged. The
Office of Equal Opportunity within the Department of Agriculture
recommends that discrimination because of a handicap be included
among the prohibited bases under the ECOA.
Uniform Guidelines for Enforcing Regulation B
The five Federal agencies that supervise Federally insured financial
institutions—the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Home Loan Bank
Board, the Federal Reserve Board, and the National Credit Union
Administration—have jointly proposed uniform guidelines for enforcement of the Equal Credit Opportunity Act, its implementing
Regulation B, and the Fair Housing Act. The guidelines were issued
for public comment in June 1978. They are intended to promote
improved and uniform enforcement of the equal credit opportunity
and fair housing laws among Federally regulated financial institutions by requiring corrective action for violations discovered during examinations and through investigation of complaints.
The enforcing agencies would encourage voluntary correction and
compliance, and take the actions noted in the guidelines to correct
violations. These violations include discouraging applications on a
prohibited basis, using discriminatory elements in credit evaluation
systems, charging a higher rate of interest on a prohibited basis or
requiring insurance in violation of fair housing or equal credit opportunity laws, requiring a cosigner on a prohibited basis, failing to
provide notices of adverse action, failing to maintain and report
300
Consumer Affairs
separate credit histories where required, failing to collect information for monitoring purposes, and terminating or changing the terms
of accounts on a prohibited basis. In each case, the circumstances
would be considered in determining the suitability of the remedy
provided in the uniform guidelines. If violations remain uncorrected,
the enforcing agencies would take administrative actions to ensure
correction. The agencies have reviewed the comments received and
are working toward final guidelines.
Comprehensive Review of Regulation B
In June 1978 the Board announced that it was embarking on a comprehensive review of all its regulations to determine whether they
needed modernization or improvement. The style and format of
existing regulations are receiving special attention in any attempt to
make Federal Reserve regulations more understandable and to reduce
the burden of compliance. The Federal Reserve Bank of Philadelphia,
which was assigned responsibility for reviewing Regulation B, submitted its report to the Board at the end of 1978. The Board's staff
will review the report and make recommendations to the Board.
New Information
During the past year the Board published the results of two studies—
a major survey of consumers and a less extensive collection of data
from creditors.6 Both inquiries were undertaken to learn more about
credit use and consumer needs and to provide information about
consumer awareness and use of consumer credit legislation.
Consumer Awareness Survey
In the summer of 1977 the Survey Research Center of the University
of Michigan conducted a survey of consumer awareness under the
joint sponsorship of the Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. The
survey, which involved interviews with a nationwide sample of 2,563
consumers, included several questions pertaining to the act and
Regulation B.
6
Thomas A. Durkin and Gregory Elliehausen, 1977 Consumer Credit Survey
(Board of Governors of the Federal Reserve System, 1978); "Exercise of Consumer Rights under the Equal Credit Opportunity and Fair Credit Billing Acts,"
Federal Reserve Bulletin, vol. 64 (May 1978), pp. 363-66.
Consumer Affairs
301
Nearly one-quarter of the consumers surveyed experienced problems or treatment they considered unfair in their credit transactions;
622 respondents mentioned 947 problems. However, relatively few
of them considered credit discrimination to be among their problems.
They reported only 26 problems because of sex or marital status,
8 because of age, 3 because of race, and 6 because of other personal
characteristics—a total of only 4.4 per cent of all problems (see
Table 9).
The survey asked respondents what information they thought
creditors use in deciding whether to make a loan. As shown in
Table 10, 9.6 per cent of the responses related to personal characteristics such as age or race, while the rest related to credit history
or financial characteristics. In response to a question that focused
on personal characteristics protected by the ECOA, personal factors
were mentioned very infrequently (Table 11), even by minority,
female, elderly, and nonmarried respondents (Table 12).
9. Type of Credit Problem Considered Unfair
Problem '
Number
of
mentions
Per cent
Problems
mentioned
Respondents
6.7
0
5.0
2.1
1.0
.8
1.4
3.7
1.0
2.1
2.7
Credit refusals, limits
Reason for refusal not given
High rates, charges
Other terms poor, short maturities, etc
Contract sale to other creditor
Prepayment penalty
Insufficient information about credit terms
Dunning, garnishment, embarrassment over bills
Repossession
Problem with handling of defective merchandise
Billing errors
Improper identification (another's purchase, former
spouse, stolen credit card)
Other mistakes, incorrect information, incompetence. .
Rudeness, unfriendliness
Family background or size, and credit
Sex, marital status, and credit
Age and credit
Race and credit
Other personal characteristics and credit
Lack of: assets, security, savings account, downpayment.
Insufficient credit history
,
Credit-rating problem
Requirement of certain financial characteristics, residence,
or job
All other mentions
Do not know or not ascertained
172
1
128
54
27
21
35
94
25
54
70
18.2
10
66
8
2
26
8
3
6
13
17
33
1.0
7.0
.8
.2
2.7
.8
.3
.6
1.4
1.8
3.5
.4
2.6
.3
33
25
16
3.5
2.6
1.7
1.3
1.0
.6
Total.
947
100.0
1
13*. 5
5.7
2.8
2.2
3.7
9.9
2.6
5.7
7.4
.2
.5
.7
1.3
The 947 problems were mentioned by 622 respondents, or by 24.3 per cent of the 2,563 total
respondents.
302
Consumer Affairs
The survey did not attempt to measure consumers' awareness of
the ECOA directly because at the time of the interviews the law had
only recently taken effect. Survey research with respect to other credit
laws indicates that public awareness of them tended to develop very
slowly.
10. Consumer Perceptions of Credit Criteria Used by Creditors,
Open-Ended Question
Mentions
Criterion
Number
Personal
Family size
Marital status
Sex
Age
Race
Personal character reputation
Other
Credit
Credit history, credit rating, credit bureau reports
Assets, collateral, security
Amount of other debt
Other
Financial
Type of employment, security of employment, time on job
Homeownership
Time of current address
Amount of income
Other
Other
Other responses
Do not know or not ascertained
1,583
556
646
40
Total
Per cent
1,033
94
102
1,089
34
1.1
1.1
.4
1.8
.2
3.8
1.2
26.4
9.3
10.8
.7
17.2
1.6
1.7
18.1
.6
45
193
.7
3.2
6.002
100.0
68
69
27
110
12
228
73
11. Consumer Responses to Closed-End Question about Credit Criteria
Used by Creditors, by Criterion
Criterion
Length of time on present job
Length of time at present address
Race
Having a checking account or not
Homeownership (own or rent)
Sex
Amount of other monthly payments (including rent or mortgage)
Age
Income
Marital status (married, single, separated, divorced)
Size of family
Previous credit experience
Number
of
mentions
Per cent of
respondents
(N =2,563)
1,478
358
57
251
726
74
1,022
219
1,592
143
77
1,634
57.7
14.0
2.2
9.8
28.3
2.9
39.9
8.5
62.1
5.6
3.0
63.8
Consumer Affairs
303
12. Distribution of Responses by Consumers with Selected Characteristics
about Use by Creditors of that Characteristic as Criterion
Per cent of respondents
Group
Race
Caucasian
Non-Caucasian
All
Sex
Male
Female .
. .
All
Age
Under 50 years
50 years and over
All
Marital status
Married
Separated
Divorced
Widowed
.
.. .
Single, never married. .
All
Mentioning
Not mentioning
1.9
4.5
2.2
98.1
95.5
97.8
2.2
4.3
2.9
97.8
95.7
97.1
5.4
12.4
8.5
94.6
87.6
91.5
5.0
2.4
9.4
7.9
4.8
5.6
95.0
97.6
90.6
92.1
95.2
94.4
Inquiry on Exercise of Rights
under the Equal Credit Opportunity Act
In November 1977 the Board surveyed eight large creditors to determine the extent to which consumers exercise certain rights under the
ECOA and the cost to creditors of complying with this law. Two
areas covered in the inquiry were the right to a separate credit history
for married persons and notification by creditors of specific reasons
for denial of credit.
Creditors enclosed with billing statements the initial notices regarding the right to a separate credit history. Approximately 11 per cent
of customers requested the maintenance of separate credit histories.
The average cost to the creditors of printing and processing each
notice in such a mailing was less than 1 cent, and the average cost of
processing the return requests and initially reporting the new information to the credit-reporting agencies was about 9 cents per request.
A substantial proportion of rejected credit applicants requested
the reasons for denial if they had not been given reasons at the time
of rejection; many applicants subsequently provided additional information sufficient to warrant the granting of credit. Similarly, many
applicants who were initially given reasons for credit denial supplied
more information, and a high proportion of these were then granted
credit. The cost of providing reasons for the denial of credit to the
304
Consumer Affairs
rejected applicants varied widely—ranging from 22 cents to $5.25
per account.
Consumer Advisory Council
The Consumer Advisory Council, whose members include a broad
representation of consumer and creditor interests, was established in
late 1976 to advise on the Board's responsibilities in the field of
consumer credit protection laws. During 1978 the Council met four
times and discussed various issues, including the uniform guidelines
for enforcing Regulation B. In addition, the Council reviewed the
efforts of the Federal Reserve in achieving member bank compliance
with the ECOA and Fair Housing Act and explored approaches the
Board should consider in its consumer education efforts.
In February 1978 the Board expanded the Council membership
to 28 by appointing 2 additional members. In December, 8 new
members were appointed to the Council for terms of 3 years to
replace those whose terms expired at the end of 1978. A list of
members currently serving on the Council, and their terms, is shown
in the section "Federal Reserve Directories and Meetings."
Administrative Functions
Amendments and Interpretations of Regulation B during 1978
Over the course of 1978 the Board made a number of amendments
and interpretations of Regulation B.
Occurrence of adverse action at point of sale. Under Regulation B,
in each instance of adverse action, a creditor must either give a written
explanation to the customer of the reason for such action or inform
the customer of the right to receive an explanation upon request. In
March 1978 the Board amended its definition to exclude most pointof-sale or loan denials from the adverse-action requirements. Under
the revised definition a refusal to authorize a point-of-sale or loan
transaction is not adverse action unless a creditor unfavorably changes
the terms of an account, such as by lowering the customer's credit
limit; closes an account; or turns down an application to increase the
credit of an account made in accordance with the creditor's procedures at the point of sale. The amendment superseded Official Staff
Interpretation EC-0008, which was rescinded.
Revised procedures for issuance of official staff
interpretations.
In April 1978 the Board amended Regulation B to revise the pro
Consumer Affairs
305
cedure for issuing official staff interpretations. Under the new procedure, official staff interpretations are issued with an effective date
30 days after publication in the Federal Register, which enables the
public to review them before they become effective and permits
interested parties to request the opportunity for public comment.
If a request is received, the effective date of the interpretation is
suspended and its text republished for public comment together with
the request for a comment period or a summary of the arguments
presented in the request. After the comments have been reviewed, a
final interpretation is issued.
Proposed amendments to Regulation B. In response to certain
recommendations from the staff of the Federal Trade Commission
and the President's Task Force on Women Business Owners, the
Board, in October 1978, proposed for comment several changes to
Regulation B that would broaden its scope. The proposed amendments would (1) bring under the regulation arrangers of credit—
for example, real estate brokers who choose the creditors with which
a credit application willl be filed; (2) eliminate the exemption of business credit from the record-keeping and notification requirements in
certain transactions under $100,000; and (3) eliminate the exemption of business credit from the general bar against asking for an
applicant's marital status. The proposed amendment regarding business credit incorporates Official Staff Interpretation EC-0009, which
requires creditors to give applicants for business credit written or
oral notice of action taken on an application or an existing account
within a reasonable time. The comment period ended December 26,
1978.
Official staff interpretations. During 1978 the staff issued three
official staff interpretations of Regulation B and withdrew two previously issued. In March 1978 the Board instructed its staff to withdraw Official Staff Interpretation EC-0007 dealing with the collection, for marketing purposes, of information otherwise prohibited
under the regulation, and to issue a new interpretation, EC-0010,
limiting the applicability of the interpretation. Official Staff Interpretation EC-0008, which concerned whether adverse action can
occur at the point of sale, was superseded by the March 1978 amendment to the regulation.
The remaining two official staff interpretations, EC-0011 and EC0012, deal, respectively, with the applicability of Regulation B to
certain lending operations conducted outside the United States, and
306
Consumer Affairs
with the revised application forms for residential mortgage loans
prepared by the Federal Home Loan Mortgage Association and the
Federal National Mortgage Association. Both were issued under the
revised procedures but were not challenged.
Education
An integral part of any enforcement program is educating both
creditors and consumers as to their rights and responsibilities. During
the past year the enforcement agencies participated in a number
of educational efforts, including speeches and seminars involving
consumers, creditors, school groups, professional associations, and
others.
Explanatory pamphlets remain a popular method of consumer
education. This past year the Federal Reserve Board announced
two new brochures, one of which, The Equal Credit Opportunity
Act and . . . Credit Rights in Housing, provides information about
how the major provisions of the ECOA affect mortgage lending.
Another, the Board's Consumer Handbook to Credit Protection Laws,
is a compilation of consumers' rights under credit laws and regulations. The Small Business Administration reports that pamphlets
concerning its "Women in Business Program" are available for
distribution in all SB A program offices.
The Federal Reserve Bank of Philadelphia has recently produced
a film entitled "To Your Credit." The film is being distributed to
various consumer and civic groups. It depicts common problems
faced by consumers in credit transactions and offers solutions by
informing consumers of their rights under the many consumer credit
protection laws. The FTC and the Federal Reserve Bank of San
Francisco have each developed public service announcements for
television and radio.
Education of creditors often occurs during the examination process.
Most agencies report that this procedure enables one-to-one guidance in the areas in which it is most needed. As a supplement to this
on-site education, the Federal Reserve System continued its program
of advisory visits to member banks with approximately 450 visits
during 1978. In addition, several new publications have been developed for creditors in 1978, such as the Federal Reserve Bank of
New York's Consumer Regulations Checklist and the NCUA's
Manual of Laws Affecting Federal Credit Unions.
Consumer Affairs
307
FEDERAL TRADE COMMISSION ACT
This is the fourth Annual Report describing the activities of the
Board of Governors of the Federal Reserve System in fulfilling its
responsibilities under Section 18(f) of the Federal Trade Commission
Act. Those responsibilities are (1) to identify unfair or deceptive
banking practices and to adopt regulations prohibiting them; (2) to
receive and take appropriate action upon complaints against State
member banks; and (3) within 60 days after rules prescribed by the
Federal Trade Commission (FTC) take effect, to promulgate substantially similar regulations applicable to banks (unless certain exceptions apply).
This report also presents the findings of a survey that was undertaken to help determine whether certain bank practices warrant
regulatory or other action by the Board. It discusses the Board's
handling of consumer complaints throughout the year and summarizes
the status of three rules proposed by the Federal Trade Commission
that may require parallel Board action.
Initiation of Regulations by the Board
In carrying out its responsibilities to identify unfair or deceptive
banking practices, the Board in early 1977 asked approximately
400 State agencies and legal-service organizations across the country
to pinpoint banking acts or practices that appeared to be prevalent
and problematical. From nearly 100 responses and subsequent discussions with representatives from other Federal bank regulatory
agencies, the Board identified six banking practices for consideration:
1. Failing to disclose in a meaningful way to new depositors the
contract terms governing use of their accounts, or failing to give
reasonable advance notice to depositors of any change in terms.
2. Describing checking account services as "free" when in fact
there are charges, or preconditions for no-cost checking.
3. Attaching, freezing, or closing a depositor's account without
promptly notifying the depositor.
4. Imposing, as a matter of policy, an unnecessarily long "hold"
on customers' funds deposited in the form of checks because of the
type of check or the location of the bank on which it is drawn.
5. Describing interest paid on savings accounts as the "highest
allowed by law."
6. Indicating in writing to a loan applicant that credit life or
308
Consumer Affairs
disability insurance is optional, but implying or stating that its
acquisition is necessary for favorable consideration of the applicant's
loan request.
To provide additional information about the first four practices,
the Board, in conjunction with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, designed
a bank survey questionnaire. Examiners from all three bank regulatory agencies incorporated the questionnaire into their scheduled
consumer examinations from February 1 through March 15, 1978;
846 commercial banks were surveyed. The major findings are discussed below.
Disclosure of Deposit Account Terms
Only 26 per cent of the banks surveyed disclosed on a single document the principal terms governing the checking accounts they offer.
The majority of the remaining banks either did not disclose their
account terms at all or made oral disclosures. In the case of savings
accounts, 51 per cent of banks made comparable written disclosures.
Of the banks surveyed, 40 per cent reported that in the last 2 years
they had changed the principal terms of checking accounts that
affected existing customers. Of these, 62 per cent indicated that
their customers were notified of the changes before they went into
effect, largely through statement stuffers and separately mailed notices.
While fewer banks reported similar changes in savings account terms,
the percentage reporting advance notification of existing customers
was approximately the same as that for checking accounts.
Advertisement of "Free" Checking Accounts
Half of the banks surveyed that advertise their checking accounts
reported using "free," "no-cost," or similar wording in their advertisements. Of this group, only 43 per cent actually offered free checking accounts; the remainder offered accounts with preconditions,
such as minimum balances in checking or savings accounts, or required lines of credit. However, 90 per cent of advertisements of
"free" checking mentioned the preconditions.
Notification of Attached or Frozen Funds, or Set-Offs
About 97 per cent of banks responding to this question indicated
an attempt to notify their account holders of attachment orders.
Notification was given in advance by 16 per cent of these banks,
simultaneously by 72 per cent, and after the attachment by 12 per
cent. In addition, 81 per cent of banks that communicated with their
Consumer Affairs
309
customers about attachment orders informed them of the balances
remaining in the accounts that had been frozen or attached.
Of the banks surveyed, 68 per cent indicated that they informed
their customers when they have exercised the right of set-off (the right
some States grant to apply funds from a customer's personal account
to delinquent obligations owed the bank); 2 per cent did not notify
customers of such actions; and the remaining 30 per cent either did
not have the right of set-off or had not exercised it. Nearly 66 per
cent of banks that notified their customers did so at the time of the
set-off, 20 per cent after the action, and 14 per cent in advance.
Delayed Funds Availability
Thirty-eight per cent of banks surveyed delayed the availability of
funds because of the type of check (such as personal, cashier's or
bank, money order, or private payroll), or the geographical location
of the bank on which the check was drawn (whether same-city, outof-city, out-of-county, or out-of-State). More than 30 per cent of
these banks delayed funds availability more than 3 days on personal
checks from banks in the same city; more than 65 per cent delayed
availability on personal checks on out-of-State banks more than
6 days; and more than 30 per cent delayed availability on out-of-State
cashier's checks more than 3 days.
Using an analysis of the survey results, the Board will consider
what regulatory or other action may be appropriate.
Consumer Complaints
During 1978, the Federal Reserve System continued to reply to
complaints and inquiries about many areas of consumer activity.
Responses ranged from providing consumers with information or
explanations to investigating and resolving complaints against State
member banks. In keeping with the Board's special civil rights
enforcement efforts, separate procedures have been developed for
handling complaints involving possible credit discrimination. Complaints that involved creditors or businesses not under the Board's
supervisory jurisdiction and that required more than information
were forwarded to the appropriate enforcement agency.
To help consumers report complaints against State member
banks, the Board published a pamphlet, How to File a Consumer
Complaint. The pamphlet explains what a consumer should do
when experiencing a problem with a bank, and includes a com-
310
Consumer Affairs
plaint form addressed to the Board, which solicits specific information about the problem. As of January 31, 1979, nearly 740,000
pamphlets had been distributed.
Table 13 summarizes all consumer complaints received by the
Board as of December 31, 1978. The following discussion focuses
on the "other" complaints, which include allegations of unfair or
deceptive practices not currently regulated.
The three most common types of "other" complaints involved discrepancies in account balances and disagreements over the amount
of a deposit made to an account, which together represented 15 per
cent of the total, and tactics used by creditors or businesses in collecting debts, which accounted for 6.5 per cent of the total.
Of the 1,543 "other" complaints, 835 were referred to other
agencies and 708 were handled by the Federal Reserve System. Of
the complaints handled by the System, 253 have been investigated,
13. Consumer Complaints Received by the Federal Reserve System, 1978
Subject area
Regulation B (Equal Credit Opportunity)
Regulation C (Home Mortgage Disclosure)
Regulation Q (Interest on Deposits)
Regulation T (Securities Credit)
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)
Fair Credit Reporting
Fair Debt Collection Practices
Title VIII, Civil Rights
Transfer agents
Holder in due course
Municipal
securities dealer regulation
Other 1
Total
Number
824
8
132
2
528
1
139
14
7
12
19
1
3,230
3,230
Disposition
Cases completed by type of creditor involved
State member banks, and processed by System staff
Other than State member banks
Referred
Response provided by System staff
1,489
821
Cases pending as of December 31 by type of creditor involved
State member banks
Other than State member banks
Total
113
15
3,230
792
1
"Other" refers primarily to complaints that did not fall under identifiable consumer
credit legislation administered by the Board, and includes complaints against business
entities as well as financial institutions.
Consumer Affairs
311
61 are still under investigation, and 39 have been deferred pending
receipt of additional information from the complainant. The remaining 355 complaints (approximately 50 per cent) were handled
by providing information or an explanation about the acts or practices that prompted the complaints.
In the 253 completed investigations, the bank was found to be
legally correct in 159 cases (in 40 of which it gave the complainant
a special concession as an indication of good faith and intentions);
to have made an error, which has since been corrected, in 66 cases;
and to have possibly made an error in 7 cases, 4 since corrected and
3 still unresolved. The remaining 21 cases concerned factual disputes,
and consumers have been advised of the legal remedies available to
them.
In an ongoing effort to monitor the effectiveness of the System's
efforts to resolve consumer complaints, the Federal Reserve Board
sent followup letters to individuals who had contacted the Board
during the year about a problem with a State member bank. Of the
45 per cent of complainants who responded to the letter, the majority
expressed satisfaction with the promptness and courtesy afforded
them. Although only 51 per cent of those were satisfied with the
resolution of their problems, more than 84 per cent indicated that
they would contact the Federal Reserve in the event of future
problems.
Issuance of Substantially Similar Regulations
During 1978, no new rules were proposed by the FTC under the
Federal Trade Commission Act. There were, however, further developments during 1978 on some proposals made in earlier years.
Preservation of Consumers' Claims and Defenses
The FTC proposed in November 1975 an amendment to its "holderin-due-course rule" that would require creditors to insert a notice
in certain consumer credit contracts to preserve a consumer's right
to assert against a lender claims or defenses that would have been
assertable against a seller of defective goods or services. In February 1976 the Board published for comment a substantially similar
version of the proposed rule; a revised draft prepared by the
Board's staff was transmitted by the Board to the FTC in early
1978.
During April 1976 the FTC held hearings on its proposed creditor
312
Consumer Affairs
amendment to the holder rule; in February 1978 it published the
report of the presiding officer, and in September 1978 the FTC staff
issued a report. The Board's staff commented on the FTC's staff
report in January 1979; the Board is awaiting further action by the
FTC before proceeding with its proposed rule, which would, if
adopted, impose substantially similar requirements on banks.
Credit-Practices Rule
This rule, first proposed by the FTC in April 1975, would ban
specified terms used in consumer credit contracts and specified
practices used in collecting unpaid debts. The rule would also require
creditors to deliver disclosures to cosigners informing them of their
responsibilities and potential liability. A virtually identical rule was
published for comment by the Board later in that month.
During the latter half of 1977 the FTC held hearings on its proposals; on December 20, 1977, an attorney on the Board's staff
appeared and presented an analysis of the comments received by
the Board and a discussion of possible technical problems concerning the proposed rule. In August 1978 the report of the presiding
officer was published by the FTC. The Board is awaiting the FTC
staff report on this proposal before acting further.
Sale of Used Motor Vehicles
In December 1975 the FTC proposed for comment a rule that would
require used-vehicle dealers to make certain disclosures. The proposal
also would cover those banks that sell used motor vehicles—for example, after repossession or expiration of leases. In May 1976 the
FTC published amendments to its proposed rule, and it received written comments (including those submitted by the Board staff) through
October of that year. Regional hearings were conducted through
May 1977, and in late May 1978 the FTC published the report of
the presiding officer. The FTC staff issued its report in midNovember 1978, and the Board staff offered further comments in
December 1978. The Board is awaiting final action by the FTC
before proceeding with its responsibilities under the act.
HOME MORTGAGE DISCLOSURE
Enforcement of the Home Mortgage Disclosure Act
The Board of Governors of the Federal Reserve System enforces the
Home Mortgage Disclosure Act (HMDA) and its implementing Reg
Consumers Affairs
313
ulation C for State member banks. Special consumer affairs examinations of State member banks covered under the HMDA continue to
indicate a high level of compliance with the act.
Exemptions from the HMDA
During 1978 the Board approved one application for exemption from
the disclosure requirements of the HMDA and annulled one exemption that had been granted previously.
In April 1978 the Connecticut Bank Commissioner, on behalf of
the State of Connecticut, requested an exemption on the ground that
Connecticut law and implementing State regulations call for disclosures substantially similar to those imposed by the HMDA and
include adequate enforcement provisions. The Board received two
comments on the application from the Federal Reserve Banks of
Boston and New York, recommending approval of the exemption
application. On August 2, 1978, the Board granted the exemption
for all Connecticut-chartered depositary institutions that are subject
to the Connecticut act.
On July 26, 1978, the Board annulled the exemption granted in
December 1976 that applied to all Illinois-chartered depositary institutions covered by the Illinois Financial Institutions Disclosure Act.
The continuation of the exemption had been contingent upon developments in litigation that had challenged the constitutionality of the
Illinois law. On May 26, 1978, the Illinois Supreme Court decided
that the Illinois act was unconstitutional in part and therefore void,
thus removing the basis for the Illinois exemption. The State of
Illinois requested that the U.S. Supreme Court review the State court
decision, but the request was denied.
Section 308 Study
Under Section 308 of the HMDA, the Board, in consultation with
the U.S. Department of Housing and Urban Development, was directed to study the feasibility and utility of extending the disclosure
requirements of the act to depositary institutions located outside
standard metropolitan statistical areas. The results of the study were
submitted to the Congress in January 1979.
314
Securities Acts Amendments of 1975
Pursuant to the Securities Acts Amendments of 1975 (Public Law
94-29), the Board of Governors is designated "the appropriate regulatory agency" with respect to State member banks and bank holding companies that act as municipal securities dealers or as clearing
agencies. As of December 31, 1978, 50 State member banks, or
separately identifiable departments or divisions of such banks, were
registered as municipal securities dealers; 48 were examined in 1978.
As of December 31, 1978, four registered clearing agencies were
members of the Federal Reserve System; all were examined during
1978. These examinations are designed to determine whether the
clearing agency's activities are conducted in accordance with safe and
sound banking practices and, if they are not, to evaluate the impact
of the agency's over-all condition and to recommend and enforce
appropriate corrective action.
315
Government in the Sunshine
Under the Government in the Sunshine Act (Public Law 94-409,
which became effective March 12, 1977), the Board opened more than
a third of its meetings in 1978 to public observation, either entirely
or in part. Items considered in closed sessions under exemptions in
the act related primarily to monetary policy (premature disclosure
of which could cause financial speculation) and to supervision of
banks and bank holding companies (discussions of which generally
involve information from bank examination reports or confidential
commercial and financial information). To illustrate, more than half
the agenda items since March 1977 involved applications by individual banks and bank holding companies; in these discussions the
Board is required by law to consider financial and managerial information, which it obtains chiefly from bank examination reports.
To aid the public in obtaining the maximum possible benefit from
the Board's open meetings, copies of most staff memoranda considered by the Board at open meetings are made available to the
public and an agenda summarizing the issues to be discussed is provided at each meeting. A pamphlet has been prepared explaining the
applicability of the act to the Board's proceedings. Photographs of
Board members and seating charts are available in the Board Room.
For those unable to attend, a recording of the discussion is retained
in cassette form in the Board's Freedom of Information Office; copies
may also be purchased at a nominal fee.
The Board maintains a Sunshine mailing list to ensure that interested members of the public learn of meetings in a timely manner.
Besides announcements in the Federal Register, notices of meetings
are made available at the Board's Freedom of Information and Public Affairs Offices and at the Treasury Department's press room.
A record, including either minutes or recordings, of each closed
meeting is provided in the Freedom of Information Office, unless the
Board has voted to withhold part or all of the discussion under the
act's exemptions. This material is released when the exemptions no
longer apply.
316
Legislative Recommendations
The Board of Governors has made the following recommendations
for legislation to the Congress of the United States.
MONETARY IMPROVEMENT PROGRAM
Confronting rapid change in the financial system of the Nation and
increasingly intense competition among depositary institutions, many
banks have become less willing in recent years to bear the high cost
of uncompensated cash reserve requirements associated with membership in the Federal Reserve System. Consequently, there has been a
steady and, indeed, accelerating decline in the proportion of bank
deposits subject to Federal reserve requirements. At the end of 1978,
member banks held less than 71 per cent of total commercial bank
deposits, down more than 9 percentage points since 1970. At present,
more than one-fourth of commercial bank deposits—and over threefifths of all banks—are outside the Federal Reserve System.
The attrition in deposits subject to reserve requirements set by the
Federal Reserve weakens the linkage between member bank reserves
and the monetary aggregates and makes the relationship less predictable. It is essential that the Federal Reserve maintain adequate control over the monetary aggregates if the Nation is to succeed in curbing inflation, sustaining economic growth, and maintaining the value
of the dollar in international exchange markets.
Moreover, because of the attrition in membership and the growth
of transactions balances at nonbank depositary institutions, the proportion of the financial system with direct access to the discount
window on a day-to-day basis has shrunk. The growth of transactions
balances at institutions that do not have access to Federal Reserve
clearing services also could lead to a deterioration of the quality of
the Nation's payments system.
In sum, the major functions of the Federal Reserve System—to
conduct monetary policy in the public interest, to provide back-up
liquidity and flexibility to the financial system, and to assure a safe
and efficient payments mechanism—all have been undermined by
attrition in Federal Reserve membership.
The basic reason for the decline in membership is the financial
Legislative Recommendations
317
burden that membership entails. Member banks must keep their
required reserves entirely in nonearning form and thus are at a competitive disadvantage compared with nonmember banks and other
depositary institutions, which do not face similar requirements. Using
1977 data, the Board's staff estimates that the aggregate burden to
member banks of Federal Reserve membership exceeds $650 million
annually, or about 9 per cent of the profits of member banks before
taxes.
To facilitate the implementation of monetary policy and to promote competitive equality among all depositary institutions, the
Board suggests legislation that would establish universal reserve requirements applicable to all deposits at commercial banks and to
transactions balances at thrift institutions. Reserve ratios would be
reduced from present-day levels. Under this proposal, small institutions would be exempt from holding any reserves at all. The proposed exclusion would apply to the first $10 million of transactions
deposits at all institutions, and $10 million of other deposits at commercial banks. The reserves against deposits above the $10 million
exclusion and up to $50 million would be held in an "earnings participation account" at the Federal Reserve, on which the earnings
would be equivalent to the average return on the Federal Reserve's
portfolio. The proposal would greatly increase the proportion of
transactions deposits at commercial banks controlled by the Federal
Reserve—from 70.8 per cent to 94 per cent—thereby enhancing the
implementation of monetary policy.
The proposal also contemplates giving all commercial banks and
thrift institutions with transactions accounts access to the Federal
Reserve discount window. The Federal Reserve could then act as a
lender of last resort to a broad class of depositary institutions, thereby
providing greater safety and soundness to the depositary system. All
depositary institutions would also be given access to Federal Reserve
services; under an appropriate pricing schedule, this action should
improve the efficiency of the payments mechanism that underlies all
of the Nation's economic transactions.
FINANCIAL TRANSACTIONS WITH AFFILIATES
During 1976 and 1977 the Board conducted a major review of
Section 23A of the Federal Reserve Act. Section 23A is designed to
protect member banks from abuse by restricting non-arm's-length
318
Legislative Recommendations
financial transactions between these banks and affiliated companies.
The Board's review of this statute was prompted in part by the discovery that several relatively large banks had been adversely affected
by transactions with their affiliates.
One of the Board's major conclusions is that bank transactions
with affiliates within the statutory limits have not produced substantial instability in the banking system. At the same time, the Board
finds someflawsin the present statute: (1) it is inordinately complex;
(2) it contains some potentially troublesome loopholes; and (3) it
appears to be unduly restrictive in several ways.
The Board has recommended amendments to Section 23A to correct these flaws. Principal among its recommendations are those (1) to
allow a holding company greater freedom to transfer funds among
its sister subsidiary banks but prohibit a bank from purchasing lowquality assets from a sister bank subsidiary; (2) to broaden the definition of "affiliate" to include real estate investment trusts and other
financial organizations that are sponsored and advised by a banking
organization; and (3) to expand the types of collateral permitted on
bank loans and extensions of credit to affiliates while requiring that
these new types of collateral have a high value relative to the loan.
LENDING AUTHORITY OF FEDERAL RESERVE BANKS
The Board again urges enactment of legislation to permit member
banks to borrow from their Reserve Banks on the security of any
sound assets without paying a penalty rate of interest whenever paper
ineligible for discount by Federal Reserve Banks is presented as
collateral.
Under Section 13 of the Federal Reserve Act, Federal Reserve
Banks may extend credit at the basic discount rate to member banks
on promissory notes that are secured by obligations eligible either for
purchase or for discount by the Reserve Banks.
Under Section 10(b) the Reserve Banks are authorized to extend
to member banks credit on promissory notes secured to the satisfaction of the Reserve Banks. However, Section 10(b) also provides that
such credit extensions "shall bear interest at a rate not less than onehalf of 1 per centum per annum higher than the highest discount rate
in effect" at the Reserve Bank making the loan, except when the loan
is secured by mortgages on 1- to 4-family homes. The result is
that many sound member-bank loans cannot qualify as security for
Legislative Recommendations
319
Federal Reserve advances except at this penalty rate of interest, even
though their quality may be equal to that of currently "eligible"
paper. Elimination of the penalty rate means that obligations such as
commercial paper with maturities in excess of 90 days could be used
as collateral for advances at the basic discount rate.
EXPANSION OF CLASS C DIRECTORS
The Board has submitted to the Congress draft legislation to increase
the number of Class C directors at each Federal Reserve Bank from
three to six. The proposal aims to diversify further the backgrounds
and interests represented on the Reserve Bank boards of directors as
a way of accomplishing one of the objectives of the Federal Reserve
Reform Act of 1977. That act provides for the representation of the
interests of consumers, labor, and services, in addition to agriculture,
commerce, and industry, on the boards of directors of the Reserve
Banks.
TERM OF CHAIRMAN OF THE BOARD OF GOVERNORS
Proposals to align the term of the Chairman of the Federal Reserve
with the term of the President of the United States have been under
consideration in various forms for some years. The Board has recommended legislation making the 4-year term of the Chairman begin
1 year following the inauguration of the President, believing that
this arrangement would contribute to the coordination of monetary,
fiscal, and other economic policy-making without undermining the
independence of the Federal Reserve System.
The bill also would authorize the Vice Chairman to act as Chairman in the event of (1) the temporary absence and unavailability or
incapacity of the Chairman; or (2) the death, resignation, or permanent incapacity of the Chairman, pending appointment and confirmation of a successor. In addition, it would clarify that the Chairman and Vice Chairman continue to serve in those capacities after
expiration of their terms until a successor is designated and confirmed.
LOANS TO EXAMINERS
Section 212 of the U.S. Criminal Code prohibits loans to a bank
examiner by any bank that the examiner is authorized to examine.
As a result, Federal Reserve examiners are greatly limited in their
320
Legislative Recommendations
sources of credit because they are authorized to examine not only
State member banks but also national banks and any insured nonmember bank that is an affiliate of either a member bank or a registered bank holding company. The growth of the bank holding company movement has increasingly narrowed the remaining sources of
credit for System examiners. The Board recommends enactment of
an amendment that would authorize an insured bank to make loans
to an examiner under regulations prescribed by the Federal agency
that employs the examiner, provided that the examiner does not
examine that institution.
AUTHORITY FOR BANK HOLDING COMPANIES TO
ACQUIRE BANKS ACROSS STATE LINES IN
EMERGENCY AND FAILING-BANK SITUATIONS
The Board again recommends that the Congress give the Federal
Reserve authority in certain emergency and failing-bank situations to
approve the acquisition by an out-of-State bank holding company of
a large bank that is in severe financial difficulty. The purpose of the
legislation is to avoid an adverse potential impact when the failing
bank is one of the largest in the State and the public interest would
best be served by such an acquisition.
The authority would be limited to cases involving a bank that has
assets in excess of $500 million or a bank that is one of the three
largest in the State. The authority would be used only in cases in
which few or no purchasers could be found within the State and in
which the size or other special characteristics of the problem bank
and the probability of widespread financial effects of its failure warrant an exception to the general restrictions on out-of-State bank
acquisitions by a bank holding company.
SIMPLIFICATION OF TRUTH IN LENDING ACT
As a result of widespread concern about the complexity of Truth in
Lending, the Board has made recommendations to the Congress to
improve and simplify the statute. Creditors acting in good faith have
experienced difficulty in complying with Truth in Lending. Likewise,
the complexity of the disclosures appears to have diminished their
usefulness to consumers.
The Board's proposal has several major elements. It is designed
Legislative Recommendations
321
to inform consumers better and to emphasize the cost disclosures
most needed in shopping for credit—the annual percentage rate, the
finance charge, and the payments schedule. The 1977 Consumer
Credit Survey, which was initiated by the Board in cooperation with
the Comptroller of the Currency and the Federal Deposit Insurance
Corporation and conducted by the University of Michigan's Survey
Research Center, shows that these disclosures are far more important
to consumers than those of other terms. The proposal reduces the
detail of the disclosures—for example, eliminating the itemization of
the components of the finance charge and of the amount financed.
Significant information that is less important for shopping purposes,
such as whether the obligation is secured, would be summarized, but
the details would be relegated to the contract.
Under the proposal the disclosures required by Federal law would
be segregated from other matters in the contract and from other disclosures required by State law so that the Truth in Lending disclosures would not be lost among other provisions.
In addition, the credit-cost terminology would be explained in
plain English; and the Board would develop and publish model forms
and clauses that, if properly completed, would protect creditors from
civil liability under the act. The proposal also contains extensive technical clarifications.
UNIFORM RULES FOR CREDIT AND EFT TRANSACTIONS
When the Ninety-Fifth Congress enacted the Electronic Fund Transfer Act to regulate the consumer aspects of electronic funds transfers,
the Board was assigned the responsibility of writing regulations to
implement the act. In doing so, the Board has become concerned that
consumers will encounter unnecessary difficulty in understanding the
rules provided by the new act, and will confuse them with the rules
under the Truth in Lending and Fair Credit Billing Acts.
Confusion may arise particularly when a single card will perform
multiple functions and be subject at one time to the rules of the
Truth in Lending and Fair Credit Billing Acts, as in the case of
a credit purchase, and at another time to the different rules of the
EFT Act, as in the case of a cash withdrawal. Even apart from the
multiple-function card, the Board believes consumers should not
have to learn one set of rules for a credit card and another for an
EFT card. In order to minimize confusion, the Board recommends
322
Legislative Recommendations
that the act be amended to provide a single set of rules governing
credit and EFT transactions.
Among its proposals to unify the requirements, the Board has made
the following specific recommendations:
To establish a uniform dollar limit governing liability for unauthorized use. Now, the Truth in Lending Act imposes a $50 limit on the
liability of a credit-card holder each time a card is lost or stolen;
the EFT Act has a $50, $500, and unlimited-liability structure.
To provide that oral notice to the creditor be sufficient to take
advantage of the rules on the resolution of disputes under the Fair
Credit Billing Act. Now, a consumer must write to the creditor under
that act, whereas the EFT Act permits oral notice.
To establish parallel timing requirements for correction of errors
under the EFT and Fair Credit Billing Acts. Under both acts, within
10 days of a customer's notifying a creditor of an error, the customer
would be given either notice that a correction had been made or, if
the creditor believes that no error occurred, an explanation of the
transaction. As an alternative, a written notice that the customer's
account had been provisionally recredited would be required for EFT
transactions; and a written notice that amounts in dispute need not
be paid would be required for credit transactions. Also, the EFT Act
would be amended to conform to the Fair Credit Billing Act's requirement for resolution of a dispute within 90 calendar days.
To eliminate the annual notice of rights under the EFT Act and
the semiannual notice of rights under the Fair Credit Billing Act, and
in their place to require that periodic statements contain a summary
notice setting out the rights and the way to obtain a complete
explanation.
To permit the unsolicited issuance of unvalidated credit cards.
At present, the Truth in Lending Act prohibits the unsolicited
issuance of credit cards, while the EFT Act permits the unsolicited
issuance of cards provided they are not validated.
323
Litigation
During 1978 the Board of Governors was named in 22 lawsuits, compared with 15 filed in 1977 and 22 in 1976. Of the actions filed in
1978, 17 raise questions under the Bank Holding Company Act; 9
such actions were filed in 1977. As of December 31, 1978, 33 cases
remained pending, 24 of which raise questions under the Bank Holding Company Act. A brief description of each case that is still pending or that was disposed of in 1978 follows.
BANK HOLDING COMPANIES—ANTITRUST ACTION
In 1978 the U.S. Department of Justice filed no challenges under the
antitrust laws of the United States to acquisitions by registered bank
holding companies or bank mergers that had been previously approved by the Board, and no such cases are pending from previous
years.
BANK HOLDING COMPANIES—REVIEW OF BOARD
ACTIONS
In Bankers Trust New York Corporation v. Board of Governors,
No. 73-1805 (2d Cir., filed May 25, 1973), petitioner requested the
court to review and set aside a Board order (Federal Reserve Bulletin,
volume 59, May 1973, page 364) denying petitioner's application to
engage in investment advisory activities through a newly formed subsidiary corporation in Palm Beach, Florida. In October 1973 the
court granted petitioner's request for a delay in the proceedings
pending the outcome, on appeal, of a suit in U.S. District Court for
the Northern District of Florida challenging the constitutionality of a
Florida statute prohibiting out-of-State banking organizations from
performing investment advisory services in Florida, upon which the
Board had based its order. On April 14, 1975, the U.S. Supreme
Court vacated the district court judgment in that suit, finding the suit
inappropriate for a three-judge court, and sent the case back to the
district court (421 U.S. 901). The district court, on December 15,
1978, ruled that the Florida statute violated the commerce clause of
324
Litigation
the U.S. Constitution, thus leaving the petitioner's suit against the
Board pending.
In Investment Company Institute v. Board of Governors, No. 771862 (D.C. Cir., filed on September 23, 1977), petitioner sought judicial review of a Board order, dated August 31, 1977 (Federal Reserve Bulletin, volume 63, September 1977, page 856), denying its
petition for reconsideration and rescission of a portion of the
Board's January 1972 amendment to Regulation Y (Federal Register,
volume 37, 1972, page 1463). Petitioner challenged the validity, under the Glass-Steagall Act, of the Board's amendment, which permits
bank holding companies to act as investment adviser to an investment
company that is registered under the Investment Company Act of
1940. Oral argument has been heard by the court, and the case is
pending.
In Alabama Association of Insurance Agents, Inc. v. Board of
Governors, No. 74-2981 (5th Cir., filed July 26, 1974), and Georgia
Association of Independent Insurance Agents v. Board of Governors,
No. 74-3544 (5th Cir., filed October 3, 1974), petitioners challenged
the Board's orders (Federal Reserve Bulletin, volume 60, August
1974, page 596, and Federal Register, volume 39, 1974, page 33414)
permitting Southern Bancorporation, Birmingham, Alabama, and
First National Holding Company, Atlanta, Georgia, to engage in certain insurance agency activities. On June 10, 1976, the court issued
a decision upholding the Board's findings that the sale of property
and casualty insurance by a bank holding company, when related to
an extension of credit, is closely related to banking within the meaning
of Section 4(c)(8) of the Bank Holding Company Act and of Section
225.4(a) of the Board's Regulation Y, and that the applications in
question could reasonably be expected to have public benefits that
outweight possible adverse effects. The court, however, determined
that the sale of insurance for the holding company and its nonbanking
subsidiaries, the sale of insurance as a convenience for the purchaser,
and general insurance agency activities in towns of fewer than 5,000
inhabitants are not activities closely related to banking and therefore
are not permissible for bank holding companies (533 F.2d 244).
On petitions for rehearing by the parties, the court, by order dated
September 1, 1977 (558 F.2d 729), rejected petitioners' contentions
that the sale of property and casualty insurance in connection with
extensions of credit and other financial services should be restricted
Litigation
325
to sales by bank subsidiaries of bank holding companies. The court
also remanded to the Board the question of whether general insurance
agency activities in towns of fewer than 5,000 inhabitants are closely
related to banking. A petition for certiorari filed by petitioners in the
U.S. Supreme Court was denied on February 2, 1978 (46 U.S.L.W.
3541).
In Florida Association of Insurance Agents, Inc. v. Board of Governors, Nos. 75-3151 to 3153 (5th Cir., filed August 12, 1975), petitioner sought judicial review of three Board orders (Federal Register,
volume 40, 1975, pages 30869, 30872, 30876) approving the applications of four bank holding companies to engage in certain insurance agency activities in Florida to the extent permitted by State
law. These cases were consolidated in the Fifth Circuit with the claims
brought in National Association of Insurance Agents, Inc. v. Board
of Governors, Nos. 75-3342, 75-3343, and 75-3358 (D.C. Cir.), in
which the petitioner challenged the same Board orders. These cases
were argued on September 12, 1978, and are pending before the
court.
In BankAmerica Corporation v. Board of Governors, No. C771005 SW (N.D. Cal., filed May 13, 1977), petitioner sought a declaratory judgment that its proposal to expand geographically and to continue to engage in data processing activities through its subsidiary, the
Decimus Corporation, within a 500-mile radius of Piscataway, New
Jersey, had been approved because the Board failed to act on the
proposal within the 91-day period required for Board action under
12 U.S.C. 1843(c). On July 29, 1977, the district court ruled in favor
of BankAmerica Corporation. The Board has appealed this decision
(No. 77-3485, 9th Cir.).
In a second case, BankAmerica Corporation v. Board of Governors, No. 77-2173 (9th Cir., filed May 25, 1977), BankAmerica
sought judicial review of a Board order, dated May 20, 1977 (Federal Register, volume 42, 1977, page 27293), providing for a hearing
with respect to its application to engage in data processing activities
through the Decimus Corporation. Both actions have been consolidated and are pending in the Court of Appeals for the Ninth Circuit.
In First Lincolnwood Corporation v. Board of Governors, No. 761114 (7th Cir., filed February 5, 1976), petitioner asked the court to
review the Board's order of January 9, 1976 (Federal Reserve Bulletin, volume 62, February 1976, page 153), denying, on the grounds
326
Litigation
of inadequate financial resources, petitioner's application to become
a bank holding company through acquisition of the First National
Bank of Lincolnwood, Lincolnwood, Illinois. In a decision dated December 7, 1976 (546 F.2d 718), a panel of the court affirmed the
Board's order, holding that substantial evidence supported the Board's
findings; that the Board's order was issued within 91 days from the
submission of the complete record; and that the Board complied with
its own regulations governing applications to form a bank holding
company.
On petitioner's request for rehearing, the court en bane, in a decision dated July 13, 1977 (560 F.2d 258), set aside the Board's order,
holding that under the Bank Holding Company Act the Board's authority to deny, for financial reasons, an application to form a bank
holding company is limited to cases in which the formation would
cause or worsen adverse financial conditions in the proposed subsidiary bank. The court found that the restructuring of bank ownership from individuals to a corporation owned by the same individuals
was not likely to have such a result and that the Board improperly
denied approval to First Lincolnwood.
The Board filed a petition for a writ of certiorari by the U.S. Supreme Court for review, which was granted (No. 77-832). The
Supreme Court held that the Board has authority under the Bank
Holding Company Act to disapprove formation of a bank holding company solely on grounds of pre-existing financial or managerial unsoundness, regardless of whether the unsoundness would be caused or
enhanced by the formation. The Court reversed the decision of the
Seventh Circuit (47 U.S.L.W. 4048, December 12, 1978).
In Memphis Trust Company v. Board of Governors, No. C76-64
(W.D. Tenn., filed February 19, 1976), plaintiff requested that the
Board's order of April 10, 1975 (Federal Reserve Bulletin, volume
61, May 1975, page 327), denying plaintiff's application to acquire
Home Owners Savings and Loan Association, Collierville, Tennessee,
be set aside. In a decision on June 4, 1976, the court held that plaintiff's application had been approved by operation of law because the
Board had not acted on the application within 91 days after the submission of the complete record to the Board. The district court further held that it had jurisdiction over plantiff's suit.
The Board appealed the decision to the U.S. Court of Appeals for
the Sixth Circuit (No. 76-2183). The Court held, on September 22,
Litigation
327
1978, that the district court lacked subject matter jurisdiction, reversed the district court, and remanded the case for dismissal without
prejudice to petitioner's right to request the Board to reconsider its
order of April 10, 1975.
In Central Wisconsin Bankshares, Inc. v. Board of Governors, No.
76-1603 (7th Cir., filed June 25, 1976), petitioner requested the
court to review and set aside an order of the Board dated May 26,
1976 (Federal Reserve Bulletin, volume 62, June 1976, page 538),
denying petitioner's application to acquire Central National Bank of
Wausau, Wausau, Wisconsin. Petitioner argued that the application
was approved by operation of law because the Board failed to act
on the application within the 91-day period required for Board action
by 12 U.S.C. 1842(b). On July 14, 1978, the court upheld the
Board's order, finding that the Board had met the 91-day statutory
requirement for processing the application.
In National Automobile Dealers Association, Inc. v. Board of Governors, No. 76-2021 (D.C. Cir., filed November 12, 1976), petitioner
challenged a Board order dated October 13, 1976 (Federal Reserve
Bulletin, volume 62, November 1976, page 930), in which the Board
determined that automobile leasing is closely related to banking and
made a general determination that automobile leasing is a proper
incident to banking. The Board concluded that bank holding companies may continue to conduct automobile leasing activities consistent with the Board's personal-property leasing regulation and
amended its Regulation Y to provide that such leases be on a nonoperating basis. The court upheld the Board's order on February 21,
1978, and the NADA petition for a writ of certiorari to the U.S. Supreme Court was denied on October 3, 1978 (42 U.S.L.W. 3225).
In First State Bank of Abilene, Texas v. Board of Governors, No.
77-1703 (D.C. Cir., filed August 5, 1977), petitioner asked the court
to set aside the Board's order of July 7, 1977 (Federal Reserve Bulletin, volume 63, August 1977, page 744), approving the application
of First International Bancshares, Inc., Dallas, Texas, to acquire the
Texas State Bank, Abilene, Texas, a proposed new bank. The court
dismissed the action on February 15, 1978, pursuant to a motion filed
by First International Bancshares.
In Plaza Bank of West Port v. Board of Governors, No. 77-1730
(8th Cir., filed September 14, 1977), petitioner sought judicial review
of a Board order dated August 15, 1977 (Federal Reserve Bulletin,
328
Litigation
volume 63, September 1977, page 848), approving the application of
Manchester Financial Corporation, St. Louis, Missouri, to acquire
Manchester Bank West County, Maryland Heights, Missouri, a proposed new bank. The court, on May 15, 1978, upheld the Board's
order (575 F.2d 1248).
In Central Bank v. Board of Governors, No. 77-1937 (D.C. Cir.,
filed October 17, 1977), petitioner asked the court to review a September 13, 1977, determination by the Board denying petitioner's request for a determination that the individual organizers of the Tri-City
National Bank of West Allis, West Allis, Wisconsin, constitute a company under the Bank Holding Company Act. The court remanded
the case to the Board for further proceedings on November 21, 1978.
The Board petitioned the court for rehearing on December 12, 1978.
In Vickars-Henry Corporation v. Board of Governors, No. 773890 (9th Cir., filed December 13, 1977), petitioner challenged a
Board letter determination, dated November 15, 1977, that petitioner
is not a bank holding company for purposes of the Bank Holding
Company Tax Act of 1976. The case is awaiting oral argument.
In Gelfand v. Board of Governors, No. 77-3473 (5th Cir., filed
December 19, 1977), petitioner sought to overturn a November 22,
1977, decision by the Federal Reserve Bank of Chicago to extend,
pursuant to Section 4(c)(2) of the Bank Holding Company Act, for
1 year the time within which First Chicago Corporation, Chicago,
Illinois, must divest shares of Beacon Hill Corporation acquired by
First Chicago in the course of securing or collecting a debt previously
contracted in good faith. The court granted, on May 25, 1978, the
Board's motion to dismiss for lack of standing.
In Wisconsin Bankers Association v. Board of Governors, No. 781083 (D.C. Cir., filed January 31, 1978), petitioner sought judicial
review of the Board's order, dated December 30, 1977 {Federal Reserve Bulletin, volume 64, January 1978, page 40), approving the
application of WISCUB, Inc., Milwaukee, Wisconsin, to become a
bank holding company through the acquisition of Cleveland State
Bank, Cleveland, Wisconsin. On October 27, 1978, the court remanded the case to the Board for further development of the record.
In Michigan National Corporation v. Board of Governors, No. 783057 (6th Cir., filed February 1, 1978), petitioner sought judicial review of the Board's order, dated January 31, 1978 {Federal Reserve
Bulletin, volume 64, February 1978, page 127), approving petitioner's
Litigation
329
application to acquire Michigan National Bank-Sterling, Sterling
Heights, Michigan, a proposed new bank, on the condition that petitioner discontinue the "accommodation transaction services" offered
at its subsidiary banks. The court granted, on April 21, 1978, petitioner's motion to consolidate the case with two others that petitioner
has appealed from Federal district court. The case is awaiting oral
argument.
In Security Bancorp v. Board of Governors, Nos. 78-1581 and
78-2031 (9th Cir., filed March 17 and May 12, 1978), petitioners
challenged the Board's action in denying Security Bancorp's application to become a bank holding company through the acquisition of
Security National Bank, Walnut Creek, California (Federal Reserve
Bulletin, volume 64, May 1978, page 405). The cases are awaiting
oral argument.
In Citicorp v. Board of Governors, No. 78-4039 (2d Cir., filed
March 23, 1978), petitioner sought judicial review of a Board order,
dated March 13, 1978 (Federal Reserve Bulletin, volume 64, April
1978, page 321), denying petitioner's application to retain Advance
Mortgage Corporation, Southfield, Michigan. On January 2, 1978,
the court upheld the Board's order, holding that the Board's decision
was supported by substantial evidence and that the Board had met the
91-day statutory requirement for processing the application.
In Dakota Bankshares, Inc. v. Board of Governors, No. 78-1257
(8th Cir., filed April 4, 1978), petitioner sought judicial review of the
Board's order, dated March 9, 1978 (Federal Reserve Bulletin, volume 64, April 1978, page 310), denying the application by petitioner
to become a bank holding company through the acquisition of The
Dakota National Bank and Trust Company of Fargo, Fargo, North
Dakota. The case was dismissed by the court on August 7, 1978, pursuant to petitioner's motion, after the Board granted reconsideration
of its order and approved petitioner's application.
In Hawkeye Bancorporation v. Board of Governors, No. 78-1247
(8th Cir., filed April 5, 1978), petitioner sought judicial review of the
Board's order, dated March 7, 1978 (Federal Reserve Bulletin, volume 64, April 1978, page 315), denying petitioner's application to
acquire Second National Bank, Eldora, Iowa. The court remanded
the case to the Board on September 21, 1978, pursuant to petitioner's motion, to enable the Board to consider petitioner's request
for reconsideration of the Board's denial. The Board granted recon-
330
Litigation
sideration and approved the acquisition on November 3, 1978. On
November 27, 1978, the court dismissed the case pursuant to petitioner's motion.
In Ellis Banking Corporation v. Board of Governors, No. 78-2098
(5th Cir., filed May 22, 1978), petitioner sought judicial review of
the Board's order, dated April 24, 1978 {Federal Reserve Bulletin,
volume 64, May 1978, page 400), denying petitioner's application to
acquire Madeira Beach Bank, Madeira Beach, Florida, and First Gulf
Beach Bank and Trust Company, St. Petersburg Beach, Florida. The
court dismissed petitioner's appeal on November 29, 1978, pursuant
to a motion by petitioner.
In NCNB Corporation v. Board of Governors, No. 78-1363 (4th
Cir., filed June 8, 1978), petitioner sought review of the Board's
order, dated May 10, 1978 (Federal Reserve Bulletin, volume 64,
June 1978, page 506), refusing to publish for comment a proposal to
engage in the underwriting of property and casualty insurance, adjusting insurance claims, and appraising and valuing property in
connection with those activities. Petitioner claims that the Board
failed to act on the application within the 91-day period required for
Board action by 12 U.S.C. 1842(b) and that the Board acted arbitrarily and capriciously in declining to publish for comment petitioner's proposal. The case is awaiting oral argument.
In NCNB Corporation v. Board of Governors, No. 78-1364 (4th
Cir., filed June 8, 1978), petitioner sought judicial review of a Board
order, dated May 11, 1978 (Federal Reserve Bulletin, volume 64,
June 1978, page 504), denying petitioner's application to retain
TranSouth Financial Corporation and its subsidiary, TranSouth
Mortgage Corporation, both of Florence, South Carolina. The court
entered a consent order on August 1, 1978, remanding the case to
the Board for consideration of an amended application by NCNB.
The Board approved NCNB's amended application by order dated
October 27, 1978 (Federal Reserve Bulletin, volume 64, November
1978, page 904). The court dismissed the case on December 7, 1978,
pursuant to petitioner's motion to dismiss.
In Mid-Nebraska Bancshares, Inc. v. Board of Governors, No. 781658 (D.C. Cir., filed July 14, 1978), the petitioner sought judicial
review of a Board order, dated June 16, 1978 (Federal Reserve Bulletin, volume 64, July 1978, page 589), denying the application by
Mid-Nebraska Bancshares, Inc., Ord, Nebraska, to become a bank
Litigation
331
holding company through the acquisition of Nebraska State Bank,
Ord, Nebraska. Petitioner claims that the Board's order was not
supported by substantial evidence and was in excess of the Board's
authority under the Bank Holding Company Act.
In Manchester-Tower Grove Community Organization/ACORN
v. Board of Governors, No. 78-1898 (D.C Cir., filed September 12,
1978), petitioner sought judicial review of the Board's order of June
16, 1978 (Federal Reserve Bulletin, volume 64, July 1978, page 576),
approving the merger of Manchester Financial Corporation, St. Louis,
Missouri, into Commerce Bancshares, Inc., Kansas City, Missouri.
On December 1, 1978, the court denied petitioner's motion for a
stay of the approved merger. Petitioner claims the Board failed to
comply with the recently enacted Community Reinvestment Act in
approving the merger. The case is pending.
In Metro North State Bank v. Board of Governors, No. 78-1786
(8th Cir., filed October 30, 1978), petitioner sought judicial review
of the Board's order, dated September 27, 1978 (Federal Reserve
Bulletin, volume 64, October 1978, page 803), approving the acquisition of the Commerce Bank of Clay County, N.A., Kansas City, by
Commerce Bancshares, Inc., Kansas City. The case is pending.
In United Bank Corporation of New York v. Board of Governors,
No. 78-4172 (2d Cir., filed November 1, 1978), petitioner challenged
the Board's order, dated October 3, 1978 (Federal Reserve Bulletin,
volume 64, November 1978, page 894), denying petitioner's application to acquire the Schenectady Trust Co., Albany, New York. The
case has been dismissed, pursuant to stipulation, pending submission
by petitioner of a petition to the Board for reconsideration of an
amended application.
In Jackson v. Board of Governors, No. 78-3476 (5th Cir., filed
November 13, 1978), petitioners sought judicial review of the Board's
order, dated November 1, 1978 (Federal Reserve Bulletin, volume 64,
December 1978, page 982), approving the application of Texas
American Bancshares, Inc., Fort Worth, Texas, to acquire additional
shares of Bank of Fort Worth, Fort Worth, Texas. The case is
pending.
In Commercial National Bank v. Board of Governors, No. 782238 (D.C. Cir., filed December 4, 1978), petitioners sought judicial
review of the Board's order, dated November 3, 1978 (Federal Reserve Bulletin, volume 64, December 1978, page 964), approving
332
Litigation
indirect retention by First Arkansas Bankstock Corporation, Little
Rock, Arkansas, of First National Bank in Mena, Mena, Arkansas.
Petitioner filed a motion to dismiss on January 12, 1979.
In Hunter Holding Company v. Board of Governors, No. 78-1907
(8th Cir., filed December 28, 1978), petitioner sought judicial review
of a Board order, dated November 29, 1978 (Federal Reserve Bulletin, volume 64, December 1978, page 976), denying petitioner's
application to become a bank holding company by acquiring Security
State Bank of Hunter, Hunter, North Dakota. The case is pending.
In California Life Corporation v. Board of Governors, No. 791013 (D.C. Cir., filed January 4, 1979), petitioner sought judicial
review of a December 7, 1978, letter of the Federal Reserve Bank of
Kansas City regarding the proposed acquisition by Baldwin-United
Corporation, Cincinanti, Ohio, pursuant to 12 U.S.C. 1843(c)(12)
and 12 C.F.R. 225.4(d), of College/University Corporation, Indianapolis, Indiana. The case is pending.
OTHER LITIGATION INVOLVING CHALLENGES
TO BOARD PROCEDURES AND REGULATIONS
In Roussel v. Board of Governors, No. 75-1044 (E.D. La., filed
April 5, 1975), plaintiff sought damages and an injunction against a
removal action instituted against plaintiff by the Board under the
Financial Institutions Supervisory Act—12 U.S.C. 1818(e)(2) and
(4). The court dismissed the request for injunctive relief following
plaintiff's resignation from the board of directors of the National
American Bank of New Orleans, New Orleans, Louisiana, and the
entry of a consent order of prohibition concerning his participation
in the affairs of that institution. The court dismissed the case with
prejudice on March 14, 1978, pursuant to a stipulation between the
parties.
In a case related to the failure of the United States National Bank,
San Diego, California, Roberts Farms, Inc. v. Comptroller of the
Currency, No. 75-0268 (S.D. Cal., filed November 20, 1975), plaintiff sought damages on the grounds that the Federal bank regulatory
agencies negligently supervised the bank. The case has been stayed
indefinitely pending the outcome of similar suits.
In Merrill v. Federal Open Market Committee, No. 75-0736
(D.D.C., filed May 8, 1975), plaintiff brought suit under the Freedom
Litigation
333
of Information Act to compel the Committee to disclose immediately
records of its policy actions and memoranda of discussion at its
meetings in January and February 1975. By order of March 9, 1976
(413 F. Supp. 494), the court ruled that the records of the Committee's policy actions must be made available to the public upon
adoption and that reasonably segregable factual portions of the
memoranda of discussions must also be disclosed. The Committee
appealed to the U.S. Court of Appeals for the District of Columbia
Circuit the ruling on policy actions (No. 76-1379). The Court of
Appeals, on November 10, 1977 (565 F.2d 778), affirmed the ruling
of the district court that the Committee's monthly policy actions,
including its Domestic Policy Directives and tolerance ranges for the
money supply and the Federal funds rate, must be publicly released
upon adoption by the Committee. The Board filed a petition for a
writ of certiorari by the Supreme Court for review of the decision
of the court of appeals (46 U.S.L.W. 3722, May 23, 1978), which
was granted. The case was argued before the Supreme Court on
December 6, 1978, and is pending.
In Re: Franklin National Bank Securities Litigation, MDL No.
196 (cases consolidated on April 22, 1977), consolidated several
actions for damages brought against various defendants who were
connected with the Franklin National Bank, New York, New York,
which was declared insolvent by the Comptroller of the Currency on
October 8, 1974. Several defendants in these actions—the insurers
and auditors of Franklin National Bank and its parent holding company—filed, or sought to file, third-party actions against the United
States based on the alleged negligence of the banking regulatory
agencies, including the Board and the Federal Reserve Bank of
New York, in the supervision of the bank. In an opinion dated
January 17, 1978, the court declined to dismiss completely the Government's motion to dismiss the third-party actions. The court held
that in certain circumstances the United States may be liable for
alleged negligent supervision by bank regulatory agencies if their
activities with respect to the bank substituted their decisions for those
of the bank's management to the bank's detriment. The case is
pending.
In a related case, Corbin v. Federal Reserve Bank of New York,
No. 77-C4896 (S.D.N.Y., filed October 6, 1977), plaintiff, the
trustee in bankruptcy of Franklin National Bank's parent holding
334
Litigation
company, alleges that certain provisions in the agreement under
which the Federal Deposit Insurance Corporation assumed the obligation to repay Franklin National Bank's indebtedness to the Federal
Reserve Bank of New York are inequitable and unjust. On October
6, 1978, the court dismissed the suit as to the Board.
In National Urban League v. Office of the Comptroller of the
Currency, No. 76-0718 (D.D.C., filed April 26, 1976), plaintiffs
(nine civil rights organizations and the National Association of Real
Estate Brokers) filed suit against the Board, the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board, alleging that those agencies failed to
establish regulations and otherwise to enforce the provisions of Title
VIII of the Civil Rights Act of 1968, which prohibits discrimination
in home mortgage lending. The complaint was dismissed with respect
to the Federal agency defendants other than the Board after these
agencies entered into settlement agreements with the plaintiffs. Defendant's motion for summary judgment for lack of standing was
granted, and the case was dismissed on May 3, 1978 (78 F.R.D. 543).
In Reuss v. Balles, No. 76-1142, (D.D.C., filed June 22, 1976),
plaintiff, a member of the U.S. House of Representatives, alleged that
the provisions of the Federal Reserve Act governing the appointment
of members of the Federal Open Market Committee violate the appointments clause of the Constitution, Article II, Section 2, Clause 2.
On December 22, 1976, the court dismissed the complaint for lack
of standing (73 F.R.D. 90). Plaintiff appealed from the dismissal of
the complaint (No. 77-1012, D.C. Cir.), and, on July 7, 1978, the
U.S. Court of Appeals for the District of Columbia affirmed the
district court's dismissal. On July 21, 1978, Representative Reuss'
petition for rehearing en bane was denied by the Court of Appeals.
His petition for a writ of certiorari to the U.S. Supreme Court was
denied on November 28, 1978 (47 U.S.L.W. 3369).
In Department of Revenue of the State of Illinois v. Olympic
Savings and Loan Association, No. 77-L-8824 (Circuit Court of
Cook County, Illinois, filed July 7, 1977), the Board of Governors
was named as defendant in a third-party action that challenged the
constitutionality of the Federal Internal Revenue Code and the issuance of Federal Reserve notes. On December 8, 1977, the court
dismissed the third-party complaint against the Board.
In Hansen v. The National Commission on Observance of Inter-
Litigation
335
national Women's Year, No. 77-1158 (D. Ida., filed September 21,
1977), plaintiff, a U.S. Congressman, brought suit against the National Commission on Observance of International Women's Year
and various Federal officials, including the Chairman of the Board
of Governors, to prevent the expenditure of Federal funds in connection with the activities of the Commission. Defendants' motion
to dismiss for lack of standing is pending.
In Consumers Union v. Board of Governors, No. 77-1800 (D.D.C.,
filed October 17, 1977), plaintiff sought to compel the Board to
provide access under the Government in the Sunshine Act to internal
memoranda and other materials to be discussed at public meetings
of the Board. Access to the memoranda sought by Consumers Union
had been granted under the Freedom of Information Act. The parties
filed a stipulation of dismissal with prejudice on January 19, 1978.
In Emch v. United States, No. 77-C-677 (E.D. Wis., filed November 18, 1977), plaintiff, a shareholder of the parent company of
the American City Bank & Trust Co., N.A., Milwaukee, Wisconsin,
a failed bank, alleged that the Board and other bank regulatory agencies were negligent in supervising and examining the bank. A motion
to dismiss is pending.
Two cases were pending in 1978 involving challenges to the Board's
employment practices. On June 29, 1977, the complaint in Hilliard
v. Burns, No. 76-1655 (D.D.C., filed December 8, 1976), was dismissed. Plaintiff has filed a notice of appeal from that decision
(No. 77-1700, D.C. Cir.), and the case is pending. In Hadigian v.
Board of Governors, No. 76-1694 (D.D.C., filed September 17,
1976), the court granted, on December 6, 1978, the Board's motion
for summary judgment. The court held that the Board's action was
neither arbitrary nor capricious.
In Waller v. First National Bank of Maryland, No. 78-0193
(D.D.C., filed February 3, 1978), the petitioner challenged the
Board's refusal to help petitioner recover funds that the petitioner
alleged had been converted by First National Bank of Maryland,
Baltimore, Maryland. The court dismissed the case on August 21,
1978, pursuant to the defendants' motion to dismiss.
In U.S. League of Savings Associations v. Board of Governors, No.
78-0878 (D.D.C., filed May 16, 1978), the plaintiff challenged the
Board's May 1, 1978, decision to amend Regulation Q, effective
November 1, 1978, to permit individual bank customers to transfer
336
Litigation
funds automatically from their savings to their checking accounts.
The court granted the Board's motion for summary judgment on
October 31, 1978. The plaintiff has appealed the decision to the
U.S. Court of Appeals for the District of Columbia, where the case
is pending.
In Independent Bankers Association of Texas v. First National
Bank in Dallas, No. CA 3-78-0918-F (N.D. Tex., filed July 26,
1978), the plaintiff alleged that the Board and the Federal Reserve
Bank of Dallas are unlawfully permitting the collection of share
drafts drawn on Federal credit unions. The Federal defendants have
moved to dismiss.
In Beckley v. Board of Governors, No. 78-C-2955 (N.D. 111., filed
July 27, 1978), petitioner challenged the Board's withholding of
certain raw data used to compile reports. A stipulation between
petitioner and the Board for dismissal of the case is currently pending.
In Consumers Union of United States, Inc. v. Miller, No. 78-2188
(D.D.C., filed November 21, 1978), the plaintiff seeks declaratory
and injunctive relief, alleging that the Board exceeded its authority
and acted arbitrarily in amending Regulation Z (see Federal Register,
volume 42, 1977, page 62146) to provide certain exceptions to the
right of rescission for credit secured by a consumer's residence. The
case is pending.
337
Legislation Enacted
INTERNATIONAL BANKING ACT
Public Law 95-369, the International Banking Act (IBA), approved
September 17, 1978, contains the following provisions:
1. Authorizes the Comptroller of the Currency to waive the requirement that all of the directors of a national bank be U.S. citizens.
2. Removes the requirement in the Edge Act—Section 25(a) of
the Federal Reserve Act—that all of the directors of an Edge corporation be U.S. citizens. Similarly, the Edge Act is amended to permit one or more foreign banks to own 50 per cent or more of the
shares of an Edge corporation with the prior approval of the Board.
Previously, the Edge Act required, without exception, that a majority
of the shares of an Edge corporation be owned by U.S. citizens.
3. Requires the Board to revise its regulation dealing with Edge
corporations within 270 days of enactment of the IBA. In doing so,
the Board is required to implement several congressional purposes
for Edge corporations including affording Edge corporations powers
sufficiently broad to enable them to compete in the United States and
abroad with similar foreign-owned institutions. Edge corporations are
also to serve as a means of financing international trade, particularly
exports. The minimum 10 per cent reserve requirement on the U.S.
deposits of Edge corporations is eliminated, and the Board is authorized to impose the same reserve requirements on the corporations as
on member banks. The IBA removes the statutory limitation on the
issuance by Edge corporations of debentures, bonds, and promissory
notes. The Board is required to report to the Congress the effects of
these amendments on the capitalization and activities of Edge corporations, banks, and the banking system. This report is printed in the
section on Bank and Bank Holding Company Supervision and Regulation by the Federal Reserve System of this ANNUAL REPORT.
4. Authorizes the Comptroller of the Currency to license and supervise one or more Federal branches or agencies of a foreign bank
in States that do not prohibit the establishment of branches or
agencies by foreign banks.
5. Prohibits a foreign bank from establishing and operating
branches outside its "home" State unless the foreign bank enters into
338
Legislation Enacted
an agreement or undertaking with the Board that it will receive only
such deposits at the out-of-State offices as are permissible for an Edge
corporation. Offices of foreign banks that were established, or for
which an application had been filed, prior to June 27, 1978, are
exempt from this prohibition.
6. Requires Federal deposit insurance for branches of foreign
banks that receive deposits of less than $100,000. Requires Federal
deposit insurance for Federal branches wherever located and for
State branches in States that require deposit insurance for Statechartered banks.
7. Authorizes the Federal banking agencies to examine U.S. offices
of foreign banks and in appropriate circumstances to institute ceaseand-desist proceedings against them.
8. Imposes reserve requirements and interest rate limitations on
Federal branches and agencies of large foreign banks in the same
manner and to the same extent as on member banks. The Board is
authorized to impose the same requirements and limitations on State
branches and State agencies after consultation and in cooperation
with State bank supervisory authorities. Subject to the Board's regulations, branches and agencies that maintain reserves would have access to System facilities.
9. Subjects a foreign bank that has a branch, agency, or commercial lending company in the United States to most provisions of the
Bank Holding Company Act in the same manner and to the same extent as bank holding companies. Nonbanking activities engaged in or
applied for by July 26, 1978, are exempt under a grandfather clause.
Otherwise, a foreign bank may not engage directly or indirectly in
nonbanking activities in the United States other than those permissible to bank holding companies.
10. Requires that joint studies and reports be undertaken by the
President with respect to the McFadden Act; the Secretary of the
Treasury with respect to the treatment of U.S. banks abroad; and the
Board with respect to Edge corporations becoming members of the
Federal Reserve System.
FULL EMPLOYMENT AND BALANCED GROWTH ACT
Public Law 95-523, approved October 27, 1978, has the following
provisions, among others:
1. Finds that an effective policy to promote full employment and
Legislation Enacted
339
production, increased real income, balanced growth, a balanced Federal budget, adequate productivity growth, proper attention to national priorities, achievement of an improved trade balance, and
reasonable price stability should be based on the development of
explicit economic goals and policies involving the President, the
Congress, and the Board of Governors of the Federal Reserve System, with maximum reliance on the resources and ingenuity of the
private sector of the economy.
2. Provides that the Economic Report of the President set forth
short-term numerical goals and programs and policies that the President deems necessary to achieve prescribed medium-term goals and
a balanced Federal budget, and to achieve reasonable price stability
as rapidly as feasible. The medium-term goals in the first three Economic Reports, subject to revision and modification, are to include
interim numerical goals for reducing the rate of unemployment to
not more than 3 per cent among individuals aged 20 and over, and
4 per cent among individuals aged 16 and over, within a 5-year period, and for reducing the rate of inflation to not more than 3 per cent
within the same period. Policies and programs for reducing the rate
of inflation, however, are to be designed so as not to impede achievements of the goals and timetables for reduction of unemployment.
3. States that the means of achieving the goals for unemployment
and reasonable price stability should be mutually reinforcing to the
extent practicable.
4. Provides that the Board of Governors transmit to the Congress,
not later than February 20 and July 20 of each year, independent
written reviews and analyses of recent developments affecting economic trends, the objectives and the plans of the Board of Governors
and the Federal Open Market Committee with respect to the ranges
of growth of the monetary and credit aggregates for the calendar
year, and the relation of such objectives and plans to the short-term
goals set forth in the most recent Economic Report of the President
and to any short-term goals approved by the Congress. The July 20
report is also to include a statement of objectives and plans with
respect to the ranges of growth of the monetary and credit aggregates
for the next calendar year. The Board is to consult with the appropriate committees, which will then submit their views and recommendations with respect to the Board's intended policies.
While nothing in the act requires the Board to fulfill its plans for
340
Legislation Enacted
the monetary and credit aggregates set out in its reports if the Board
and the Federal Open Market Committee determine that the plans
cannot or should not be achieved because of changing conditions,
the act does require the Board to explain any revision of that kind
in subsequent consultations.
FINANCIAL INSTITUTIONS REGULATORY AND
INTEREST RATE CONTROL ACT
On November 10, 1978, the President approved the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (Public
Law 95-630).
Title I, Supervisory Authority Over Depository Institutions, effective 120 days after enactment, does the following, among others:
1. Provides for civil penalties for violations of Section 22 (loans
to executive officers and transactions with directors) and 23A (loans
to affiliates) of the Federal Reserve Act, to be assessed by the Board
of Governors or the Comptroller of the Currency; for violations of
Section 19 of the Federal Reserve Act (reserve requirements and
interest rate ceilings), to be assessed by the Board of Governors;
and for violations of the National Bank Act, to be assessed by the
Comptroller of the Currency.
2. Amends Section 22 of the Federal Reserve Act to limit loans to
executive officers or 10 per cent stockholders or their controlled
entities (18 per cent stockholders in towns of less than 30,000 population) to 10 per cent of capital and surplus. Loans to any executive
officer, director, or 10 per cent stockholder must be made on substantially the same terms as those prevailing for comparable transactions with others and be without more than normal risk; if the
aggregate of such loans to any such person and his controlled entities
is more than $25,000, advance approval of a majority of the directors, with the interested party abstaining, is required.
3. Prohibits payment of an overdraft on the account of an executive officer or director.
4. Authorizes the Board to require a holding company to divest
a nonbank subsidiary or terminate a nonbank activity if there is reasonable cause to believe that continuation of such activity or control
constitutes a serious risk to the financial safety, soundness, or stability
of a subsidiary bank.
Legislation Enacted
341
5. Provides for civil penalties for violation of the Bank Holding
Company Act to be assessed by the Board, and authorizes the Board
to issue subpoenas and exercise other procedural authority in connection with hearings or investigations under the Bank Holding
Company Act.
6. Provides for cease-and-desist actions directly against directors,
officers, employees, agents, or other persons participating in the affairs
of a bank and not merely against the bank itself, and against any
bank holding company or subsidiary of a bank holding company and
against Edge Act and agreement corporations; however, only the
Board of Governors may initiate such proceedings against bank
holding companies.
7. Authorizes the Federal banking agencies to remove an officer,
director, or other person participating in the affairs of a bank in the
case of a violation that involves personal dishonesty or a willful or
continuing disregard for the bank's safety and soundness.
8. Provides for civil penalties for violation of cease-and-desist orders to be assessed by the Federal banking agencies.
9. Amends Section 22(g) of the Federal Reserve Act to double
the dollar limitation on loans that may be made to executive officers and thus permits a loan of $60,000 for the purchase of a home;
$20,000 to finance the education of children; and $10,000 for any
other purpose.
10. Provides a standard for suspension or removal of an officer,
director, or other person participating in the affairs of a bank because
of his indictment for or conviction of a felony involving dishonesty
or breach of trust.
11. Repeals the Bank Holding Company Act exemption for labor,
agricultural, or horticultural organizations, but includes a grandfather
clause for those in existence on January 4, 1977.
12. Authorizes obligations that are fully guaranteed as to principal and interest by the United States or any of its agencies to be
eligible collateral for Federal Reserve notes.
Title II (the Depository Institution Management Interlocks Act),
effective 120 days after enactment, has the following provisions,
among others:
1. Prohibits interlocks between management officials of nonaffiliated depositor institutions (banks, thrift institutions, industrial
banks, and credit unions) or holding companies in the same Standard
342
Legislation Enacted
Metropolitan Statistical Area or in the same or contiguous or adjacent
city, town, or village, except that in the case of depositary institutions
with less than $20 million in assets, the SMSA test does not apply.
2. Prohibits interlocks of this kind between an institution with
more than $1 billion in assets and another with more than $500 million in assets without geographic limit.
3. Excludes from coverage as affiliates holding companies and
their subsidiaries; corporations with 50 per cent or more common
ownership; insured State banks that are engaged primarily in providing banking services for other banks and not the public whose voting
securities are held by other banks or officers of banks; and interlocks
between mutual savings banks and existing trust companies owned
by mutual savings banks.
4. Exempts a number of organizations, including Edge and agreement corporations, a credit union being served by a management
official of another credit union, an organization that does no business
in the United States except as an incident to its foreign activities, a
State-chartered savings and loan guaranty corporation, and a Federal
home loan bank or other bank organized specifically to serve depositary institutions.
5. Applies a grandfather clause for a 10-year period to existing
interlocks not in violation of Section 8 of the Clayton Act.
6. Divides administrative, enforcement, regulatory, and rulemaking authority among the five Federal supervisory agencies for depositary institutions.
Title III (Foreign Branching), effective 120 days after enactment,
does the following, among other things:
1. Provides that State nonmember insured banks must have the
written consent of the Federal Deposit Insurance Corporation to
establish foreign branches or to invest in foreign banks.
2. Reduces from three to two the number of directors needed to
attest to the correctness of reports of condition.
3. Makes it a Federal offense to kill an employee of the Federal
financial regulatory agencies (including the Federal Reserve Banks)
when he is in pursuit of his official duties.
4. Amends the International Banking Act of 1978 to apply to
operations in the United States of foreign banks, branches, and controlled lending companies the Federal and State nondiscrimination
laws applicable to national or State banks; and requires that nondis
Legislation Enacted
343
crimination be agreed to in any Federal or State branch or agency
application.
Title IV (American Arts Gold Medallions), effective October 1,
1979, directs the Treasury to strike and sell to the general public
each year, over a 5-year period, gold medallions containing in the
aggregate not less than 1 million troy ounces of fine gold and commemorating outstanding individuals in the American arts.
Title V (Credit Union Restructuring), effective on the effective
date of the act, establishes a National Credit Union Administration
as an independent agency in the executive branch to be managed by
a new three-member National Credit Union Administration Board,
appointed by the President for 6-year terms, with the advice and
consent of the Senate.
Title VI (Change in Bank Control Act), effective 120 days after
enactment, makes the following changes, among others:
1. Provides that no person shall acquire control of any insured bank
unless the appropriate Federal banking agency has been given 60
days' prior written notice and does not disapprove within that time
period or any authorized extension.
2. Except as otherwise provided by regulation, requires the applicant to furnish the agency with a personal history, information on
business background, pending legal or administrative proceedings,
criminal indictments or convictions, financial statements, the terms
and conditions of the proposed acquisition, the source of funds, and
any plans to liquidate, sell, or merge the bank or make major changes
in its business or management.
3. Authorizes Federal banking agencies to disapprove on anticompetitive grounds; because the financial condition of the acquiring
person might jeopardize the financial stability of the bank; because
the competence, experience, or integrity of an acquiring person or
proposed management personnel indicates that the acquisition would
be contrary to the interest of the bank; or because any acquiring person fails to furnish all information required.
4. Requires an insured bank to report all loans that it makes that
are secured by 25 per cent or more of the stock of another insured
bank.
5. Requires the acquired bank to report any changes in its chief
executive officer or any director during the year following acquisition.
6. Provides for civil penalties for violations.
344
Legislation Enacted
Title VII (Change in Savings and Loan Control Act), effective 120
days after the date of enactment, provides that no person shall
acquire control of any insured savings and loan association (or any
savings and loan holding company) unless the Federal Savings and
Loan Insurance Corporation has been given 60 days' prior written
notice and does not disapprove of the proposed acquisition within
that time period or any authorized extension.
Other provisions, including criteria for disapproval, are virtually
identical to those applicable to insured banks under Title VI.
Title VIII (Correspondent Accounts), effective 120 days after the
date of enactment, does the following, among other things:
1. Prohibits a correspondent bank from extending credit to an
executive officer, director, or 10 per cent stockholder of a respondent
bank, or from opening a correspondent account for another bank
while it has outstanding an extension of credit to an officer, director,
or 10 per cent stockholder of that bank, unless that credit is granted
on substantially the same terms as those prevailing for comparable
transactions with other persons and does not involve more than normal risks.
2. Establishes the same prohibitions for similar transactions initiated by a respondent bank with respect to correspondent banks.
3. Requires each executive officer or 10 per cent stockholder of
record to make a written report to the board of directors of that bank
for any year during which he has outstanding an extension of credit
from a correspondent bank; such reports are to be compiled and forwarded to the appropriate Federal banking agency.
4. Requires each insured bank to file a report listing by name the
executive officers or 10 per cent stockholders of record who file such
reports, together with the aggregate amount of all extensions of credit by correspondent banks to such officers, directors, and their controlled entities.
5. Provides for civil penalties for violations.
Title IX (Disclosure of Material Facts), effective 120 days after
the date of enactment, among other things, requires an insured bank
to file an annual report with the appropriate Federal banking agency
listing each executive officer or 10 per cent stockholder of record
of the bank and listing the aggregate amount of all extensions of
credit by the bank during the preceding calendar year to them, or
their controlled entities.
Title X (Federal Financial Institutions Examination Council Act
Legislation Enacted
345
of 1978), effective 120 days after enactment, has the following provisions, among others:
1. Establishes a Federal Financial Institutions Examination
Council consisting of the Comptroller of the Currency, the Chairman of the Federal Deposit Insurance Corporation, a Governor of
the Federal Reserve Board to be designated by the Chairman of the
Board, the Chairman of the Federal Home Loan Bank Board, and
the Chairman of the National Credit Union Administration.
2. Provides that the Council shall establish uniform principles and
standards and report forms for the examination of financial institutions to be applied by the agencies; make recommendations for
uniformity on other matters, such as classifying loans subject to
country risk, identifying institutions in need of special supervisory
attention, and evaluating large loans shared by two or more institutions; make recommendations regarding the adequacy of supervisory
tools for determining the impact of holding company operations on
subsidiary financial institutions; and consider the ability of supervisory agencies to discover possible fraud or questionable and illegal
payments and practices of financial institutions or their holding companies.
3. Provides that when a recommendation of the Council is unacceptable to an agency, the agency shall submit to the Council a
written statement of its reasons.
4. Provides that the Council shall conduct schools for examiners
to be open to employees of State supervisory agencies.
5. Establishes a liaison committee composed of five representatives of State supervisory agencies to encourage the application of
uniform examination principles and standards by State and Federal
agencies.
6. Subjects the Council to audit by the General Accounting Office.
Title XI (Right to Financial Privacy Act of 1978), effective 120
days after enactment, except where otherwise provided, does the
following:
1. Prohibits a government authority from having access to, information from, or copies of a financial institution's customer records,
unless obtained pursuant to written consent of the customer, administrative subpoena or summons, search warrant, judicial subpoena, or
formal written request (procedures and requirements for each method
of obtaining information are specified in detail).
2. Prohibits financial institutions from providing any government
346
Legislation Enacted
authority access to, information from, or copies of any customer's
financial records until the government authority certifies in writing
that it has complied with the provisions of Title XI.
3. Requires financial institutions promptly to notify all of their
customers of their financial privacy rights and provides that the Board
of Governors of the Federal Reserve System shall prepare a statement of customers' rights; and provides that any financial institution
that provides its customers a statement of customers' rights as prepared by the Board shall be deemed to be in compliance with the
customer notice requirement. (On March 7, 1979, this section of the
act was repealed.)
4. Exempts from the procedures of Title XI examination by or
disclosure to any supervisory agency of financial records or information in the exercise of its supervisory, regulatory, or monetary functions with respect to a financial institution, in accordance with procedures authorized by the Internal Revenue Code, when disclosure is
required by Federal statute or regulation, in connection with criminal
or civil litigation to which the Government and the customer are
parties, and in connection with an official proceeding, investigation,
examination, or inspection directed at the financial institution itself.
5. Provides exemptions for the Secret Service or a Government
authority authorized to conduct foreign intelligence activities and
exempts the Securities and Exchange Commission for 2 years.
6. Effective October 1, 1979, generally requires a government authority to reimburse the financial institution for the cost incurred due
to its request, subject to regulations of the Board of Governors
establishing the rate and conditions of reimbursement.
7. Provides for civil penalties for violations by a Federal agency
or department or a financial institution.
8. Provides that financial institutions making disclosure in goodfaith reliance on a certificate of a government agency are not liable
to the customer for such disclosure.
9. Establishes certain reporting requirements for the Administrative Office of the U.S. courts and each Government authority requesting financial institution records during the year.
Title XII (Charters for Thrift Institutions), effective 120 days after
enactment, does the following, among other things:
1. Authorizes the Federal Home Loan Bank Board to establish
rules and regulations for the organization, examination, and opera-
Legislation Enacted
347
tion of Federal mutual savings banks (State mutual savings banks
that have converted from State charters where conversion is not prohibited by State law).
2. Prohibits conversion from the State mutual to the stock form of
ownership.
3. Subjects State mutuals converting to Federal charters to the
branching limitations of State law, except as to any numerical limits
and except that the Federal Home Loan Bank Board may permit
branches in the converted bank's Standard Metropolitan Statistical
Area or county, or within 35 miles of its home office, but only in its
State of domicile.
4. Provides that the Federal Savings and Loan Insurance Corporation shall insure the accounts of Federal mutual savings banks.
Title XIII (NOW [Negotiable Orders of Withdrawal] Accounts),
effective on the date of enactment, adds New York to the States that
are authorized to issue NOW accounts.
Title XIV (Insurance of IRA [Individual Retirement Accounts]
and Keogh Accounts), effective on the date of enactment, increases
Federal deposit insurance for IRA and Keogh accounts to $100,000
per account at insured banks, savings and loan associations, and
credit unions.
Title XV (Miscellaneous Provisions), effective upon enactment, has
the following provisions:
1. Extends until February 27, 1981, the prohibition on the imposition of surcharges for use of a credit card and restrictions of cash
discounts by credit-card issuers.
2. For purposes of the Community Reinvestment Act, permits a
financial institution serving predominantly military personnel to define its entire community to include its entire customer base without
regard to geographic location.
3. Exempts graduated-payment mortgages insured by the Department of Housing and Urban Development from State requirements
for a minimum amortization of principal.
4. Enables the Comptroller of the Currency to charter a national
bank whose powers are limited to trust activities.
Title XVI (Interest Rate Control), effective upon the date of enactment, extends the authority to set flexible deposit interest rates
(Regulation Q) to December 15, 1980, and eliminates the differential
for interest rate ceilings on automatic transfer accounts offered by
348
Legislation Enacted
thrift institutions. The maximum rate on such accounts is the commercial bank rate.
Title XVII (Federal Savings and Loan Investment Authority),
effective on enactment, amends the investment authority of savings
and loan associations in the following ways:
1. Permits investment in community development areas.
2. Increases the authority to invest in loans for property alteration,
repair, or improvements.
3. Expands the authority to invest in obligations issued by State
or local governments for the purpose of rehabilitation, financing, or
construction of residential real property.
4. Places in the unlimited-investment category the authority to invest in or lend to State housing corporations provided that the obligations are secured by real estate insured by the Federal Housing
Administration.
Title XVIII (National Credit Union Central Liquidity Facility
Act), effective October 1, 1979, does the following, among others:
1. Establishes a Central Liquidity Facility, with voluntary membership, within the National Credit Union Administration. The purpose of the Facility is to improve the general financial stability of
credit unions by meeting their liquidity needs, defined to include seasonal, short-term adjustment, and longer-term emergency or unusual
credit requirements.
2. Prohibits the Facility from extending credit to expand credit
union portfolios.
3. Authorizes the NCUA, acting in the interest of the Facility, to
borrow from any source provided that the total value of these obligations not exceed 12 times the subscribed capital stock and surplus of
the Facility, from the National Credit Union Share Insurance Fund
up to $500,000 to defray initial organizational and operating expenses, and from the Treasury up to $500 million in the event that
the NCUA certifies that the Facility does not have sufficient funds
to meet the liquidity needs of credit unions.
Title XX (Electronic Fund Transfer Act), which is effective 18
months after enactment (except for the provisions on consumer
liability and unsolicited-card distribution, effective 90 days after
enactment), has these provisions, among others:
1. Requires disclosure of the terms and conditions of electronic
Legislation Enacted
349
funds transfers (defined to exclude, among other things, wire transfers
of funds, telephone transfers not pursuant to an agreement, and transfers made pursuant to an automatic transfer service program) at the
time the consumer contracts for an electronic funds transfer service.
2. Requires that the consumer be afforded written documentation
for each funds transfer made from an electronic terminal, notice as
to whether pre-authorized transfers were completed, and a periodic
statement of account.
3. Requires financial institutions to establish procedures for correcting errors for electronic funds transfers.
4. Provides limitations on the maximum liability of a consumer
for unauthorized transfers from his or her account subject, in part,
to whether the consumer reports to the financial institution within
prescribed time periods either unauthorized transfers appearing on
the periodic account statement, or the loss or theft of an electronic
funds transfer card.
5. Imposes liability on the financial institution under certain circumstances for all damages proximately caused by the institution's
failure to make an electronic funds transfer or failure to stop payment of a pre-authorized transfer when instructed to do so in accordance with the terms and conditions of the accounts.
6. Permits unsolicited distribution only for unvalidated debit cards.
7. Provides that Title XX does not annul, alter, or affect the laws
of any State relating to electronic funds transfers, except to the extent
that those laws are inconsistent with Title XX.
8. Authorizes the Board to exempt from coverage electronic funds
transfers within any State that imposes requirements "substantially
similar" to Title XX.
9. In connection with promulgating regulations to carry out the
act, requires the Board to prepare a statement on economic impact,
to issue model clauses to facilitate compliance, and, if necessary,
to modify its regulations to ease the compliance burden on small
financial institutions.
SECURITIES INVESTOR PROTECTION ACT AMENDMENTS
Public Law 95-283, approved May 21, 1978, has the following provisions, among others:
350
Legislation Enacted
1. Increases from $50,000 to $100,000 the maximum amount
that the Securities Investor Protection Corporation can reimburse
customers of insolvent securities firms.
2. Increases the maximum reimbursement from $20,000 to
$40,000 for cash in customers' accounts.
3. Increases the maximum amount of securities issues exempt
from the registration requirements of the Securities Act of 1933 from
$500,000 to $1.5 million.
FEDERAL BANKING AGENCY AUDIT ACT
Public Law 95-320, approved July 21, 1978, has the following provisions, among others:
1. Provides for General Accounting Office audit of the Federal
Reserve Board, the Federal Reserve Banks and their branches and
facilities, the Federal Deposit Insurance Corporation, and the Office
of the Comptroller of the Currency.
2. Exempts from General Accounting Office audit of the Federal
Reserve transactions conducted on behalf of or with foreign central
banks, foreign governments, and nonprivate international financial
organizations; deliberations, decisions, and actions on monetary
policy matters, including discount window operations, reserves of
member banks, securities credit, interest on deposits, and open market operations; transactions made under the direction of the Federal
Open Market Committee; and System communications and discussions regarding the foregoing matters.
3. Generally prohibits the General Accounting Office or any of its
employees or officers from disclosing information that would identify
a specific customer of any bank or bank holding company, or a
specific operating bank or bank holding company.
4. Limits General Accounting Office access to bank examination
materials in the custody of audited agencies to statistically meaningful
samples, as determined by that Office.
5. Provides that, as frequently as practicable, the Comptroller General make reports to the Congress on the results of audit work after
an advance copy of the report has been made available to the agency
concerned with 30 days for agency comments.
6. Imposes criminal penalties on General Accounting Office per-
Legislation Enacted
351
sonnel for disclosure of specified confidential material from examination reports.
DEBT CEILING INCREASE
Public Law 95-333, approved August 3, 1978, increases the temporary debt limit to $798 billion through March 31, 1979. An earlier
authorization (Public Law 95-252) had extended the temporary debt
limit of $752 billion from March 31, 1978, to July 31, 1978. Public
Law 95-333 also increases from $27 billion to $32 billion the
amount of long-term U.S. Government bonds that may be issued
with interest rates above the 4.25 per cent statutory ceiling.
NEW YORK CITY LOAN GUARANTEES
Public Law 95-339, approved August 8, 1978, has the following
provisions, among others:
1. Authorizes the Secretary of the Treasury to guarantee New York
City obligations with an aggregate principal amount outstanding not
to exceed $1.65 billion at any one time, in accordance with a specified
time schedule and conditions and limitations, including a determination by the Secretary that there is a reasonable prospect of repayment,
that credit is effectively unavailable to the city elsewhere, and that
the interest rate is reasonable.
2. Specifies independent auditing procedures to precede and follow
extension of guarantees.
3. Specifies that the city shall offer to sell its term notes in 1980,
1981, and 1982 and its long-term bonds in 1981 and 1982, unless
the Secretary determines that any such offer would be inconsistent
with the financial interests of the city.
4. Requires the city to establish a Productivity Council to develop
means to enhance the productivity of city employees.
5. Provides that interest on guaranteed obligations be taxable.
The authority to guarantee new obligations terminates on June 30,
1982.
Public Law 95-415, approved October 5, 1978, authorizes the
Secretary of the Treasury to guarantee the payment of princi-
352
Legislation Enacted
pal and interest on loans in accordance with the provisions of the
New York City Loan Guarantee Act of 1978 in amounts not to exceed $1.65 billion in principal outstanding at any time, and appropriates, effective October 1, 1978, amounts necessary for payment of
principal and interest on loans in default and guaranteed pursuant to
the Guarantee Act, to remain available until September 30, 1998.
NATIONAL CONSUMER COOPERATIVE BANK
Public Law 95-351, approved August 20, 1978, among other things,
provides the following:
1. Establishes a National Consumer Cooperative Bank, to be privately owned after a period of joint Federal and private ownership,
to provide credit and technical assistance to consumer cooperatives.
2. Establishes within the Bank an Office of Self-Help Development
and Technical Assistance authorized to make capital investment advances to cooperatives serving low-income persons.
3. Authorizes the Secretary of the Treasury, over the first 5 years,
to purchase up to $300 million of stock of the Bank to be retired as
soon as practicable.
FUTURES TRADING ACT
Public Law 95-405, approved September 30, 1978, amends the
Commodity Exchange Act to require the Commodity Futures Trading
Commission to do the following, among other things:
1. Keep the Treasury, the Board of Governors of the Federal
Reserve System, and the Securities and Exchange Commission fully
informed of Commission activities relating to the responsibilities of
those agencies, in order to seek their views on such activities, and to
consider the relationships between the volume and nature of investment and trading in commodity futures and in securities and financial
instruments under the jurisdiction of those agencies.
2. Deliver to the Treasury and the Board of Governors a copy of
any application by a Board of Trade to be designated as a contract
market involving transactions for future delivery of any security
issued or guaranteed by the United States or any of its agencies with
Legislation Enacted
353
a 45-day opportunity for comment; to consider all comments it receives from the Treasury and the Board of Governors; and consider
the effect that any such designation, suspension, revocation, or emergency action may have on the debt financing requirements of the
U.S. Government and the continued efficiency and integrity of the
underlying market for government securities.
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
Public Law 95-435, approved October 10, 1978, has three provisions of special interest:
1. Authorizes the appropriation of an amount of dollars equivalent to 1.45 billion Special Drawing Rights for the participation of
the United States in the Supplementary Financing Facility (the
"Witteveen Facility") of the International Monetary Fund.
2. Provides that the Secretary of the Treasury shall instruct the
U.S. Executive Director of the International Monetary Fund to seek
to assure that no decision on the use of the facility undermines or
departs from U.S. policy regarding comparability of treatment of
public and private creditors in cases of debt rescheduling in which
official U.S. credits are involved.
3. Provides that the budget of the Federal Government shall be
balanced beginning with fiscal year 1981.
SUSAN B. ANTHONY DOLLAR COIN ACT
Public Law 95-447, approved October 10, 1978, among other things
provides for the issuance of a new $1 coin, bearing on one side
the likeness of Susan B. Anthony, and on the other a design of the
symbolic eagle of the Apollo 11 landing on the moon; and modifies the size and weight specifications for $1 coins so that the new
coins will be smaller and lighter than those previously minted.
ETHICS IN GOVERNMENT ACT
Public Law 95-521, approved October 26, 1978, among other things,
provides for annual financial disclosure statements that will be avail-
354
Legislation Enacted
able to the public by members of the Congress, the President, the
Vice President, and high-level officials of the legislative, executive,
and judicial branches of the Federal Government; establishment
of an Office of Government Ethics within the Office of Personnel
Management; and limitations on the activities of officers and employees after they leave the Federal Government.
RENEWAL OF FEDERAL RESERVE BANKS' DIRECT
PURCHASE AUTHORITY
Public Law 95-534, approved October 27, 1978, amends Section
14(b) of the Federal Reserve Act to renew through May 1, 1979, the
authority of Federal Reserve Banks to purchase U.S. obligations
directly from the Treasury. The previous authority had expired on
April 30, 1978.
HOUSING AND COMMUNITY DEVELOPMENT
AMENDMENTS
Public Law 95-557, approved October 31, 1978, amends and extends certain Federal laws relating to housing, and community development and preservation. Title III has the following provisions,
among others:
1. Authorizes direct sales and servicing access to the Federal
Home Loan Mortgage Corporation by mortgage bankers.
2. Authorizes the Federal Housing Administration to insure,
under Section 203(k) of the National Housing Act, mortgages to purchase and rehabilitate one- to four-family structures, which could
then be purchased by the Government National Mortgage Association.
3. Authorizes the FHA to insure mortgages on one-family condominium units in existing non-FHA-insured multifamily projects
containing 12 or more units.
4. Reduces paperwork by consolidating and simplifying mortgage forms of the Department of Housing and Urban Development
and the Veterans Administration.
Legislation Enacted
355
5. Establishes a procedure for legislative review of proposed rules
and regulations of HUD.
Title VI has the following provisions, among others:
1. States the finding by the Congress that the neighborhood housing service of the Urban Reinvestment Task Force is a successful
program to revitalize older urban neighborhoods by mobilizing public,
private, and community resources at the neighborhood level. The demand for neighborhood housing services programs in cities throughout the United States warrants the creation of a public corporation
to institutionalize and expand that program.
2. Establishes the National Neighborhood Reinvestment Corporation to continue the efforts of the Federal financial supervisory
agencies and the Department of Housing and Urban Development to
promote reinvestment in older neighborhoods by local financial institutions cooperating with community people and local government.
The board of directors of the corporation consists of the Chairman
of the Federal Home Loan Bank Board, as chairman of the board of
directors for the first 2 years, the Secretary of Housing and Urban
Development, a member of the Board of Governors of the Federal
Reserve System to be designated by the Chairman of that Board, the
Chairman of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Administrator of the National Credit
Union Administration.
3. Sets out the duties of the corporation to include (a) establishing
neighborhood housing services and providing them with grants and
technical assistance; (b) identifying, monitoring, evaluating, and providing grants and technical assistance to selected neighborhood preservation projects that promise to reverse neighborhood decline; (c)
experimentally replicating successful neighborhood preservation
projects; and (d) supporting Neighborhood Housing Services of
America with technical assistance and grants to expand its national
loan purchase pool. An appropriation to the corporation not to exceed $12.5 million is authorized for fiscal year 1979.
REVENUE ACT
Public Law 95-600, approved November 6, 1978, includes the following:
356
Legislation Enacted
1. Liberalizes personal income tax provisions.
2. Provides for a five-step schedule for corporate tax rates with
a maximum tax rate of 46 per cent and makes the investment tax
credit of 10 per cent permanent.
3. Reduces the effective rate on individual capital gains.
4. States the intention of the tax-writing committees of the Congress to report legislation providing significant tax reductions for individuals when certain goals for Federal expenditures are met and
when justified in the light of prevailing and expected economic conditions over the next 4 years.
357
Bank and Bank Holding Company
Supervision and Regulation by the
Federal Reserve System
DOMESTIC ACTIVITIES AND APPLICATIONS
Bank Holding Companies
The System meets its supervisory and regulatory responsibilities with
regard to bank holding companies through two primary functions:
1. Monitoring the operations and performance of bank holding
companies, mainly by "on-site" inspections and evaluations of reports
and other information obtained from such companies.
2. Action on applications to form or expand bank holding companies.
The Board of Governors' Division of Banking Supervision and
Regulation is organized along functional lines in order to provide
effective staff monitoring of financial institutions and efficient processing of applications. Individual responsibilities within the Division are
sharply defined with regard to bank holding company, bank merger,
and international applications; surveillance; trust activities; legally
oriented activities; research and policy matters; regulatory compliance; and supervision of financial institutions.
A new standardized Report of Bank Holding Company Inspection, which became effective on January 1, 1978, has intensified the
supervision of bank holding companies. As a result, approximately
85 per cent of all bank holding company assets will be subject to
Federal Reserve review each year. The report is to be used in conjunction with the annual inspection of (1) bank holding companies
with consolidated assets of more than $300 million; (2) bank holding
companies with consolidated assets of less than $300 million that
control significant credit-extending nonbank subsidiaries; and (3) any
other bank holding company at the discretion of a Federal Reserve
Bank.
Most bank holding companies that are exempt under the new inspection procedures will continue to be subject to inspection at least
358
Supervision and Regulation
once every 3 years. For these holding companies, all of which will
have less than $300 million in consolidated assets and no significant
credit-extending nonbank subsidiaries, a new standardized report has
been developed and will be implemented in early 1979. To aid in
on-site inspections and report preparation, a System task force is
drafting a new manual for inspections of bank holding companies,
which is expected to be completed during 1979.
For the calendar year 1977, annual reports were obtained from all
registered bank holding companies, pursuant to the provision of Section 5(c) of the Bank Holding Company Act. At the end of 1978,
2,222 bank holding companies were in operation.
Each action by the Board on an application to form a bank holding company or to expand an existing company through acquisition
of a bank or an existing nonbank company is effected by an order.
Orders set forth the action taken, the voting record of the Board
members participating, the essential facts, and the basis for the action.
Whether issued by the Board or by Reserve Banks acting under
delegated authority, orders are released immediately to the public
and press. Copies are available from the Board's offices, and the
System's actions are reported in Board publications, including the
Federal Reserve Bulletin and the weekly H.2 statistical release. The
numbers of proposals acted on during 1978 by the Board, and under
delegated authority by the Secretary's Office and the Federal Reserve
Banks, are shown in the accompanying table.
Although the number of applications processed in 1978 increased
by 12 per cent over 1977, the System again processed more than
Direct action
Section
3(a)(l)
3(a)(3)
3(a)(5)
4(c)(8)
4(c)(12)
Total...
Delegated authority
Secretary's
Office
Board
Reserve Banks
Approved
Denied
Approved
Approved
Permitted
68
77
4
58
2
209
14
6
0
4
0
24
41
13
0
3
0
57
150
57
0
28
0
235
0
0
0
494
28
522
Total
273
153
4
587
30
1,047
Supervision and Regulation
359
90 per cent within 90 days of the filing of a legally and internationally sufficient application, as the table below indicates. This
standard, it should be noted, is self-imposed and is considerably
more difficult to meet than the period referred to in the Bank Holding
Company Act of 1956 as amended.
1977
1978
Item
Number processed
Per cent processed
within 90 days
Ql
Q2
Q3
Q4
Year
Ql
Q2
Q3
Q4
Year
205
226
241
259
931
269
257
270
251
1,047
84
89
90
94
90
90
90
95
94
92
Late in the year the Federal financial regulatory agencies adopted
regulations implementing the Community Reinvestment Act. This
statute provides that an agency, in acting upon an expansion proposal
involving depositary financial institutions, must consider an applicant's record in meeting the credit needs of its community. Beginning
November 6, 1978, all applications to acquire a bank had to disccuss
the applicant's performance in this respect.
On December 28, 1978, the Board issued a policy statement concerning grandfather rights that expire on December 31, 1980. This
statement built on earlier ones dated February 15, 1977, which provided general divestiture guidelines, and October 13, 1977, which
established a voluntary filing date of June 30, 1978, for those facing
the December 31, 1980, deadline.
The Board established September 30, 1979, as the date by which
affected bank holding companies should have filed either retention
applications or divestiture plans with their respective Reserve Banks.
The Board pointed out that the failure to do so could lead to forced
sales and that there were a number of possible obstacles that could
delay expeditious processing of applications, especially those filed in
a tardy manner.
Of particular concern to the Board was the number of bank holding companies and subsidiaries that remain to comply fully with the
December 31, 1980, deadline and the insubstantial progress made
360
Supervision and Regulation
to date. As the table shows, several hundred filings have yet to be
made, and only 2 years remain for all requisite clearances to be
obtained.
Date
October 1977
December 1978
Number of bank holding company subsidiaries l
Number
of bank
holding
companies
Total
Permissible 2
Impermissible 2
General
insurance
agencies 3
353
313
497
404
175
136
171
123
151
145
1
2
8
This includes parent companies engaging directly in nonbanking activities.
This is based on preliminary review.
The Board has yet to determine the permissibility of operating a general insurance agency in a
town of less than 5,000 population.
Member Banks
Each State member bank is subject to examination, made by direction of the Board of Governors or of the Federal Reserve Bank of
the district in which it is located, by examiners selected or approved
by the Board. The general policy is for the Bank to conduct at least
one regular examination of each State member bank in its district
during each calendar year and to prepare a complete examination
report. However, banks that clearly exhibit no major unsatisfactory
features in operations and financial condition, and that have been
operated prudently over time, may receive an examination of limited
scope in 1 year, with a brief report, and a full examination the
following year. Banks with severe problems are examined fully at
least once in each calendar year and more often when necessary.
In some States concurrent examinations are made in cooperation
with the State banking authorities; in others, the examinations are
independent.1 All but 27 of the 1,015 State member banks subject
to examination during 1978 were examined.
The Board makes its reports of examination of State member
1
In the Federal Reserve District of Chicago, one examiner is assigned to
accompany a full contingent of State examiners at each annual examination
of State member banks in that portion of Indiana located in the Chicago
Reserve District. The State examination report of these banks is accepted in
lieu of a Federal Reserve report.
Supervision and Regulation
361
banks available to the Comptroller and to the Federal Deposit
Insurance Corporation (FDIC). Also, upon request, the FDIC provides its reports of insured nonmember State banks to the Board.
In its supervision of State member banks, the Board analyzes reports of examination of State member banks and coordinates and
evaluates the examination and supervisory functions of the System.
Similar oversight is exercised with respect to bank holding companies, for which the Board has sole supervisory responsibility.
National banks, all of which are members of the Federal Reserve
System, are subject to examination by direction of the Board or of
the Federal Reserve Banks. As a matter of practice, they are not
examined by either because the law charges the Comptroller of the
Currency directly with that responsibility. The Comptroller provides
reports of examination of national banks to the Board upon request,
and each Federal Reserve Bank purchases from the Comptroller
copies of those reports.
The Board passes on applications for admission of State banks to
membership in the System; administers the public-disclosure requirements of the Securities Exchange Act of 1934, as amended, with
respect to equity securities of State member banks within its jurisdiction under the 1934 act, and regulates certain security credit transactions; and under provisions of the Federal Reserve Act and other
statutes, passes on applications of member banks for permission to
(1) merge banks, (2) establish domestic and foreign branches, (3) exercise expanded powers to create bank acceptances, (4) establish foreign banking and financing corporations, and (5) invest in bank
premises an amount in excess of 100 per cent of the bank's capital
stock.
By Public Law 88-593, approved September 12, 1964, insured
banks must inform the appropriate Federal banking agency of any
changes in control of management, and of any loans by them secured
by 25 per cent or more of the voting stock of any insured bank.
In 1978, 10 changes in ownership of the outstanding voting stock of
State member banks were reported to the Federal Reserve Banks as
changes in control. Arrangements continue among the three Federal
supervisory agencies for appropriate exchanges of reports received
pursuant to the act. The Reserve Banks send copies of all reports
received to the appropriate district office of the FDIC, the Regional
362
Supervision and Regulation
Administrator of National Banks (Comptroller of the Currency), and
the State bank supervisor.
The Reserve Banks are under instructions to forward promptly to
the Board reports involving changes in control of State member
banks, with a statement (1) that the new owner and management
are known and acceptable to the Reserve Bank, or (2) if they are
not known, that an investigation is being made; its findings, and
the conclusions of the Reserve Bank, are to be forwarded to the
Board.
By Public Law 90-44, approved July 3, 1967, each member bank
of the Federal Reserve System must include with each report of condition a list of all loans to its executive officers since its previous
report. Data submitted by member banks during 1978 appear, as
required by law, below.
Period covered
(condition report dates)
July
Oct.
Jan.
Apr.
July
Oct.
1
1, 1977-Sept. 30, 1977
1, 1977-Dec. 31, 1977
1, 1978-Mar. 31, 1978
1, 1978-June 30, 1978
1, 1978-Sept. 30, 1978
1, 1978-Dec. 31, 1978
Total loans to executive officers
Number
Amount (dollars)
Range of
interest rates
charged
(per cent)
7,322
8,138
8,030
8,038
7,866
0)
30,120,828
34,967,924
32,383,601
34,198,118
32,884,172
0)
1-18
1-19
1-18
1-18
1-23
(l)
Compilation of data for condition reports of December 31, 1978, has not been completed.
Federal Reserve Membership
As of December 31, 1978, member banks accounted for 38 per cent
of the number of all commercial banks in the United States and for
58 per cent of all commercial banking offices, and they held approximately 72 per cent of the total deposits in such banks—almost the
same percentages as at the end of 1977. State member banks accounted
for 11 per cent of the number of all State commercial banks in the
United States and for 27 per cent of the banking offices, and they
held approximately 39 per cent of total deposits in State commercial
banks.
Of the 5,564 banks that were members of the Federal Reserve
System at the end of 1978, there were 4,564 national banks and
1,000 State banks. During the year there were net declines of 91
Supervision and Regulation
363
national and 14 State member banks. The decline in State member
banks was offset in part by the organization of 37 new national
banks and by the conversion of 3 nonmember banks to national
banks. The decrease in State member banks reflected mainly 37 withdrawals from membership and 13 conversions to branches incident
to mergers and absorptions.
At the end of 1978, member banks were operating 22,830
branches, facilities, and additional offices, 643 more than at the
close of 1977. During the year member banks established 1,044
de novo branches.
Detailed figures on changes in the banking structure during 1978
are shown in Table 19 in the Statistical Tables section of this REPORT.
Bank Mergers
Under Section 18(c) of the Federal Deposit Insurance Act, 12 U.S.C.
1828(c), the prior written consent of the Board of Governors must
be obtained before a bank may merge, consolidate, or acquire the
assets and assume the liabilities of another bank if the resulting bank
is to be a State member bank.
In deciding whether to approve an application, the Board is required by Section 18(c) to consider the impact of the proposed transaction on competition, the financial and managerial resources and
prospects of the existing and proposed institutions, and the convenience and needs of the community to be served. The Board is
precluded from approving "any proposed merger transaction which
would result in a monopoly, or which would be in furtherance of any
combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States." A proposed transaction "whose effect in any section of the country may be
substantially to lessen competition, or to tend to create a monopoly,
or which in any other manner would be in restraint of trade" may
be approved only if the Board is able to find that the anticompetitive
effects of the transaction would be clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
Before acting on each application the Board must request reports
from the Attorney General, the Comptroller of the Currency, and
the Federal Deposit Insurance Corporation on the competitive factors
364
Supervision and Regulation
involved in each transaction. The Board in turn responds to requests
by the Comptroller or the FDIC for reports on competitive factors
involved when the resulting bank is to be a national bank or an
insured nonmember State bank.
During 1978 the Board approved 3 merger applications and submitted 84 reports on competitive factors to the Comptroller of the
Currency and 78 to the FDIC. In addition, the Federal Reserve
Banks approved 19 merger applications on behalf of the Board
pursuant to delegated authority. As required by Section 18(c), a
description of each of the 22 applications approved by the Board
or the Reserve Banks, with other pertinent information, is shown
in Table 21.
Orders of the Board with respect to all bank merger applications,
whether approved or disapproved, are released immediately to the
press and the public. These orders set forth the factors considered,
the conclusions reached, and the vote of each member of the Board
present.
Miscellaneous Actions under Delegated Authority
In addition to delegating action on certain applications concerning
bank holding companies and bank mergers, the Board of Governors
has delegated to the Reserve Banks, along with other things, authority
to approve, on behalf of the Board, certain applications of State
member banks to establish domestic branches, to invest in bank
premises, and to grant or deny a waiver of 6 months' notice by a
bank of its intention to withdraw from membership in the Federal
Reserve System.
The Board has also delegated authority to the Director of the Division of Banking Supervision and Regulation for, among other things,
furnishing to the Comptroller of the Currency and the Federal
Deposit Insurance Corporation certain reports on competitive factors under Section 18(c)(4) of the Federal Deposit Insurance Act,
12 U.S.C. 1828(c)(4). The Director may furnish the reports if each
of the appropriate departments or divisions of the Federal Reserve
Bank and the Board believe that the competitive effects of the proposed merger would be at worst only slightly adverse, and if no
member of the Board has objected prior to the forwarding of the
Supervision and Regulation
365
report. Under this authority 151 reports on competitive factors were
furnished.
INTERNATIONAL ACTIVITIES AND APPLICATIONS
Foreign Activities of Member Banks
Under provisions of the Federal Reserve Act (Section 25 for national
banks and Sections 9 and 25 for State member banks) and Regulation M, member banks may establish branches or subsidiaries in foreign countries and invest in foreign banks, usually subject to prior
Board approval. In reviewing proposed transactions, the Board considers regulatory limitations, the condition of the bank, and the
bank's existing foreign operations. In 1978 the Board approved 74
applications for the establishment of branches in foreign countries
and 27 applications by member banks for investments in banks in
various countries.
At the end of 1978, member banks had in active operation 761
branches in foreign countries and overseas areas of the United States:
105 national banks were operating 649 of these branches, and 32
State member banks were operating 112 branches. The growth in the
number and total assets of foreign branches is shown in the table
below.
Total assets (billions of dollars)
Number
Year
Foreign
branches
Sections
25 and 25(a)
corporations
Foreign
branches *
Sections
25 and 25(a)
corporations
1971
1972
1973
1974
577
627
699
732
85
92
103
117
55.1
72.1
108.8
127.3
5.5
6.1
6.9
10.1
1975
1976
1977
1978
762
7312
738
761
116
H7
122
124
145.3
174.5
205.0
270.0e
9.1
11.1
13.4
15.5 «
e
Estimated.
These data are derived from reports of condition that were filed at the end of the year with the
Comptroller of the Currency and the Federal Reserve System, and they differ in certain respects from
other statistical reports on overseas branch operations. The amounts shown are net of claims on other
foreign branches of the same bank.
2
This decrease from 1975 is due primarily to the conversion of 30 branches in Colombia into subsidiaries to conform with Colombian banking laws.
1
366
Supervision and Regulation
International Financial Corporations
Under provisions of Sections 25 and 25(a) of the Federal Reserve
Act and Regulation K, corporations ("Edge Act" or "agreement"
corporations) may be established to engage in international banking
or foreign financial transactions. These corporations are generally of
three types: banking corporations that are owned by large banks and
located in U.S. commercial centers other than the location of their
parent banks, and that engage in international banking; investment
companies owned by banks of large or medium size that invest in
foreign financial institutions, such as consumer or mortgage finance
corporations or leasing companies; and corporations that invest in
foreign commercial banking institutions.
In 1978 the Board acted on 164 applications, in accordance with
Sections 25 and 25(a) of the Federal Reserve Act, and with Section 4(c)(13) of the Bank Holding Company Act, which included
requests for investments in such activities as commercial banking
in Egypt, Nigeria, Malaysia, and Australia; equipment leasing in
Korea, Brazil, and Belgium; investment banking in the Philippines,
France, England, and Korea; and consumer finance in Japan and
Chile. At the end of 1978, 124 of these corporations were in
existence, and during that year all but one were examined by
examiners for the Board.
Under the provisions of Section 25(a) of the Federal Reserve Act,
the Board issued two final permits during 1978 for corporations to
engage in international or foreign financial operations. In addition,
the Articles of Association were approved and preliminary permits
were issued for the formation of two other corporations.
Growth in the number of Section 25 and 25 (a) corporations is
given in the table on the previous page.
Timely Processing of Applications
As in the domestic area, the System measures its performance in
the timely processing of international applications against a 90-day
standard. In 1978 the number of international applications processed
increased from 233 to 287, or 23 per cent. Nine out of ten of the
applications were processed within 90 days in 1977, compared with
86 per cent in 1978, as the following tabulation shows.
Supervision and Regulation
1977
1978
Q3
Q2
Ql
Year
367
Year
Q4
Number
Per
cent
Number
Per
cent
Number
Per
cent
Number
Per
cent
Number
Per
cent
36
47
81
89
76
67
92
82
57
75
100
84
64
98
84
89
233
287
90
86
Capitalization and Activities of Edge Corporations, Banks, and
the Banking System
The International Banking Act of 1978 (IBA) (Public Law 95-369),
amended the Edge Act—Section 25(a) of the Federal Reserve Act—in
several respects. One amendment removed the provision in the Edge
Act that limited an Edge corporation's liabilities on account of debentures, bonds, and promissory notes to ten times the corporation's capital and surplus. Another removed the statutory minimum
10 per cent reserve requirement on the U.S. deposits of an Edge corporation. Section 3(h) of the IBA requires the Board, as part of its
ANNUAL REPORT, to assess the effects of these amendments on the
capitalization and activities of Edge corporations, banks, and the
banking system.
The Board of Governors has amended its regulation governing
Edge corporations to conform to the elimination of the statutory
minimum reserve requirement. In addition, the Board has conducted
a general review of its regulation and, as required by the IBA, has
issued for comment proposed amendments to the regulation. Amendments to the regulation will become effective in mid-1979. Particular
attention has been given to the regulatory requirement that an Edge
corporation's aggregate liabilities (including liabilities on account of
debentures, bonds, and promissory notes) be limited to ten times the
corporation's capital and surplus.
Because the IBA only recently became effective and requires further Board action for its implementation, it is not possible to assess
at this time its effects on Edge corporations, banks, or the banking
system. Information available to the Board during the coming year
should permit an assessment in the next ANNUAL REPORT of the
Board.
368
Supervision and Regulation
SCHOOLS
In 1978 the Bank Examination School of the Board of Governors
conducted two sessions of the School for Examiners, three sessions
of the School for Assistant Examiners, one session of the School for
Trust Examiners, two sessions of the Bank Holding Company School,
and one session of the International School. A Senior Trust Seminar
was held in 1978 jointly with the Comptroller of the Currency and
the Federal Deposit Insurance Corporation.
Since the establishment of this program, 6,220 persons have attended the various sessions, including representatives of the Federal
bank supervisory agencies; the State Banking Departments of 36
States; the Treasury Department of the Commonwealth of Puerto
Rico; the Division of Banking and Insurance, the Virgin Islands;
and 29 foreign countries.
369
Condition of the Banking System
Throughout 1978 the American banking system continued to make a
good recovery from the problems that it encountered during the
1974-75 recession. Seven banks failed during the year, fewer then
half the 1975—76 average, and the number of problem banks continued to decline. The continuation of the economic expansion that
began in 1975 made a major contribution to this improvement by its
favorable impact on the financial condition of many borrowers and
the consequent reduction in problem loans of most banks.
At the end of 1978 the banking system was in good condition.
Nevertheless, as banks entered 1979 they faced significant challenges.
These included a likely slowdown in the economy, particularly in
housing, a high rate of inflation with its consequent distortions, an
intensified competitive environment, and a need to arrest the decline
in bank capital ratios and bank liquidity.
TRENDS IN INDEXES OF BANK SOUNDNESS
Appraisals of the condition of the banking system are typically based
on an analysis of trends in the major indexes of bank soundness:
asset quality, capital, liquidity, and earnings.
Asset Quality
Between 1973 and 1976 the classified assets of member banks almost
quadrupled, rising from $9 billion to $35 billion.1 During 1977,
however, asset quality improved, and classified assets declined more
than 11 per cent to $31 billion. Moreover, the amount of assets
classified as "doubtful" and "loss"—the two most serious classifications—fell about 20 per cent. This trend continued in 1978. For
example, at midyear nonperforming assets were 12.2 per cent below
their level at the end of 1977, according to a recent analysis of
the nonperforming assets of slightly more than 100 large banking organizations. The ratio of such assets to loans was down
to 2.6 per cent at midyear 1978, compared with 3.2 per cent,
1
Classified assets are loans or securities that have been identified by bank examiners as
having significant potential for loss.
370
Condition of the Banking System
4.5 per cent, and 4.3 per cent at the end of 1977, 1976, and 1975,
respectively.
Real estate loans, particularly construction loans and loans
to real estate investment trusts, remain the major problem in bank
loan portfolios. Most of these problem loans were made during the
real estate boom of the early 1970's, when far more projects were
undertaken than the market could digest. In the last several years
real estate markets have improved significantly, as has the financial
condition of many real estate borrowers. As a result, some problem
loans have been repaid, and banks have been able to liquidate at
more favorable prices property acquired in foreclosure.
Capital
In the several decades ending in 1975, bank capital ratios had declined almost steadily, a trend that had accelerated as a consequence
of the rapid bank growth of the early 1970's. With the marked slowing of bank growth during 1975-76, capital ratios improved significantly. In 1977 and 1978, however, capital ratios resumed their
secular decline as a result of relatively rapid asset growth—on average, about 13 per cent per year. In June 1978 the aggregate ratio of
equity capital to total assets for banks stood at 5.96 per cent, compared with 6.11 per cent at the end of 1976.
In recent years banks have been building up their equity capital
at a fairly steady annual rate of about 10 per cent. They have relied
principally on retained earnings for these additions to capital and
are now retaining about two-thirds of their earnings. Because prices
of bank stocks have been depressed since 1974, banks have largely
avoided new equity issues. At present, the stock prices of most of the
major banking organizations are hovering between five and seven
times earnings, and many stocks are selling below book value. Discussions with banks and investment bankers indicate, however, that
many banking organizations desire to come in to the equity market
whenever bank stock prices improve.
Liquidity
After having run their liquidity down sharply during the rapid growth
of the early 1970's, banks considerably restored their liquidity positions during 1975-76. The decline was resumed in 1977, how-
Condition of the Banking System
371
ever, and accelerated last year. For example, between mid-1977 and
mid-1978 bank holdings of U.S. Treasury and agency securities with
a maturity of less than 1 year fell from $45 billion to $36 billion.
Meanwhile, on the other side of the balance sheet, volatile liabilities
of banks increased sharply. Time deposits exceeding $100,000 rose
from $136 billion to $180 billion, and Federal funds purchased rose
from $76 billion to $90 billion.
Earnings
During the last 2 years, bank earnings have been unusually strong.
In 1977 earnings of insured banks rose more than 13 per cent. Moreover, current estimates suggest that earnings for 1978 were approximately 25 per cent ahead of 1977, which would be the largest gain
in several decades.
A primary reason for the unusually strong earnings performance
in 1978 was the rapid growth of bank assets and loans, which were
up an estimated 14 per cent and 16 per cent, respectively. A second
factor was a slight improvement in net interest margins because of a
rise in the general level of interest rates, fewer nonaccruing loans, and
a shift in portfolios toward higher-yielding assets.2 The improvement
in net interest margins in 1978 was greater at the large regional banks
than at the money center banks. It is worth noting that loan-loss
provisions did not have a positive effect on bank earnings in 1978
as they did in 1977. Actually, responding to rapid loan growth, banks
began to increase their loan-loss provisions in 1978 (even though
charge-offs were still declining) in order to maintain their ratios of
valuation reserves to loans.
INTERNATIONAL ACTIVITIES
While data for the end of 1978 are not yet available, the growth
in foreign assets held by U.S. banks in 1978 apparently was below
the 17 per cent growth rate in 1977 and an even higher rate of growth
in the previous year. Factors contributing to the slower rate were
an increase in loan demand in the United States and declining spreads
on Euro-currency credits.
In spite of slower asset growth and lower spreads on some new
2
A bank's net interest margin is equal to the difference between the interest earned and
the interest paid by the bank divided by the bank's average earning assets.
372
Condition of the Banking System
business, international earnings in 1978 appear to have remained
strong, and international earnings continue to account for a substantial part of the total earnings of the largest U.S. banks. Loan-loss
experience on international credits also remained good.
Most foreign countries in which U.S. banks make loans improved their economic performance and balance of payments in 1978.
However, several of these countries continued to experience serious
economic and financial problems and to have difficulty servicing their
external debt promptly. In the past, actual default by countries on
external debt has been rare. Assuming a continuation of past trends,
the risk to banks from the failure of countries to service their external
borrowings on schedule would be a temporary reduction in liquidity
and lower income rather than loan charge-offs.
SUPERVISORY IMPROVEMENTS
During 1978 the Federal Reserve took new steps and continued past
initiatives to improve its policies and procedures for supervising State
member banks and bank holding companies. Some of these changes
resulted from problems that had become evident in recent years.
Others represented efforts to anticipate banking problems and to enable
the Federal Reserve to respond quickly as circumstances change. Two
key underlying objectives have been to enhance the effectiveness and
efficiency of the supervisory process and, in cooperation with other
Federal banking agencies and the Interagency Coordinating Committee, to ensure uniform treatment of significant banking practices.
Last year the Federal Reserve and the other banking agencies developed a new examination system for dealing with country risks in
international lending by banks. Under this system, to be implemented
in 1979, concentrations of credit that might have a significant impact on a bank's condition in the event of problems in a particular
country will get special attention. The year also saw a continuation
of efforts to increase cooperation among central banks and the regulatory authorities of the major countries.
During 1978 the Federal Reserve put into practice an expanded
program for inspecting bank holding companies. The program calls
for a standardized report form for use in examining, on an annual
basis, most holding companies with consolidated assets in excess of
$300 million. This initiative has served to focus attention on nonbank
assets, holding company debt, and the financial condition of the con-
Condition of the Banking System
373
solidated corporation. To further enhance the supervision of holding
companies, a framework is being developed for evaluating and rating
the performance and financial condition of bank holding companies.
In conjunction with the inspection program, the rating system will
ensure that institutions are reviewed on a timely basis and that supervisory resources are directed to those companies most in need of
supervisory attention.
In the interests of uniformity in the supervision of commercial
banks, the Federal Reserve and the other two Federal banking agencies have adopted a new uniform bank-rating system. The system
will expand the number of financial factors considered in rating
banks, set forth the principal relationships that must be analyzed, and
identify more precisely those banks with significant operating or financial difficulties. The Federal regulatory agencies have also adopted
uniform systems and procedures for evaluating trust departments and
electronic data-processing centers and for appraising the audit and
control functions of commercial banks.
The Federal Reserve reinforced these strengthened supervisory
programs during 1978 with continued emphasis upon examiner training. In addition, the Federal Reserve has continued to treat examiners as specialists in fields such as consumer compliance and international banking. Moreover, significant resources have been allocated
to the development of examination procedures and staffs to ensure
compliance with the Community Reinvestment Act. In addition, a
standardized report form for use in examining Edge corporations has
been developed as a means for ascertaining the impact of the international operations of Edge subsidiaries on the parent bank. Finally,
the Federal Reserve has maintained its efforts to improve surveillance
and data collection, and to reduce the reporting burden by streamlining the process.
CONCLUSION
The financial condition of the banking system has improved significantly in the last several years, and the system was in good condition
at year-end 1978. During 1978 the quality of bank portfolios continued to improve and banks experienced their fastest earnings growth
in many years, although bank capital ratios and bank liquidity declined.
At the end of 1978 it appeared likely that banks would have to
374
Condition of the Banking System
operate in 1979 in an economy marked by higher inflation and slower
growth than was true of the previous several years. If expectations
are borne out, this development will come at a time when banks still
have a relatively high, though declining, level of problem loans.
Further, the competitive environment in which banks operate is
becoming steadily more rigorous. First, domestic banks are expanding
their entry into each other's markets in a variety of activities. Second,
foreign banks are steadily increasing their presence in the U.S.
market, and are competing more and more aggressively in foreign
markets in which American banks have played a major role. Finally,
the new powers of thrift institutions are blurring the distinctions between them and banks and consequently making them more formidable competitors.
375
Regulatory Improvement Project
PROJECT PLAN
In June 1978 the Board of Governors formally adopted a plan to
improve all Federal Reserve regulations and rulemaking procedures,
including its internal rules and procedures. The scope of the Regulatory Improvement Project is broad and encompasses a number of
separate but related phases, each with assignments and deadlines
designed to produce the desired result by early 1980.
Phase I focuses on (1) improving the organizational scheme and
framework of the regulations, and (2) broadening access to Board
regulatory materials by creating a new, publicly distributed regulatory service that will contain all formal regulations, underlying
statutes, published and unpublished Board interpretations, previously uncirculated Board and staff rulings and opinions, and other
regulatory materials.
Phase II involves a substantive zero-base review of each Federal
Reserve regulation to determine (1) fundamental objectives and the
extent to which the regulation is meeting current policy goals, (2)
costs and benefits of the regulation, (3) any unnecessary burdens
imposed by the regulation that could be eliminated, (4) clarity and
readability of the regulation, and (5) nonregulatory alternatives that
would accomplish the same objectives.
Another phase of the project focuses on improving the Board's
Rules of Procedure and the quality of its regulations, and enhancing public participation in and understanding of the regulatory
process, in compliance with the spirit and intent of Executive Order
12044 (Improving Government Regulations).
The final phase contemplates creation of a system that will preserve the integrity of the improved regulatory structure and content
and the adoption of procedures for reviewing each regulation at
least once every 5 years.
IMPLEMENTATION
Each Federal Reserve Bank is actively involved in the Regulatory
Improvement Project and has accepted responsibility for one or
376
Regulatory Improvement Project
more regulations, sometimes in conjunction with another Bank or
with the Board's staff. Guidelines have been established for analysis
of the regulations, development of policy issues warranting review
by the Board, and drafting of the regulations.
Reports on each regulation usually are prepared by the staff of
a Reserve Bank and are accompanied by comments of the Board's
staff. These reports and comments are reviewed by committees made
up of Board members. The staff proposals, modified as necessary,
are then sent to the Board of Governors for review and approval.
Once the Board approves the proposals, any contemplated regulatory changes ordinarily are sent out for public comments. After
consideration of the comments and any modification of the proposals, final rules may be adopted.
ACCOMPLISHMENTS
Considerable work on various phases of the Regulatory Improvement Project has been completed since June 1978.
The main issues involved in Phase I of the project were resolved
in December 1978. An Options Paper concerning changes to the
structure and format of regulations, interpretations, orders, and
other regulatory documents was distributed to Federal Reserve
Banks and outside users for their comments. Project staff analyzed
the responses and prepared a report on recommendations and detailed procedures for organizing regulatory materials, which was
approved by the Board. The Phase I proposal for a new, publicly
distributed regulatory service was also approved by the Board.
The regulatory service, to be published in early 1980, will make
publicly available a wide range of regulatory materials, including
regulations, previously unpublished interpretations, rulings, and other
documents along the lines recommended in the Phase I report.
Work on Phase II also progressed rapidly in 1978. The majority
of the reports received from 10 Reserve Banks, together with comments of the Board's staff, were reviewed by appropriate Board
committees. In addition, the full Board issued revised versions of
Regulations O (Loans to Executive Officers) and V (Loan Guarantees for Defense Production) for comment, and completed the
review of Regulations C (Home Mortgage Disclosure) and E (Warrants), in the last case rescinding the regulation. Proposals regard-
Regulatory Improvement Project
377
ing several other regulations are in advanced stages of development.
Another part of the project was completed in early 1979, when
the Board adopted a Statement of Policy Regarding Expanded
Rulemaking Procedures. The Board's policy is to improve the quality
and minimize the burdens of its regulations by encouraging maximum
public participation in their development, by carefully considering
an analysis of proposals before they are published for comment, and
by informing the public of the reasons for the Board's regulatory
actions. The new procedures will apply to all major regulatory
proposals, except for those in which speed is necessary or beneficial to the public, such as when regulations or amendments are
adopted to implement monetary policy, to relieve undue regulatory
burdens, or to meet statutory deadlines.
Finally, preliminary planning for the final phase—creating a system for the future review of regulations—was begun, and additional
review procedures for the drafting of regulations were recommended.
378
Federal Reserve Banks
PAYMENTS MECHANISM DEVELOPMENTS
In 1978 the Federal Reserve successfully linked together the 36 automated clearing houses (ACH's) into a nationwide network. This action, along with operational improvements planned for 1979, will
substantially increase the attractiveness of the ACH as an alternative
to the check-clearing system. During 1978 retirement payments of
the Navy Department and the Central Intelligence Agency were
added to the Direct Deposit of Federal Recurring Payments Program,
increasing the activity in that program to 104.5 million items, a gain
of 25 per cent over 1977. At the end of 1978, the Treasury Department began to test the feasibility of paying salaries to Federal employees through ACH's.
During 1978 the 48 Federal Reserve offices that process checks
handled more than 14.1 billion items, an increase of 6 per cent over
the previous year.
The Treasury Check Truncation Program, a new procedure to expedite reconciliation of U.S. Treasury checks by the Treasury Department, was implemented during the year. Treasury checks received
for payment by the Federal Reserve Banks are microfilmed, and the
data required by the Treasury Department to reconcile its accounts
are put on magnetic tape. The magnetic tape and microfilm are then
sent to the Treasury in order to speed the processing of inquiries from
check recipients and to avoid the issuance of duplicate checks.
In November 1978 the Board sent to the Congress a preliminary
schedule of prices for Federal Reserve check collection and for ACH
services as part of a comprehensive plan to promote greater competitive equality among financial institutions. Pricing may be implemented
when steps have been taken to alleviate the burden of membership
in the Federal Reserve System.
EXAMINATION
The Board's Division of Federal Reserve Bank Examinations and
Budgets examined the 12 Federal Reserve Banks and their 25
Federal Reserve Banks
379
branches during 1978, as required by Section 21 of the Federal Reserve Act.
In conjunction with the examination of the Federal Reserve Bank
of New York, the Board's examiners audited the accounts and holdings related to the System Open Market Account and the foreign
currency operations conducted by that Bank in accordance with
policies formulated by the Federal Open Market Committee, and
furnished copies of these reports to the Committee. The procedures
followed by the Board's examiners were surveyed and appraised by a
private firm of certified public accountants, pursuant to the policy of
having such reviews made on an annual basis.
EARNINGS AND EXPENSES
The accompanying table summarizes the earnings, expenses, and distribution of net earnings of the Federal Reserve Banks for 1978 and
1977.
Current earnings of $8,455 million in 1978 were 23 per cent higher
than in 1977. The principal changes in earnings were increases
of $1,546 million on U.S. Government securities and $40 million on
loans, and a decrease of $25 million on all other earnings.
Current expenses were $653 million, or 4.6 per cent more than in
1977. Assessment for expenditures of the Board of Governors
amounted to $53 million.
The profit and loss account showed a $633 million net deduction,
primarily because of net losses of $130 million on sales of U.S. Government securities and of $506 million on foreign exchange operations. The loss on foreign exchange operations includes realized losses
of $297 million and unrealized losses of $209 million resulting from
the revaluation of foreign exchange holdings and outstanding commitments at current exchange rates. Of these amounts, $264 million
and $150 million, respectively, reflect realized and unrealized losses
associated with Swiss franc commitments entered into before August
15, 1971. The total unrealized net loss was calculated in accordance
with generally accepted accounting principles (Financial Accounting
Standards Board Statement No. 8), using market exchange rates of
December 29, 1978. Previously, foreign exchange holdings and outstanding commitments were valued at historical rates.
380
Federal Reserve Banks
Statutory dividends to member banks totaled $63 million, $3 million more than in 1977. This rise reflected an increase in the capital
and surplus of member banks and a consequent increase in the
paid-in capital stock of the Federal Reserve Banks.
Payments to the Treasury as interest on Federal Reserve notes
totaled $7,006 million, compared with $5,937 million in 1977. This
sum consists of all net earnings after dividends and the amount
necessary to bring surplus to the level of paid-in capital.
Earnings, Expenses, and Distribution of Net Earnings
of Federal Reserve Banks, 1978 and 1977
Thousands of dollars
Ftem
Current earnings
Current expenses
Current net earnings
Net deduction from current net earnings
Assessment for expenditures of Board of Governors .
Net earnings before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal Reserve notes)
Transferred to surplus
1978
1977
8,455,390
652,617
7,802,773
633,123
53,322
7,116,328
63,280
6,891,318
623,860
6,267,458
177,034
47,366
6,043,058
60,182
7,005,780
47,268
5,937,148
45,728
A detailed statement of earnings and expenses of each Federal Reserve Bank during 1978 is shown in Table 6 and a condensed historical statement in Table 7, in the Statistical Tables section of this
REPORT. A detailed statement of assessments and expenditures of
the Board of Governors appears in the section "Federal Reserve
Directories and Meetings."
FEDERAL RESERVE BANK PREMISES
During 1978 the Board of Governors authorized construction of a new
building for the Miami Branch. The Federal Reserve Bank of Richmond occupied its new quarters, and the vacated building and property were sold. With approval of the Board, property adjacent to the
New Orleans Branch was acquired for future expansion.
Table 8 in the Statistical Tables section of this REPORT shows the
cost and book value of bank premises owned and occupied by the
Federal Reserve Banks
381
Federal Reserve Banks and of real estate acquired for banking-house
purposes.
HOLDINGS OF LOANS AND SECURITIES
The accompanying table shows holdings, earnings, and average interest rates on loans and securities of the Federal Reserve Banks during the past 3 years.
Average daily holdings of loans and securities during 1978
amounted to $115,291 million, an increase of $10,587 million over
1977. Holdings of U.S. Government securities increased $10,208 million, loans increased $411 million, and acceptances decreased $32
million.
The average rates of interest on holdings increased from 6.56 per
cent to 7.33 per cent on U.S. Government securities, from 5.68 to
7.58 per cent on loans, and from 5.27 to 7.85 per cent on acceptances.
Loans and Securities of Reserve Banks, 1976-78
Total
Item and year
U.S. Govt.
securities 1
Loans
Acceptances
Millions of do liars
Average daily holdings 2
1976
1977
1978
Earnings
1976
1977 ..
1978
. ..
. ..
97,523
f 104,704
115,291
6,528.2
6,859.0
8,449.0
96,834
104,002
114,210
6,487.8
6,820.1
8,366.5
85
465
876
4.8
26.4
66.4
604
237
205
35.6
12.5
16.1
Per cent
Average rate of interest
1976
1977
1978
6.69
6.55
7.33
6.70
6.56
7.33
5 65
5.68
7.58
5 89
5.27
7.85
'Revised.
Includes Federal Agency obligations.
Based on holdings at opening of business.
1
2
LOAN GUARANTEES FOR DEFENSE PRODUCTION
Under the Defense Production Act of 1950, the Departments of the
Army, Navy, and Air Force; the Defense Logistics Agency of the
382
Federal Reserve Banks
Department of Defense; the Departments of Commerce, Interior,
Agriculture, and Energy; the General Services Administration; the
National Aeronautics and Space Administration; and the Nuclear
Regulatory Commission are authorized to guarantee loans for defense production that are made by commercial banks and other
private financing institutions. The Federal Reserve Banks act as fiscal
agents of the guaranteeing agencies under the Board's Regulation V.
During 1978 the guaranteeing agencies did not authorize the
issuance of any new guarantee agreements. Loan authorizations outstanding on December 31, 1978, totaled $2.9 million, all of which
represented outstanding loans. Of total loans outstanding, less than 1
per cent on the average was guaranteed. During the year, no amounts
were disbursed on the guaranteed loans.
Authority for the V-loan program will terminate on September 30,
1979.
Table 16 in the Statistical Tables section of this REPORT shows
guarantee fees and maximum interest rates applicable to Regulation
V loans.
VOLUME AND COST OF OPERATIONS
Table 9 in the Statistical Tables section of this REPORT shows the
volume of operations in the principal departments of the Federal Reserve Banks for 1975-78, and Table 10 shows the cost of the larger
operations of the Reserve Banks.
The Reserve Banks handled greater volume in 1978 than in 1977.
The number of transfers of funds increased 16.6 per cent to 28.7
million, involving $50.5 trillion. The number of checks processed
rose 5.5 per cent to 14.8 billion; the dollar amount rose to $7.6 trillion. Other significant volume increases were experienced in loans
and in currency and coin.
383
Board of Governors
FINANCIAL STATEMENTS
The accounts of the Board for the year 1978 were audited by Arthur
Andersen & Co., independent public accountants.
AUDITORS' REPORT
Board of Governors of the
Federal Reserve System
Washington, D.C.
We have examined the balance sheet of the Board of Governors of
the Federal Reserve System as of December 31, 1978, and the related
statements of assessments and expenses and changes in financial position
for the year then ended. Our examination was made in accordance with
generally accepted auditing standards and, accordingly, included such tests
of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The financial statements of the
Board of Governors of the Federal Reserve System for the year ended
December 31, 1977, were examined by other auditors whose report
dated February 10, 1978, expressed an unqualified opinion on those
statements.
In our opinion, the accompanying financial statements present fairly
the financial position of the Board of Governors of the Federal Reserve
System as of December 31, 1978, and the results of its operations and
the changes in its financial position for the year then ended, in conformity
with generally accepted accounting principles applied on a basis consistent
with that of the preceding year.
Arthur Andersen & Co.
1666 K Street, N.W.
Washington, D.C.
February 9, 1979
384
Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
December 31
ASSETS
1978
1977
$4,797,310
360,095
$4,897,185
847,867
155,543
5,312,948
168,368
5,913,420
1,299,884
59,223,136
6,753,431
3,476,832
—
70,753,283
$76,066,231
1,255,864
49,860,720
4,479,586
3,342,122
4,834,267
63,772,559
$69,685,979
$ 2,872,392
1,562,912
4,435,304
$ 2,393,968
1,330,114
3,724,082
OPERATING FUND:
Cash
Miscellaneous receivables and advances
Stockroom and cafeteria inventories, at lower of cost
(first-in, first-out) or market
Total operating fund
PROPERTY FUND, at cost (Notes 1 and 4):
Land and improvements
Buildings
Furniture and equipment
Computer equipment
Construction-in-progress
Total property fund
LIABILITIES AND FUND BALANCES
OPERATING FUND:
Liabilities—
Accounts payable
Accrued payroll and related taxes
Commitments and contingencies (Notes 1, 2, and 4)
Fund balance (Note 1)—
Balance, beginning of year
Expenses in excess of assessments
Balance, end of year
Total operating fund
PROPERTY FUND (Note
2,189,338
(1,311,694)
877,644
5,312,948
2,234,625
(45,287)
2,189,338
5,913,420
63,772,559
8,688,619
(1,707,895)
70,753,283
$76,066,231
60,377,404
7,556,266
(4,161,111)
63,772,559
$69,685,979
1):
Fund balance—
Balance, beginning of year
Additions—at cost
Disposals—at cost
Total property fund
The accompanying notes are an integral part of this balance sheet.
Financial Statements
385
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF ASSESSMENTS AND EXPENSES
Year ended December 31
1978
1977
ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS (Note 1):
For Board expenses and property additions
For expenditures made on behalf of the Federal Reserve
Banks for printing, issuance and redemption of Federal
Reserve notes
Total assessments
$ 53,321,700
$47,366,100
60,454,967
50,543,541
113,776,667
97,909,641
31,212,936
6,313,145
1,174,888
564,501
492,689
1,117,575
1,687,813
683,049
415,660
405,986
877,116
305,653
424,402
130,318
227,395
29,021,842
5,383,462
1,040,702
607,008
613,700
1,088,676
1,670,001
789,649
371,930
380,739
836,954
271,714
372,398
119,764
188,179
46,033,126
42,756,718
EXPENSES (Note 1):
Board expenses—
Salaries
Retirement and insurance contributions (Note 3)
Travel expenses
Professional fees
Contractual services
Printing and binding, net
Equipment, office space and other rentals (Note 2) . . .
Telephone and telegraph
Postage
Stationery, office and other supplies
Heat, light, and power
Cafeteria operations, net
Repairs and maintenance
Books and subscriptions
Miscellaneous
Board property additions, net of recoveries on disposals
of $88,351 in 1978 and $2,901,597 in 1977 (Note 1)
Expenditures for printing, issuance and redemption of
Federal Reserve notes on behalf of the Federal Reserve
Banks (Note 1)
Total expenses
EXPENSES IN EXCESS OF ASSESSMENTS
8,600,268
4,654,669
54,633,394
47,411,387
60,454,967
50,543,541
115,088,361
97,954,928
$ (1,311,694)
The accompanying notes are an integral part of this statement.
$
(45,287
386
Financial Statements
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF CHANGES IN FINANCIAL POSITION
Year ended December 31,
1978
1977
SOURCES OF FUNDS:
Assessments levied for Board expenses and property
additions
Assessments levied for expenditures made on behalf of
the Federal Reserve Banks
Recoveries from disposals of property
Decrease (increase) in miscellaneous receivables, advances and inventories
Increase in liabilities
Total sources
$ 53,321,700
$ 47,366,100
60,454,967
88,351
50,543,541
2,901,597
500,597
711,222
115,076,837
(500,067)
1,275,638
101,586,809
46,033,126
42,756,718
60,454,967
50,543,541
88,970
6,511,319
1,953,620
134,710
111,029
158,826
224,279
3,052,800
4,009,332
7,556,266
100,856,525
730,284
4,166,901
$ 4,897,185
APPLICATIONS OF FUNDS:
Board expenses
Expenditures for printing, issuance and redemption of
Federal Reserve notes on behalf of the Federal Reserve
Banks
Additions to property—
Land and improvements
Buildings
Furniture and equipment
Computer
Construction-in-progress
Total applications
INCREASE (DECREASE) IN CASH
CASH BALANCE, beginning of year
CASH BALANCE, end
of year
8,688,619
115,176,712
(99,875)
4,897,185
$ 4,797,310
The accompanying notes are an integral part of this statement.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1978 AND 1977
(1)
SIGNIFICANT ACCOUNTING POLICIES
In preparing its financial statements, the Board has applied accounting principles which,
in its opinion, best reflect its financial position and results of operations. These accounting
principles include certain principles which are generally accepted for organizations in the
private sector and also certain principles which are generally accepted for governmental
units. A summary of significant accounting policies is shown below.
Accounting for Assessments, Board Expenses and Property Additions—Assessments made
by the Board on the Federal Reserve Banks for Board expenses and additions to property
are calculated based upon expected cash needs and are accrued when assessed. Board
expenses and property additions are recorded on the accrual basis of accounting.
Accounting for Assessments and Expenditures Made on Behalf of the Federal Reserve
Banks—Assessments and expenditures made on behalf of the Federal Reserve Banks for
the printing, issuance, and redemption of Federal Reserve notes are recorded on the cash
basis. This treatment produces results which are not materially different from those which
would have been produced using the accrual basis of accounting.
Financial Statements
387
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS—CONTINUED
YEARS ENDED DECEMBER 31, 1978 AND 1977
Accounting for Property—The Board does not charge depreciation as an operating
expense. Property additions are charged to expense in the Operating Fund in the year
of acquisition; recoveries on the disposal of property are recorded as a reduction of
expense in the Operating Fund in the year of disposal. When property is acquired or sold,
the property accounts in the Property Fund are increased or reduced at cost, with a
corresponding increase or decrease in the Property Fund balance.
Accounting for Employee Annual Leave—The Board does not accrue for salary expense
related to employee annual leave that has been earned and would be paid if not taken
prior to termination of employment. As of December 31, 1978, vested employee annual
leave is approximately $1,830,000.
(2)
LEASES
The Board leases office and computer equipment and office and storage space under
leases, which may generally be terminated within one year. At December 31, 1978, fixed
future rental commitments are $495,000 for 1979.
(3)
RETIREMENT PLANS
There are two major retirement programs for employees of the Board. Approximately
86 per cent of the employees are covered by the Federal Reserve Board Plan. All new
members of the staff who do not come directly from a position in the government are
covered by this Plan. The second Plan, the Civil Service Retirement Plan, covers all new
employees who come directly from government service. Employee contributions are the
same percentage of salary under both Plans, and benefits are similar, being based upon the
Civil Service Plan.
Under the Civil Service Plan, Board contributions match employee payroll deductions
while under the Federal Reserve Board Plan, Board contributions are actuarially determined.
Additionally, employees of the Board participate in the Federal Reserve System's Thrift
Plan. Under this Plan, the Board adds a fixed percentage to allowable employee savings.
Board contributions to all retirement plans totaled approximately $5,691,000 in 1978 and
$4,798,000 in 1977.
(4)
CONTINGENT LIABILITIES
The Board has been named as a defendant in litigation involving challenges to, or appeals
from, actions or proposed actions of the Board pursuant to statutory requirement or
authorization. Such lawsuits generally seek injunctive or declaratory relief against the
Board rather than monetary awards. It is the opinion of Board counsel that lawsuits
involving monetary awards do not represent a material liability to the Board.
The Board does not maintain insurance against loss of its buildings and furniture and
equipment from fire or other casualties or employee fidelity bonding. Coverage for other
customarily insured risks, such as worker's compensation insurance, builders risk and
comprehensive general liability insurance, is carried by the Board.
Statistical Tables
390
Tables
1. Detailed Statement of Condition of All Federal Reserve
Banks Combined, December 31, 1978
Thousands of dollars
ASSETS
Gold certificates on hand
Gold certificates due from U.S. Treasury
1,278
11,669,796
Total gold certificate account
Special Drawing Rights certificate account
Coin
,
Loans to member banks, by type of security
U.S. Government and agency obligations
Other eligible paper
Other paper, Sec. 10(b)
11,671,074
1,300,000
273,667
701,090
210,217
262,712
1,174,019
Loans to others
Total loans
Acceptances
Bought outright
Held under repurchase agreement
Federal agency obligations
Bought outright
Held under repurchase agreement
U.S. Government securities
Bought outright
Bills
Notes
Bonds
1,174,019
587,128
7,895,553
133,000
42,158,660
54,854,949
12,464,780
Total bought outright
Held under repurchase agreement
Total U.S. Government securities
109,478,389
1,083,900
110,562,289
Total loans and securities
Cash items in process of collection
Transit items
Exchanges for clearing house
Other cash items
Total cash items in process of collection
Bank premises
Land
Buildjngs (including vaults)
Building machinery and equipment
Construction account
Total bank premises
Less depreciation allowances
Bank premises, net
Other assets
Furniture and equipment
Less depreciation
Total furniture and equipment, net
Denominated in foreign currencies 1
Interest accrued
Premium on securities
Real estate acquired for banking-house purposes
Suspense account
Overdrafts
All other
120,351,989
12,799,471
275,733
2,009,285
15,084,489
199,754
99,330
166,791
465,875
140,003
66,783
325,872
392,655
84,311
18,350
65,961
1,605,611
1,573,366
123,563
38,623
606,087
19,801
115,596
Total other assets
4,148,608
TOTAL ASSETS
153,222,482
Tables
391
1.—Continued
LIABILITIES
Federal Reserve notes
Outstanding (issued to Federal Reserve Banks)
Less held by Federal Reserve Banks
Total Federal Reserve notes, net
Deposits
Member bank reserves
U.S. Treasury—General account
Foreign
Other deposits
Nonmember bank—Clearing accounts
Officers' and certified checks
Reserves of corporations doing foreign banking or
financing
International organizations
Secretary of Treasury special account
All other
112,836,414
9,508,930
103,327,484
31,223,365
4,196,307
367,536
1,444
19,370
340,491
336,920
29,161
528,822
Total other deposits
1,256,208
Total deposits
Deferred availability cash items
Other liabilities
Exchange-translation account 2
Unearned discount
Discount on securities
Sundry items payable
Suspense account
All other
37,043,416
8,578,921
278,954
318
1,593,998
17,450
226,769
2,632
Total other liabilities
2,120,121
TOTAL LIABILITIES
151,069,942
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
8
TOTAL LIABILITIES AND CAPITAL ACCOUNTS
1,076,270
1,076,270
153,222,482
1 Valued at market exchange rates of Dec. 29, 1978.
2
Of this amount, $150 million reflects revaluation of Swiss franc commitments entered into before
Aug. 15, 1971.
* During the year, this item includes the net earnings, expenses, profit and loss items, and accrued
dividends, which are closed out on Dec. 31: see Table 6 in the Statistical Tables section of this REPORT.
NOTE. Amounts in boldface type indicate items in the Board's weekly statement of condition of
the Federal Reserve Banks.
CO
VO
2. Statement of Condition of Each Federal Reserve Bank, December 31, 1978 and 1977
Millions of dollars
Total
Item
New York
Boston
1978
1977
11,671
1,300
274
11,718
1,250
282
760
67
17
Loans
Secured by U.S. Government and agency
obligations
Other
717
455
226
40
30
Acceptances
Bought outright
Held under repurchase agreement
587
954
Federal agency obligations
Bought outright. .
Field under repurchase agreement
7,896
133
8,004
451
367
U.S. Government securities
Bought outright 1
Held under repurchase agreement
109,478
1,084
100,918
1,901
Total loans and securities
120,350
Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies 2
All other
15,084
394
1977
Philadelphia
Cleveland
Richmond
1978
1977
541
62
17
3,206
330
21
3,492
313
18
598
69
15
631
74
13
921
112
33
934
107
40
974
116
23
982
113
28
10
80
231
103
68
10
11
4
31
2
24
24
13
587
954
374
1,921
133
1,889
451
395
427
657
670
647
655
5,095
4,715
26,632
1,084
23,819
1,901
5,483
5,384
9,111
8,448
8,965
8 250
112,494
5,492
5,099
30,668
29,117
5,956
5,826
9,799
9,120
9,660
8 918
11,542
378
566
106
335
106
1,360
10
1,450
9
631
55
342
56
808
23
461
23
2,432
80
1 866
72
1,606
2,543
18
2,046
50
104
1
94
416
624
4
489
69
168
1
104
136
162
1
138
87
183
1
155
-525
-23
+854
153,222
139,728
6,637
6,232
37,489
1978
1978
1977
1978
1977
1978
1977
ASSETS
Gold certificate account
Special Drawing Rights certificate account..
Coin .
Interdistrict Settlement Account
TOTAL ASSETS
-1,313
33,579
-637
-389
-438
6,924
6,658
11,556
-42
10,782
-262
+ 247
13,293
12,382
LIABILITIES
Federal Reserve notes
Deposits
Member bank reserves
U.S. Treasury—General account
Foreign
All other
.
.
....
Total deposits
Deferred-availability cash items
Other liabilities and accrued d i v i d e n d s . . . .
. .
TOTAL LIABILITIES
103, 3^5
9 3 , 153
5,308
4 ,761
26, 335
73 ,678
5 198
4 936
8 551
7 987
9, 749
8 379
31
4 , 196
368
1, 256
26 709
7, 114
379
1, 187
666
222
6
23
642
428
10
23
6 884
1 033
717
815
5 ,784
1 399
174
688
1, 081
708
9
21
891
457
17
34
1 ,798
388
17
36
1 650
451
24
43
1, 781
748
11
53
534
598
15
57
37, 043
35, 389
917
1 ,103
8 949
8 ,045
1, 319
1, 389
2 ,239
2 ,168
2, 093
2, 704
8 579
7, 894
270
249
920
991
?34
183
446
361
1, 680
1 675
2 119
1, 234
76
55
725
331
85
62
136
92
157
114
151 066
137, 670
6,571
6 ,168
36 929
33 ,045
6, 836
6 570
11 ,377
10 608
13, 179
17, 277
1 078
1 078
1, 0^9
1, 029
33
33
32
32
280
280
267
267
44
44
44
44
9?
92
87
87
57
57
55
55
153 222
139, 728
6,637
6 ,232
37 489
33 ,579
6, 924
6 658
11 ,556
10 ,782
13, 293
12, 387
112 836
100, 534
6,068
4 ,977
28 269
25 ,038
6, 165
5 , 383
9 ,077
8 ,360
9 , 925
8, 897
9 511
7, 381
760
216
1 934
1 ,360
967
447
526
373
676
568
103 325
93 153
5,308
4 ,761
26 335
23 ,678
5 198
4 936
8 ,551
7 ,987
9 249
8, 329
11 671
1 300
11 713
880
760
3 491
313
598
631
971
933
974
107
987
109
7 ,500
116
44
8 791
7 950
8 ,540
9 925
9 041
CAPITAL ACCOUNTS
Capital paid i n . . . .
Surplus
Other capital accounts
...
TOTAL LIABILITIES AND CAPITAL
ACCOUNTS
. . .
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes
Issued to Federal Reserve Bank by Federal Reserve Agent and outstanding
Less held by issuing Bank, and forwarded for
redemption
Federal Reserve notes, net
3
Collateral held by Federal Reserve Agent for notes
issued to Bank
Gold certificate account
Special Drawing Rights certificate account.. . .
Eligible paper
..
U.S. Government securities
TOTAL COLLATERAL
For notes see end of table.
98 958
89 675
67
30
* 5,211
112 ,836
102 268
6,068
907
541
62
3 706
4 ,400
24 558
21 ,550
5 427
4 800
112
31
8 ,013
5 ,003
28 ,269
25 ,354
6 165
5 431
9 ,077
330
175
69
71
4
2. Statement of Condition of Each Federal Reserve Bank, December 31, 1978 and 1977—Continued
Millions of dollars
Atlanta
Item
1978
Chicago
1977
St. Louis
1978
1977
1978
Minneapolis
1977
1978
Kansas City
1977
1978
Dallas
1977
1978
San Francisco
1977
1978
1977
ASSETS
Gold certificate account..
Special Drawing Rights certificate account....
Coin
518
51
32
560
64
28
1,763
215
14
1,736
198
24
466
55
22
469
53
20
231
28
11
225
25
9
425
48
38
393
44
43
509
57
17
456
48
12
1,300
152
31
1,299
149
30
Loans
Secured by U.S. Government and agency
obligations
Other
104
50
59
8
40
2
32
30
7
8
2
1
7
20
15
11
1
46
47
23
1
215
38
5
25
357
395
1,259
1,282
322
340
190
196
324
321
410
400
1 047
1 055
4,952
4,982
17,460
16,166
4,470
4,283
2,627
2,471
4,486
4,049
5 683
5 046
14 514
13 305
5,463
5,384
18,786
17,490
4,854
4,630
2,827
2,668
4,845
4,382
6,186
5,470
15,814
14,390
1,879
22
120
190
1,127
14
1,630
16
1,367
16
583
13
565
13
802
29
573
30
1,292
19
924
18
1,066
12
887
12
2,035
9
1,645
9
1
151
246
337
3
259
50
105
48
56
1
46
68
83
1
75
91
126
1
96
225
405
2
365
-434
+ 13
+385
+362
+439
+290 +1,106 + 1,158
3,598
3,590
7,203
6,242
8,503
7,272
Acceptances
Bought outright
Held under repurchase agreement
Federal agency obligations
Held under repurchase agreement
U.S. Government securities
Bought outright x
Held under repurchase agreement
Total loans and securities
Cash items in process of collection
Bank premises
Other assets
Denominated in foreign currencies
All other
2
Interdistrict Settlement Account
-740
-277
+ 184
+89
+68
1
74
-115
TOTAL ASSETS
7,535
7,052
23,191
21,182
6,216
5,710
6
21,077
19,047
LIABILITIES
Federal Reserve notes
Deposits
Member bank reserves
U.S. Treasury—General account
Foreign
All other
3,682
3,669
17,190
15,428
4,540
3,912
1,854
1,999
4,321
3,461
4,964
4,071
12,133
10,922
2,099
229
15
57
1,952
511
21
77
4,091
428
31
107
3,591
705
41
90
888
246
6
20
817
474
9
23
866
183
6
8
720
276
8
13
1,485
255
9
18
1,156
637
12
22
2,481
162
12
34
1,922
453
15
34
7,103
594
29
64
6,050
730
38
83
2,400
2,561
4,657
4,427
1,160
1,323
1,063
1,017
1,767
1,827
2,689
2,424
7,790
6,901
Deferred-availability cash items
Other liabilities and accrued dividends
1,184
107
602
64
758
260
834
179
380
70
363
48
483
29
643
81
778
156
6,896
22,865
20,868
6,150
5,646
3,528
6,156
8,377
603
58
7,156
559
291
7,373
945
78
7,111
822
46
TOTAL LIABILITIES.
560
53
3,530
20,773
18,757
81
81
78
78
163
163
157
157
33
33
32
32
34
34
31
31
46
46
43
43
63
63
58
58
152
152
145
145
7,535
7,052
23,191
21,182
6,216
5,710
3,598
3,590
7,203
6,242
8,503
7,272
21,077
19,047
4,736
4,524
17,722
16,111
4,891
4,329
2,313
2,143
4,780
4,030
5,683
4,888
13,207
11,854
1,054
855
532
683
351
417
459
144
459
569
719
817
1,074
932
3,682
3,669
17,190
15,428
4,540
3,912
1,854
1,999
4,321
3,461
4,964
4,071
12,133
10,922
518
51
128
4,039
559
62
1,736
231
28
8
2,046
4,415
1,300
152
214
11,541
1,298
59
3,700
509
57
75
5,042
456
48
2,010
425
48
26
4,281
393
42
14,500
468
466
53
55
46
4,324 "3';856'
225
25
4,000
1,763
215
59
15,685
11,000
4,736
4,621
17,722
16,236
4,891
2,313
2,260
4,780
4,135
5,683
4,919
13,207
12,357
Total deposits
CAPITAL ACCOUNTS
Capital paid in
Surplus. .
Other capital accounts
TOTAL LIABILITIES AND
CAPITAL ACCOUNTS
FEDERAL RESERVE NOTE
STATEMENT
Federal Reserve notes
Issued to Federal Reserve Bank by Federal
Reserve Agent and outstanding
Less held by issuing Bank, and forwarded
for redemption
Federal Reserve notes, net
3
Collateral held by Federal Reserve Agent for
notes issued to Bank
Gold certificate account .
...
Special Drawing Rights certificate account..
Eligible paper
U.S. Government securities.
TOTAL COLLATERAL
1
Includes securities loaned—fully guaranteed by U-S. Government securities pledged
with Federal Reserve Banks—and excludes any securities sold and scheduled to be bought
back
under matched sale-purchase transactions.
2
Beginning Dec. 29, 1978, such assets are revalued monthly at market exchange rates.
4,371
3
Includes Federal Reserve notes held by U.S. Treasury and by Federal Reserve Banks
other
than the issuing Bank.
4
Includes
securities borrowed from other Federal Reserve Banks.
6
Includes securities loaned to other Federal Reserve Banks.
396
Tables
3. Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 31, 1976-78
Millions of dollars
Description
of issue
1December 31
Coupon
(per cent)
U.S. Government securitiesTotal
Held outright 1
Treasury bills—Total
Within 3 months
3—6 months
After 6 months
Treasury notes—Total
Feb. 15 1977—A
Feb. 28 1977—F .
Mar. 31, 1977—G.. . .
Apr. 30, 1977—H
May 15, 1977—C
—D
May 31, 1977—1
June 30, 1977—J
July 31 1977—K
Aug. 15, 1977—B.
Aug. 31, 1911—L
Sept. 30, 1977—M
Oct. 31 1977—N
Nov. 15, 1977—E.
Nov. 30, 1977—Q
Dec. 31, 1977—P
Jan. 31 1978—J
Feb. 15, 1978—A .
Feb. 28, 1978—G
Mar. 31 1978—K
Apr. 30, 1978—L.
May 15, 1978—D.. .
—F
May 31 1978—M
June 30, 1978—N
July 31, 1978—P
Aug. 15 1978—C
—E
Aug. 31, 1978—Q.
Sept. 30, 1978—R
Oct. 31, 1978—S ..
Nov. 15, 1978—B
Nov. 30, 1978—T..
Dec. 31, 1978—H
—U..
Jan. 31 1979—L
Feb. 15, 1979—H.
Feb. 28 1979—M
Mar. 31, 1979—N
Apt 30 1979—P
May 15 1979—D
May 31, 1979—Q
June 30, 1979—E.
—R
July 31 1979—S
Aug. 15 1979—A.
Aug 31 1979—T
Sept. 30, 1979—F
—U
Oct. 31, 1979—V
Nov 15 1979—B
j£
—C.
Nov 30 1979—W
Dec. 31, 1979—G
X
Jan 31 1980—K
Feb. 15 1980—G
Feb 29 1980—L
Mar. 31, 1980—C
Apr. 30 1980—N
May 15, 1980—A
May 31 1980—P
June 30 1980—D
—Q
July 31 1980—R
Aug. 15, 1980—B
—H
For notes see end of table.
1978
1977
1976
110,562
102,819
97,021
7,743
5,798
42,159
20,661
14,911
6,586
41,560
20,106
15,690
5,765
38,572
19 529
14,277
4,765
598
555
—779
821
2,989
577
1 413
1,000
54,855
50,509
47 972
2 481
4 346
2 537
2 481
8
6
7%
67s
9
IVz
272
2,650
53
312
391
953
1,539
175
771
259
633
244
643
151
550
239
157
6'/ 4
291
159
669
880
440
538
209
119
265
7Vs
IV2
7Vs
IVi
6Vz
1%...
IVz
7%
67s
8
75/8
8V4
SVi
9
63/4
230
333
455
890
250
366
475
137
568
365
921
1,503
152
723
208
629
140
352
77s
6V8
73/4
1A
6%
6%
35
241
360
177
446
88
308
570
118
SV2
6%
1
250
2,628
2,549
145
346
117
2,448
143
1,724
67s
6%
81
259
2,571
173
415
192
2,468
234
368
640
159
6Vs
6%
—525
—2 994
— 171
—260
59
—848
— 120
—48
— 166
1,231
328
1,731
578
150
—516
—84
171
260
59
848
120
48
166
6»/2
IVz
73/4
8%
83/8
57s
6
1977
2,994
6%
578
1978
150
516
84
525
evi
7 3s / 4
6 /8
7%
6%
6>/4
8
63/4
6V2
IVs
77s
7V8
67s
67s
83/4
1%
6%
6V4
57s
6
53/4
8%
5%
Increase or decrease (—)
111
630
838
210
222
248
1,700
491
70
599
814
210
248
890
228
362
261
107
-328
-272
- 2 650
-53
-312
—391
—953
-1,539
-175
-771
-259
— 633
-2,5*71
-173
-415
-192
-2,468
-234
67
197
63
7
60
70
41
12
30
38
26
48
39
42
230
8
85
207
875
121
351
92
22
4
214
30
568
365
1,461
1,452
334
724
437
167
111
5,272
5,267
5,264
288
231
177
6
2,427
489
2,422
858
699
8
177
294
858
699
2,435
657
9
334
557
437
5
168
— 1 231
—81
69
22
22
18
71
31
32
36
23
48
51
4
22
28
69
75
20
91
37
94
88
24
308
570
118
47
209
49
265
111
31
24
210
12
248
248
15
107
11
261
15
1,452
56
3
57
5
489
Tables
397
3.—Continued
December 31
Description
of issue
1978
Treasury notes—Cont.
Aug. 31, 1980—S
Sept. 30, 1980—E
—T
Oct. 31 1980—U
Nov. 15, 1980—J
Nov. 30, 1980—V
Dec. 31, 1980—F
Feb. 15, 1981—A
Mar. 31, 1981—H
May 15 1981—D.
—M
June 30, 1981—J
Aug. 15, 1981—F
—N
Sept. 30, 1981—K
Nov. 15, 1981—B
—G
Dec. 31, 1981—L
Feb. 15, 1982—D
Mar. 31, 1982—G
May 15 1982—A
—E
—K
June 30 1982—H
Aug. 15, 1982—B
Sept. 30, 1982—J
Nov. 15 1982—C
—F
Feb. 15 1983—A
May 15, 1983—C
Nov. 15 1983—B
Feb. 15, 1984—A
Aug. 15, 1984—B
Feb. 15 1985—A
Aug. 15, 1985—B
May 15, 1986—A
Aug. 15 1986—B
Nov. 15, 1987—A
May 15, 1988—A
Nov. 15, 1988—B
Treasury bonds—Total
1975-85
1978-83. . . .
1980—Feb.
Nov. .
1981—Aug.
1982—Feb
1984—Aug.
1985—May
1986—Nov.
1987-92
1988-93
1989-94
1990_Feb
May
1992—Aug
1993—Feb
Aug
Nov
1993-98... .
1994-99
1995—Feb
1995-2000
8%
67s
8%
87s
7%
9V4
57s
7
7%
67s
7 3 /8
7V%
63/4
.
7%
8%
63/4
73/4
7
7V4
6%
778
8
7
9%
8%
8%
77s
7Vs
8
77 8
7
. .
7'/ 4
8
814
77s
8
7s/8
8%
8%
. .
3'A
4
7
6%
6%
3V4
6VS
4lA
. .
/
\
4
7Vz
4Vs
7V4
r 63/4
\
77s
8s/
8%8
7
/
\
1996-2001
1998—Nov
2000-05
8^2
3
77s
8%
8
3Vi
8l/4
7%
2002-07
/
2003-08
1 8 /4
Held under RP's
Increase or decrease (—)
Coupon
(per cent)
i 77s
J 8%
3
416
153
686
309
693
250
33
351
1,007
203
182
1 034
70
297
1 297
72
1,597
113
124
56
235
1,444
30
1 018
93
1,161
62
754
209
2,136
89
95
3 900
372
1,448
I 618
[,086
,978
616
[ 744
087
12,465
156
87
266
74
123
371
355
47
310
509
24
380
77
84
342
91
70
127
61
121
157
999
2
562
2,004
480
31
,493
: ,389
265
747
661
l ,084
1977
141
1976
33
658
33
349
914
55
175
67
241
8
338
826
109
129
48
1,591
83
13
35
1,554
14
1,439
14
1,421
1,110
1,065
715
4
2,101
633
2,075
95
3 659
337
81
852
1,941
448
695
1,757
8,848
156
87
266
74
123
364
355
47
310
509
24
380
77
84
285
76
70
6,725
156
87
261
74
123
364
355
47
310
509
24
352
77
84
240
1977
1978
416
12
686
309
35
250
2
93
148
7
1,034
3
56
1,297
24
6
30
111
21
235
5
16
1,018
93
51
62
39
205
35
89
241
35
1,448
1 618
234
37
168
1 744
1,087
3,617
108
658
25
11
88
55
66
67
112
48
37
69
13
35
18
14
45
82
4
26
14
3,659
337
157
184
448
2,123
5
7
28
56
15
45
76
70
127
61
121
157
955
2
517
902
430
31
950
1,379
240
157
900
2
455
842
341
31
864
1,901
3,753
44
55
45
1,102
50
62
60
89
543
10
25
747
661
86
1,379
240
-817
-1,852
398
Tables
3. Federal Reserve Bank Holdings of U.S. Government and
Federal Agency Securities, December 31, 1976-78—Continued
Millions of dollars
December 31
Description
of issue
U.S. Government securities—Total
Within 90 days
91 days to 1 year
1-5 years
5-10 years
Over 10 years
Federal agency obligations
Held outright—Total
Banks for Cooperatives
Export-Import Bank
Federal Farm Credit Banks
Federal Home Loan Banks
Federal Intermediate Credit Banks. . .
Federal Land Banks
Farmers Home Administration
Federal National Mortgage
Association
Government National Mortgage
Association—PC's
U.S. Postal Service
Washington Metropolitan Area
Transit Authority
General Services Administration
Increase or decrease (—)
1978
1977
1976
110,562
24,097
29,465
31,608
14,717
10,675
102,819
25,309
32,539
27,516
10,388
7,067
7,896
85
69
68
2,189
466
1,377
196
1978
1977
97,021
26,429
25,889
30,710
9,045
4,949
7,743
-1,212
-3,074
4,092
4,329
3,608
5,798
-1,120
6,650
-3,194
1,343
2,118
8,004
112
106
58
2,151
465
1,352
238
6,794
78
118
1,786
414
946
295
-108
-27
-37
10
38
1
25
-42
1,210
34
-12
58
365
51
406
-57
3,196
3,266
2,899
-70
367
83
37
87
37
-4
0
-3
0
117
14
117
14
90
37
117
14
0
0
0
0
133
451
278
-318
173
Held under RP's.
1
Excludes securities sold under matched sale-purchase agreements, and securities held under repurchase agreements.
NOTE. Details may not add to totals because of rounding.
4. Federal Reserve Bank Holdings of Special Short-Term Treasury
Certificates Purchased Directly from the United States, 1971-78
Millions of dollars
Date
1971
June 8
9
10
11
12
13i
14
15
16
Amount
79
582
610
593
593
593
243
588
349
Date
Amount
1973
Aug. 15
Sept. 7
8
9i
10
11
12
14
15
16i
1972
Sept. 12
38
1
1974
Nov. 6
351
73
73
73
42
485
169
319
319
319
131
Date
1975
Mar. 11
12
13
14
15
Amount
17
626
1,043
315
820
820
820
832
Aug. 5
6
7
11
12
656
965
474
204
543
16i
Date
Amount
1975
Aug. 13
15
399
481
1976
0
1977
Sept. 30
Oct. 1
2i
3
1978
2,500
2,500
2,500
2,500
0
Sunday or holiday.
NOTE. Under authority of Section 14(b) of the Federal Reserve Act.
Throughout the period shown the interest rate paid on such securities was VA per cent below the
prevailing discount rate of the Federal Reserve Bank of New York. For data for earlier years, beginning with 1942, see previous ANNUAL REPORTS.
Tables
399
5. Open Market Transactions of the Federal Reserve System, 1978
Millions of dollars
Outright transactions in U.S. Government securities, by maturity
(excluding matched sale—purchase transactions)
Others within 1 year
Treasury bills
Month
Gross
purchases
January
February
March
April
May
June
July
August
September
October
November....
December
696
379
748
1 670
416
4,395
701
972
2,635
1,978
2,039
TOTAL..
16,628
Gross
purchases
Redemptions
Gross
sales
1,323
1,974
50
1,100
31
737
300
Gross
sales
2,148
3,587
2,751
603
171
168
73
139
13,725
2,033
1,184
Gross
purchases
-511
-653
261
136
-2,343
-380
-241
-1,544
563
-385
-778
705
56
288
100
53
135
466'
689
1-5 years
Exch.,
maturity
shifts, or
redemptions
-5,170
Gross
sales
311
511
1,109
-261
-136
-79
467
241
-490
-563
385
-657
-705
8i3"
235
290
631
424
350
507
628
-178
4,188
Matched
sale—purchase
transactions
(U.S. Government securities)
Outright transactions (continued)
Gross
purchases
January
February
March
April
May
June
July
August
September. . .
October
November. . .
December
TOTAL..
Over 10 years
5-10 years
Month
Gross
sales
Exch.
or ma- Gross
purturity chases
shifts
Gross
sales
-906
238
110
87
163
1 ,434
835
113
122
139
108
1,526
2,803
1,063
2,033 511,126 510,854
600
600
Federal agency obligations
Gross
purchases
Gross
sales
10,229
16,057
13,155
8,044
11,517
14,956
15,822
16,286
10,724
18,976
7,719
8,133
12,130
16,057
11,468
8,999
11,819
13,100
17,374
15,140
10,353
20,565
8,383
7,049
-5,815
1,447
3,127
1,923
-674
7,320
-1,261
2,854
3,540
43
-2,017
-2,743
301
TOTAL.. 151,618
152,436
7 743
301
Outright
Gross
purchases
1,323
1,974
50
Gross
purchases
2,545 24,591 13,725
895
Net
change
in U.S.
Government
securities
Month
1,252
379
2,367
2,341
935
5,451
701
1,919
3,386
2,785
3,075
Gross
sales
2,148
3,587
2,751
450
147
145
74
115
i ,526
-87
Redemptions
Gross
sales
54,859 51,016
1,100 40,128 44,270
31 44,976 44,129
42,262 42,799
300 40,634 40,362
52,544 52,557
44,657 44,712
29,162 29,641
33,346 33,130
35,112 36,106
603 40,785 40,546
52,661 51,586
100
89
370
191
101
176
Repurchase
agreements
(U.S. Government securities)
January
February
March
April
May
June
July
August
September....
October
November
December....
Total
Exch.
or ma- Gross
purturity chases
shifts
Exch.
or
maturity
shifts
Sales or
redemptions
*
Repurchase
agreements,
net
-451
737
466
689
Bankers
acceptances,
net
Outright
Repurchase
agreements
Net
change l
34
28
4
186
28
12
39
3
264
-128
-110
333
-288
48
528
-521
-127
133
-954 > -7,220
1,425
770
4,107
-480
1,315
-17
-834
747
8,673
-753
-2,305
28
2,744
419
4,460
-479
-969
-236
-2,419
587 - 2 , 0 2 6
409
-318
-366
22
53
6,951
1
Net change in U.S. Government securities, Federal agency obligations, and bankers acceptances.
* Less than $500,000.
NOTE. Sales, redemptions, and negative figures reduce System holdings; all other figures increase them.
Details may not add to totals because of rounding.
Earnings and Expenses of Federal Reserve Banks during 1978
Dollars
Item
Total
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas
City
Dallas
San
Francisco
CURRENT EARNINGS
9,505,085 4,540,535
7,617,868
2,808,745
7,351,144
8,002,815 4,379,601 2,379,465 4,626,585 8,079,987
66,432,544 3,245,915
3,894,799
.oans
16,143,824
16,143,824
Acceptances
420,301,803
384,595,104
2,079,456,103
691,795,139
679,295,907
342,463,451
1,325,212,566
8,366,526,794
38
6,649,265
1,091,752,765
200,242,758
338,156,854
426,605,079
J.S. Government securities.
?
83,524
165,279
104,982
145,774
502,812
297,496
60,400
1,941,592
81,582
58,181
60,676
110,626
270,260
oreign currencies
20,775
45,080
51,256
3,071,930
114,519
247,834
318,625
114,748
159,728
88,150
4,345,647
60,489
52,513
All other
TOTAL
8,455,390,401 390,115,584 2,108,679,754 424,946,637 694,814,243 687,070,013 392,206,541 1,333,760,711 347,018,200 202,999,029 342,953,171 434,856,181 1,095,970,337
CURRENT EXPENSES
Salaries
Retirement and other
benefits
^ees—Directors and others .
Travel
'ostage
Sxpressage
Telephone and telegraph. . .
Minting and supplies
Taxes on real estate
Sank premises
Depreciation
Maintenance and repairs.
Jtilities
tent
furniture and equipment
Rentals
Depreciation
^ost of Federal Reserve
currency
Ul other
328,005,818 21,916,219
TOTALi
Reimbursements and
recoveries
714,700,652 51,086,807
Net expenses
77,095,640 15,843,596
20,125,859
25,613,957
30,521,132
89,828,248
4,553,267
8,420,713
12,269,928
61,310,547
11,986,632
26,064,366
13,904,609
6,170,811
361,886
510,537
625,889
3,380,612
764,144
1,845,530
2,615,882
19,745,485
1,350,579
1,372,752
1,977,393
8,054,214
2,724,113
4,941,294
2,398,563
4,676,623
297,948
273,216
459,742
2,419,367
466,799
1,234,245
1,225,982
5,722,567
215,747
717,420
726,178
6,141,406
720,935
1,476,533
759,548
6,939,376
434,473
663,603
1,006,258
6,915,912
1,068,921
2,331,118
1,233,877
7,828,091
151,513
881,833
909,737
7,288,212
1,057,741
2,887,246
626,317
11,724,781
280,821
927,940
1,252,553
7,997,364
1,524,726
3,585,735
1,530,299
4,927,587
200,363
375,496
887,402
4,171,905
472,721
1,355,101
449,261
3,242,429
196,552
419,643
881,342
2,253,532
584,607
944,551
1,521,196
5,814,665
173,461
704,029
1,408,394
3,574,443
867,087
1,858,129
496,218
4,431,156
124,940
510,303
605,317
3,193,479
685,461
1,261,749
457,860
8,604,677
764,984
1,063,941
1,529,723
5,920,101
1,049,377
2,343,135
589,606
8,292,381
6,034,478
11,981,469
8,749,213
2,121,742
276,122
1,812,969
414,629
211,017
760,117
2,076,645
5,248,169
1,432,376
774,083
1,165,795
15,668
618,413
311,559
983,107
71,697
1,038,620
365,260
910,099
839,045
291,461
381,164
888,337
621,596
390,433
1,512,018
1,094,763
863,535
371,155
293,950
662,713
119,290
873,458
300,532
488,586
50,021
453,935
303,805
670,510
25,517
175,039
425,862
593,295
8,960
314,732
330,006
634,650
471,086
41,631,171
8,061,885
2,849,597
623,534
5,884,570
1,937,930
1,761,696
760,275
2,990,844
435,208
5,262,923
309,525
4,044,331
546,591
6,532,985
337,719
1,873,780
598,775
1,114,566
340,716
3,472,809
564,706
2,422,256
547,692
3,420,814
1,059,214
60,059,365
15,901,094
3,402,235
1,394,469
10,887,074
3,246,252
3,282,514
731,161
3,870,545
1,181,469
6,130,502
1,284,297
5,798,774
1,111,798
8,412,192
1,188,328
2,668,073
727,243
992,134
897,884
3,350,331
982,830
4,084,786
1,154,605
7,180,205
2,000,758
90,091,092 37,040,068 28,158,707 45,752,095 36,480,972
66,459,875
62,084,267
4,258,295
652,616,385 46,828,512
149,911,807 36,821,086
47,069,035 i 59,993,234 65,835,874
3,066,594
5,107,141
4,057,603
6,542,458
135,546,130 33,754,492
41,961,894
55,935,631
59,293,416
14,365,677
40,934,900 16,885,253 13,056,958 21,031,226 15,798,212
7,307,401
3,283,020
1,942,398
3,964,376
29,182,866
2,145,140
6,044,164
82,783,691 33,757,048 26,216,309 41,787,719 34,335,832
60,415,711
PROFIT AND LOSS
7,802,773,195 343,287,072 1,973,133,624 391,192,145 652,851,614 631,136,273 332,913,125 1,250,977,078 13,259,116 76,782,720 01,165,452 00,520,350 ,035,554,626
urrent net earnings
dditions to current net
13,774
4,940,734
130,832
153,057
234,909
685,099
86,607
234,819
22,756
13,212
2,700,179
361,442
304,048
earnings
eductions from current
net earnings
Losses on sales of U.S.
20,792,235 5,346,810 3,134,776 5,324,859 6,733,067
17,262,365
5,961,247
31,579,498 6,578,886 10,852,014 10,667,112
Government securities. 130,299,594 6,066,725
Losses on foreign ex70,795,485
77,369,352 15,676,143 15,170,461 21,238,646 28,823,876
change transactions... 505,682,038 15,676,143 130,971,648 21,744,328 42,982,973 27,306,830 37,926,153
105,515
33,731
105,555
237,989
67,674
55,676
270,521
377,346
55,742
143,039
2,082,588
All other
47,347
582,453
88,295,839
98,432,108 21,078,629 18,338,968 26,631,179 35,662,458
Total deductions.. . 638,064,220 21,790,215 163,133,599 28,428,769 53,890,729 38,116,981 44,264,746
fet deductions from current
net earnings
98,197,199 21,064,855 18,252,361 26,478,122 35,531,626
87,610,740
issessment for expenditures2
8,130,000 1,667,200 1,596,100 2,256,600 3,021,300
4,015,100
4,522,400
2,843,100
13,851,000 2,269,800
53,321,700 1,660,900
of Board of Governors .
fet earnings before payments to U.S. Treasury. 7,116,328,009 320,140,005 1,796,510,467 360,506,788 594,461,241 592,876,371 284,868,098 1,144,649,879 290,527,06 156,934,259 272,430,730 361,967,42
940,455,686
9,602,654 1,974,61
4,750,650
1,920,399 2,681,174 3,618,60
5,408,170
63,280,312 1,946,584
3,343,867
16,518,453 2,634,130
)ividends paid
ayments to U.S. Treasury
(interest on F.F. notes). . 7,005,779,497 317,624,721 1,766,858,714 358,221,808 584,291,421 587,995,404 277,118,648 1,129,478,225 287,219,396 151,703,760 267,573,50 353,757,72
923,936,171
633,123,486 21,486,167
162,772,157 28,415,557
53,867,973
35,416,802
44,029,927
ransferred to surplus
urplus, January 1
568,700
47,268,200
1,029,001,850 32,222,500
13,133,300 -349,150
266,708,950 44,148,400
4,761,650
87,018,650
1,537,100
55,093,750
2,998,800
77,609,550
urplus, December 31
1,076,270,050 32,791,200
279,842,250 43,799,250
91 780,300
56,630,850
80,608,350
1
The total expense for Richmond has been adjusted to exclude $2,354,532, which,
as allocated to the expenses of other Federal Reserve Banks for operation of the Federal
eserve Communications System.
5,569,000 1,333,050 3,310,100 2,176,050 4,591,10
157,032,950 32,136,900 30,730,200 43,479,200 58,222,65
162,601,950 33,469,950 34,040,300 45,655,250 62,813,75
7,488,200
8,881,015
7,638,500
144,598,150
152,236,650
2
For additional details, see the last three pages of the section "Board of Governors,
Income and Expenses."
NOTE. Details may not add to totals because of rounding.
7. Earnings and Expenses of Federal Reserve Banks, 1914-78
s
Dollars
Current
earnings
Period or Bank
All Federal Reserve
Banks
1914-15
1916
1917.
. . .
1918
1919
Current
expenses
Net additions
or
deductions (—)
Assessment
for expenditures of
Board of
Governors
Payments to U.S. Treasury
Dividends
paid
Franchise
tax
Under
Sec. 13b
Interest on
Federal Reserve
notes
Transferred
to surplus
(Sec. 13b)
Transferred
to surplus
(Sec. 7)
2,173,252
5,217,998
16,128,339
67 584,417
102,380,583
2,018,282
2,081,722
4,921,932
10,576,892
18,744,815
5,875
-193,001
-1,386,545
-3,908,574
-4,673,446
302,304
192,277
237,795
382,641
594,818
217,463
1,742,775
6,804,186
5,540,684
5,011,832
2,703,894
1,134,234
48 334 341
70,651,778
181 296 711
122,865,866
50 498,699
50,708,566
38 340,449
41,800,706
47 599,595
43,024,484
64 052,860
70,955,496
27,548,505
33,722,409
28,836,504
29,061,539
27,767,886
26,818,664
26,628,458
26,739,327
26,207,133
28,909,469
-3,743,907
-6,314,796
-4,441,914
-8,233,107
-6,191,143
-4,823,477
-3,637,668
-2,457,792
-5,026,029
-4,861,642
709,525
741,436
722,545
702,634
663,240
709,499
721,724
779,116
697,677
781,644
5,654,018
6,119,673
6,307,035
6,552,717
6,682,496
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
60,724,742
59,974,466
10,850,605
3,613,056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
82 916 014
15,993,086
- 6 5 9 904
2,545,513
— 3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
1930
1931
1932
1933
1934
1935.
1936
1937
1938
1939
36,424,044
29 701 279
50,018,817
49 487 318
48 902,813
42,751,959
37 900 639
41 233,135
36 261 428
38 500 665
27,533,141
26 322,110
25,562,571
28 422 677
27,869,374
30,171,545
28 194,457
27,052,234
27 186 684
27 025 391
-93,136
311,451
-1,413,192
- 1 2 307,074
-4,430,008
-1,736,758
485,817
-1,631,274
2 23^ 134
2,389,555
809,585
718,554
728,810
800 160
1,372,022
1,405,898
1,679,566
1,748,380
1,724 924
1,621,464
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
8,504,974
7,829,581
7,940,966
8,019,137
8,110,462
17,308
-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
607,422
352,524
2,616,352
1,862,433
4,533,977
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
43 537 805
41 380,095
52 662 704
69 305 715
104 391 829
142 209 546
150 385 033
158 655,566
304 160 818
316,536,930
27 461,466
31,123,609
36 877 718
41,129 934
46 879 564
46 376 762
54 975 323
62,753,308
69 466 518
74,235,176
11 487 697
720,636
— 1 568 208
23 768 282
3 221 880
—830 007
- 6 2 5 991
1,973,001
—34 317 947
-12,122,274
1,704,011
1,839,541
1 746 326
2,415,630
2 296 357
2 340 509
2,259,784
2,639,667
3 243 670
3,242,500
8,214,971
8,429,936
8,669,076
8,911,342
9 500 126
10,182,851
10,962,160
11,523,047
11,919,809
12,329,373
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929.
.
. .
i,i34,234
2,011,418
291 Ml
227,448
176,625
119 524
24,579
-60,323
27,695
102,880
67,304
- 4 1 9 140
-425,653
82,152
141,465
197 672
244,726
326 717
247 659
67,054
35,605
-54,456
-4,333
49 602
135,003
201 150
262 133
27,708
86,772
75,223,818
166,690,356
193,145,837
17,617,358
570,513
3,554,101
40,237,362
48,409,795
81,969,625
81,467,013
8,366,350
18,522,518
21,461,770
s:
1950
1951
1952
1953
1954
1955.
1956
1957
1958
1959
275 838,994
394,656,072
456 060,260
513,037,237
438,486,040
412,487,931
595,649,092
763,347,530
742,068,150
886,226,116
77,138,071
91,373,589
100,572,489
109,415,220
105,558,331
105,865,923
115,842,696
124,306,103
131,804,455
138,232,106
36 294 117
-2,127,889
1 583 988
-1,058,993
-133,641
-265,456
-23,436
-7,140,914
124,175
98,247,253
3,433,700
4,095,497
4,121,602
4,099,800
4,174,600
4,194,100
5,339,800
7,507,900
5,917,200
6,470,600
13,082 992
13,864,750
14 681 788
15,558,377
16,442,236
17 711,937
18,904,897
20,080,527
21,197,452
22,721,687
196 628 858
254,873,588
291 934 634
342,567,985
276,289,457
251,740,721
401,555,581
542,708,405
524,058,650
910,649,768
21 849 490
28,320,759
46 333 735
40,336 862
35,887,775
32,709 794
53,982,682
61,603,682
59,214 569
-93,600,791
I960
1961
1962.
1963
1964
1965
1966
1967
1968
1969
1,103,385,257
941,648,170
1,048,508,335
1,151,120,060
1,343,747,303
1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943
3,373,360,559
147,348,575
155,009,475
169 481 234
179,700,557
188,740,689
195,713,790
198,379,526
209,351,250
228,152,172
259,953,236
13 874,702
3,481,628
-55,779
614,835
725,948
1,021,614
996,230
2,093,876
8,519,996
-557,553
6,533,700
6,265,100
6,654 900
7,572,800
8,655,200
8,576,396
9,021,600
10,769,596
14,198,198
15,020,084
23,948,225
25,569,541
27 412 241
28,912,019
30,781,548
32,351,602
33,696,336
35,027,312
36.959,336
39,236,599
896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614
1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983
3,019,160,638
42 613 100
70,892,300
45 538 200
55,864,300
-465,822,800
27 053 800
18,943,500
29,851,200
30,027,250
39,432,450
1970
1971
1972
1973
1974
1975
1976
1977
1978
3,877,218,444
3,723,369,921
3,792 334 523
5,016,769,328
6,280 090 965
6,257,936,784
6 623 220 383
6,891,317,498
8,455,390,401
300,145,586
344,550,798
379 371 852
450,705,676
506 424 874
551,488,714
606 948 264
623,859,582
652,617,206
11,441,829
94,266,075
—49 615 790
-80,653,488
—78 487 237
-202,369,615
7 310 500
-177,033,463
-633,123,486
21,227,800
32,634,002
35 234 499
44,411,700
41 116 600
33,577,201
41 827 700
47,366,100
53,321,700
41,136,551
43,488,074
46 183 719
49,139,682
52 579 643
54,609 555
57 351 487
60 182 278
63,280,312
3,493,570,636
3,356,559,873
3 231 267 663
4,340,680,482
5 549 999 411
5,382,064,098
5 870 463 382
5,937,148,425
7,005,779,497
32,579,700
40,403,250
50 661 000
51,178,300
51 483 200
33,827 600
53 940 050
45,727,650
47,268,200
TOTAL, 1914-78.... 76,479,145,130 8,535,255,138 -1,036,422,554 538,615,908 1,235,051,957 149,138,300
Aggregate for each
Federal Reserve
Bank, 1914-78
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago .
St. Louis
Minneapolis
Kansas City
Dallas. . .
San Francisco
TOTAL
2,188,893 63,777,533,787
-3,657
1,204,942,249
7 111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561
25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341
280 843 2,984,222,683
369,116 16,644,377,253
722,406 3,460,430,385
82,930 5,104,794,718
172,493 4,718,771,125
79,264 3,044,057,537
151,045 10,411,036,551
7,464 2,337,816,661
55,615 1,227,898,196
64,213 2,400,846,160
102,083 2,783,272,539
101,421 8,660,009,979
135,411
-433,413
290,661
-9,906
-71,517
5,491
11,682
-26,515
64,874
-8,674
55,337
-17,089
42 886 025
317,098,821
58,129,472
105,014,093
62,510,658
85,874,890
177,930,704
38,589,578
37,917,513
49,795,200
67,091,228
162,104,067
76,479,145,130 8,535,255,138 -1,036,422,554 538,615,908 1,235,051,957 149,138,300
2,188,893 63,777,533,787
3,743,172,097
587 280 874
19,601,775,744 1,806,618,573
4,139,612,960
468,178,654
6,106,303,422
639,139,573
5,596,259,955
666,076,056
3,989,307,324
665,623,614
12,174,189,654 1,142,070,018
2,958,791,412
484,607,238
1,676,000,596
334,102,448
3,076,735,067
505,604,355
3,430,539,847
429,497,593
9,986,457,052
806,456,142
-35,167 577 24 457 386
-268,397,272 144,742,986
-41,592,461 29,389,218
-90,198,197 48,068,290
-54,133,017 28,054,276
-78,796,147 34,977,660
-165,664,337 79,705,772
-34,819,927 18,291,672
-27,236,054 13,509,315
-41,786,560 22,129,309
-58,940,696 28,594,073
-139,690,311 66,695,951
i The $1,204,942,249 transferred to surplus was reduced by direct charges of $500,000
for charge-off on Bank premises (1927), $139,299,557 for contributions to capital of the
Federal Deposit Insurance Corporation (1934), and $3,657 net upon elimination of Sec.
61 629 903
352,598,874
75,320,802
114,173,080
60,413,658
70,942,160
172,306,019
41,929,758
30,013,681
49,578,844
62,426,249
143,718,929
- 3 , 6 5 7 U,204,942,249
13b surplus (1958), and was increased by $11,131,013 transferred from reserves for
contingencies (1945), leaving a balance of $1,076,270,048 on Dec. 31, 1978.
NOTE. Details may not add to totals because of rounding.
404
Tables
8. Bank Premises of Federal Reserve Banks and Branches,
December 31, 1978
Dollars
Federal
Reserve
Bank
or branch
Boston
Annex
Cost
Lanet
Buildings
(including
vaults) *
20 ,240, 081
8 8 , 016, 595
27, 840
Building machinery and
equipment
Total
2
Net
book
value
Oth(ir
rea
estate> 3
89, 202
0 8 , 256, 676
4 4 , 538
161, 580
105, 756, 972
139 747
2 , 443, 426
26, 629, 825
? 330 553
7 070, 178
477, 862
? 417, 112
9 , 439, 872
•V 05? 419
New York . .
Annex
Buffalo
3 ,436, 277
477 863
11 065, 009
1 136 ?19
?, 768, 584
12, 128, 539
673 076
Philadelphia...
1 ,876, 601
51 803, 403
4 , 828, 637
58, 508, 641
54 999, 804
Cleveland
Cincinnati
Pittsburgh
1 ,000, 000
1 ,980 331
1 ,658 376
4 964, 238
13 541, 023
4 510, 657
3, 665, 369
7 521 727
2 937 674
9, 629, 607
?3 043 081
9 106, 707
1 386, 582
17 407, 921
4 34?, 637
Richmond
Annex
Baltimore
Charlotte
1 96? 349
5?,?, 733
70 577 480
3 775 466
3 511 136
7?, 539, 879
7 759, 335
71 78? 242
4 9?4 924
Atlanta
Birmingham
Jacksonville.. ..
Annex
Miami
Nashville
New Orleans...
1 ,202 255
Chicago
Annex
Detroit
. ...
St. Louis
Little Rock
Louisville
Memphis
738 436
347 071
340 775
164 004
107 97.5
1 ,667 108
716 471
610 759
2 434 345
1 102, 322
10 803, 860
1 905 770
3 558 580
1 019 618
1 706 794
76 236
749 369
15 842
1 189 949
677 037
j
4, 362,730
2 126,430
15, 564,695
3 266,163
2 620
?00
1 667
3 714
167
003
108
095
2 217 676
1 007 673
3 870 130
1 634 312
10 503 030
1 564 188
1 905 667
987
161
667
1 559
4?6
9?5
108
855
34?,
2 ,911 128
1 474 678
764 347
1 465 131
7 140 606
5 048 721
4 511 94?,
14 473 333
10 891 182
30? 248
? 910 976
93 916
1 95? 171
1? 7?1 687
000
797 734
79 876 457
446 164
700 378
800 104
700 075
? 981 037
? 037 868
? 945 104
3 660 178
1 015 6?8
159 753
7 341 593
3 853 600
? 017 313
? 606 217
*>508 746
147 075
5 660 881
1, 224, 363
283 753
404 197
? 511 095
,135 623
4 ,263 255
2 126 755
4 804 93?
7 525 633
Minneapolis....
Helena
1 ,394 384
65 681
23 606 389
101 000
10 928 091
61 906
35 928 864
228 587
28 ,409 784
94 942
139 ,735
Kansas City
Denver
Oklahoma City
Omaha
1 .338 737
? ,997 746
646 ,385
1 ,030 ,226
8 691 064
4 30? ,234
14 33? 035
3 ?09 ??7
? 4?8 550
1 504 365
? 336 576
1 477 ,170
817 ?14
8 543 549
4 55? 105
3 351 805
7 ,413 924
5 ,87? ,347
3 ,765 ,969
1 ,935 ,157
457 ,973
Dallas
El Paso
Houston
San Antonio
3 ,687 ,482
4 ,664 970
3 570 804
11 9?3 ?56
6 ,199 ,767
San Francisco..
Annex
Los Angeles
Portland
Salt Lake City.
Seattle
TOTAL.
1 443 ,506
4 097 606
? ,419 833
787 728
393 ,301
7?9 ,262
570 ,847
3 ,459 ,240
P 4 ,000
5 ,06? ,628
1 ,682 ,683
2 ,129 ,722
1 ,904 ,457
2 ,121 ,193
6 ,055 ,921
1 ,756 ,471
7 ,463 337
1 ,141 ,558
2 ,539 ,495
3 ,334 ,378
3 ,3?0 ,787
6€ ,783 ,212 366 ,545 ,036
99 ,329 ,605
532 ,657 ,853
262 ,477
,959 770
448 ,596
475 ,488
947 201
644 238
207 ,380
480 ,222
974 772
1 ,408 ,574
1 ,400 ,390
eo ,078
649 ,432
724 ,434
433 ,?79
5 ,732 882
828 ,056
3 ,109 ,355
1 ,401 ,773
1 ,184 ,944 17 ,223 ,440
353 ,679
3 ?88 ,503
,561 ,386
,982 ,812
1 ,3?7 ,005
392 ,655 ,123 38 ,622 ,671
1
Figures include expenditures for construction at some offices pending allocation to appropriate
accounts.
28 Figures exclude charge-offs of $17,698,968 prior to 1952.
Figures include acquisitions for banking-house purposes, and premises formerly occupied by
Federal Reserve Banks and being held pending sale.
Tables
405
9. Volume of Operations in Principal Departments of Federal
Reserve Banks, 1975-78
Operation
1978
1977
1976
1975
Millions of pieces l
Loans. . .
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. Government checks
Postal money orders.
All other 3
Collection items handled
U.S. Government coupons paid
AUother
Issues, redemptions, and exchanges of U.S.
Government securities
Transfers of funds
Food stamps redeemed
(2)
(2)
(2)
(2)
8 537
2,621
18,096
8,186
2,609
16,563
'8,061
2,671
15,925
7,666
2,625
15,412
721
125
14,107
740
139
13,312
768
169
12,287
844
176
11,410
5
5
6
4
8
4
9
16
281
29
1,906
286
25
1,901
289
21
2,003
277
17
2,493
Amounts (millions of dollars
Loans
Currency received and counted
Currency verified and destroyed
Coin received and counted
Checks handled
U.S. Government checks
Postal money orders...
All other 3 . . .
Collection items handled
U.S. Government coupons paid
Allother
Issues, redemptions, and exchanges of U.S.
Government securities
Transfers of funds
Food stamps redeemed
138 928
81,175
16,443
2 495
77 511
75,933
14,952
2,239
17 697
71,011
14,606
2,109
39,822
66,065
14,279
2,120
439,907
5 534
7 111 254
416,386
5 661
5 499 856
399,468
6 305
4,645 069
349,957
8,524
4,256,924
2,028
28 769
3,276
26 959
4,748
23 929
6,175
26 973
8,036,749
50 482 656
7,251
8,835,730
43 165 467
7,422
7,051,978
35 617 756
7,883
4,575,365
31,392,865
7,940
r
Revised.
1 Packaged items handled as a single item are counted as one piece.
2
The number handled (in thousands) was as follows: 1978, 31; 1977, 12; 1976, 4; 1975, 6.
3
1 his is exclusive of checks drawn on Federal Reserve Banks.
406
Tables
10. Principal Operations of Federal Reserve Banks—Expense, Ratio of
Expense for Each Operation to Total Expenses, and Average Number
of Employees, 1975-78
Expenses in thousands of dollars; number of employees in thousands; ratios in per cent
Operation and item
1978
1977
1976
1975
2
Check clearing operations
Expense
Ratio to total expenses
Average number of employees..
259,983
36.4
6.3
246,981
36.2
6.5
135,209
20.5
6.3
130,024
21.7
7.1
Currency function
Expense
Ratio to total expenses
Average number of employees.,
187,864
26.3
2.0
182,875
26.8
2.2
114,036
17.3
2.3
99,306
16.6
2.4
Fiscal agency operations
Expense
Ratio to total expenses
Average number of employees.
76,837
10.7
1.9
73,002
10.7
2.0
48,158
7.3
2.3
45,307
7.6
2.4
Bank supervision
Expense
Ratio to total expenses
Average number of employees.
58,303
8.2
1.3
52,702
7.7
1.3
23,322
3.5
1.1
19,936
3.3
1.0
Other operations »
Expense
Ratio to total expenses
Average number of employees.
131,713
18.4
2.2
126,318
18.6
2.2
29,919
4.6
1.4
27,623
4.6
1.5
9.8
10.1
307,806
46.8
11.1
277,014
46.2
11.3
23,298
8,050
38,519
39,814
64,292
27,219
24,501
82,113
21,702
7,289
33,226
34,652
58,391
26,449
22,255
73,050
599,210
General administration and support
Expense
Ratio to total expenses
Average number of employees
Accounting
Auditing
Bank administration.
Data processing
Occupancy
Personnel
Protection
Other
TOTAL EXPENSES.
714,700
681,878
658,450
Less reimbursements..
62,084
58,018
51,502
47,721
NET EXPENSES . . .
652,616
623,860
606,948
551,489
1
Under a new expense-accounting system, certain support activities were reclassified as operations
and2 all general administration and support costs were allocated to operations beginning in 1977.
Figures
include automated clearinghouse and noncash collections.
3
Figures include mainly economic research and statistics, foreign operations, and lending and credit.
Tables
407
11. Number and Salaries of Officers and Employees of
Federal Reserve Banks, December 31, 1978
President
Federal Reserve
Bank (including
branches)
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL
Other officers
Annual Numsalary
(dollars) ber
Total
Employees
Number
Annual
salaries
(dollars)
Fulltime
Parttime
Annual
salaries
(dollars)
Number
Annual
salaries
(dollars)
80,000
110,000
70,500
79,400
69,450
83,000
45
131
38
40
63
64
1,591,400
5,758,050
1,301,250
1,357,100
2,169,600
2,133,150
1,353
4,334
1,037
1,416
1,928
2,271
171
99
95
63
76
36
19,799,329
66,550,269
13,908,764
17,803,058
23,320,479
26,992,363
1,570
4,565
1,171
1,520
2,068
2,372
21,470,729
72,418,319
15,280,514
19,239,558
25,559,529
29,208,513
90,000
74,500
57,700
60,700
66,600
90,000
60
43
32
53
36
70
2,103,000
1,425,635
1,151,600
1,635,000
1,136,800
2,425,000
2,829
1,160
843
1,566
1,190
1,824
133
67
7
73
42
73
35,958,669
14,281,465
10,825,900
18,560,843
13,995,745
25,479,762
3,023
1,271
883
1,693
1,269
1,968
38,151,669
15,781,600
12,035,200
20,256,543
15,199,145
27,994,762
931,850
675 24,187,585 21,751
935 287,476,646 23,373 312,596,081
12. Federal Reserve Bank Interest Rates, December 31, 1978
Per cent per a n n u m
Loans to member banks
Federal Reserve
Bank
Boston
New York
9h
L o a n s to all others
under last paragraph
of Sec. 13 *
Under
Sec. 10(b) 2
Under
Sees. 13
a n d 13a *
Regular rate
Special rate 3
10
>
10Vz
12 'A
10
10»/2
12*
Philadelphia....
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis....
K a n s a s City
Dallas
San F r a n c i s c o . .
>
9%
1
This rate applies to discounts of eligible paper a n d advances secured by such paper or by U . S .
G o v e r n m e n t obligations or any other obligations eligible for purchase by a Federal Reserve Bank.
2
This rate applies to advances secured to the satisfaction of the Federal Reserve Bank. Advances
secured by mortgages on 1 - to 4-family residential property are m a d e at the Section 13 rate.
3
The rate is applicable t o special advances described in Section 20l.2(eK2) of Regulation A.
4
This rate applies to advances to individuals, partnerships, or corporations other than member
banks that are secured by direct obligations of, or obligations fully guaranteed as to principal a n d
interest by, the U . S . G o v e r n m e n t or any of its agencies.
408
Tables
13. Member Bank Reserve Requirements
Per cent of deposits
Through July 13, 1966
Net demand deposits *
Effective date
1917—June
1936—Aug.
1937—Mar.
May
1938—Apr.
1941—Nov.
1942—Aug.
Sept.
Oct.
1948—Feb.
June
Sept.
1949—May
June
Aug.
Aug.
Aug.
Aug.
Sept.
1951—Jan.
Jan.
1953—July
1954—June
July
1958—Feb.
Mar.
Apr.
Apr.
1960—Sept.
Nov.
Dec.
1962—July
Oct.
l
Time deposits
(all classes
of banks)
Central reserve
city banks
Reserve city
banks
Country
banks
13
19i/2
22 %
26
22 3 / 4
26
24
22
20
22
24
26
24
10
15
171/2
20
I71/2
20
7
IO1/2
I2V4
14
12
14
3
41/2
5%
6
5
6
22
21
20
71/2
231/2
23
221/2
22
23
24
22
21
20
I91/2
19
I8V2
18
171/2
I91/2
19
I8V2
18
19
20
19
16
15
14
13
12
13
14
13
6
21
16
1
1
16
1
20
14
3
27
11
24, 16
5, 1
30, July 1
1
11, 16
18
25
1
11, 16
25, Feb. 1
9, 1
24, 16
29, Aug. 1
27, Mar. 1
20, Apr. 1
17
24
1
24
1
28
25. N o v . 1
6
5
5
18
I71/2
17
12
HVi
11
I61/2
12
I61/2
(3)
4
July 14, 1966, through N o v . 8, 1972 (deposit intervals in millions of dollars)
Time deposits *
(all classes of banks)
Net demand
deposits 2
Effective date >
Reserve
city banks
Country
banks
Other
time
Savings
Over
5
0-5
1966—July 14, 21
Sept. 8 15
Over
5
0-5
54
* 12
* I61/2
1967—Mar. 2
Mar. 16
1968—Jan. 11, 18
1969—Apr. 17
1970—Oct.
1
0-5
31/2
3
I6V2
17
17
17Vi
12
I21/2
54
Over
5
5
6
31/2
12V,
13
5
1
Reserves required during the period from inception of the Federal Reserve System until June 20,
1917, were not strictly comparable with later requirements; they were based o n aggregate a m o u n t s of
deposits, and reserve balances with the Reserve Banks were increased in stages.
W h e n two dates are shown, the first applies to the change a t central reserve or reserve city b a n k s a n d
the second to the change at country banks.
2
D e m a n d deposits subject to reserve requirements, beginning Aug. 23, 1935, have been total d e m a n d
deposits minus cash items in process of collection and d e m a n d balances due from domestic b a n k s
(also minus war loan and Series E bond accounts during the period Apr. 13, 1943-June 30, 1947).
All required reserves were held on deposit with Federal Reserve Banks from June 21, 1917, until late
1959. Since then, member banks have also been allowed to count vault cash as reserves, as follows:
country banks—in excess of 4 a n d 2lA per cent of net d e m a n d deposits effective Dec. 1, 1959, a n d Aug.
Tables
409
13.—Continued
Beginning Nov. 9, 1972 (deposit intervals in millions of dollars)
Net demand deposits2-6
Time deposits 4
Other time
0-5, by time8 to
Effective date
0-2
2-10
10100
100400
Over
400
maturity
Savings
180
days
to
4 yrs.
30179
days
1972—Nov. 9
Nov. 16
1973—July 19.
1974 nee 12
1975—Feb. 13
Oct. 30
1976—j an . 8
Dec. 30
IneffectDec.31,1978..
8
71/2
10
12
IO1/2
I21/2
131/2
18
10
12
13
I71/2
161/2
•16V4
13
17i/2
53
Legal limits—Dec. 31, 1978
Net demand deposits
Reserve city banks
Other banks
Time deposits
91/2
91/2
\VA
11%
123/4
123/4
16%
16'/4
Over 5, by time to
maturity 8
30179
days
180
days 4 yrs.
or
to
4 yrs. more
63
65
6
3
3
101
3
7
7
4 yrs.
or
more
7
3
1021/2
3
10
21/2
101
3
6
10
21/2
10
21/2
101
101
Minimum Maximum
10
7
3
22
14
10
25, 1960, respectively; central reserve city and reserve city banks—in excess of 2 and 1 per cent effective Dec. 3, 1959,
and Sept. 1, 1960, respectively; all member banks were allowed to count all vault cash as reserves effective Nov. 24,
1960.
2 In graduated requirement schedules, each deposit interval applies to that part of the deposits of each bank.
Beginning Oct. 16, 1969, Regulation M required reserves against (a) net balances due from domestic offices to
their foreign branches and (b) foreign-branch loans to U.S. residents; Regulation D imposed a similar requirement
against (c) borrowings from foreign banks by domestic offices of a member bank. Limited reserve-free base amounts
were originally permitted under Regulation M but were eliminated for (b) effective June 21, 1973, and were lowered
in steps for (a) and (c) until eliminated effective Mar. 14, 1974. Beginning June 21, 1973, loans aggregating $100,000
or less to any U.S. resident have been excluded from computations, as have total loans of a bank to U.S. residents
if not exceeding $1 million. The applicable reserve percentage, which was originally 10 per cent, was increased
to 20 per cent on Jan. 7, 1971; reduced to 8 per cent on June 21, 1973, to 4 per cent on May 22, 1975, and to zero
on Aug. 24, 1978. Effective Dec. 1, 1977, the reserve required against deposits that foreign branches of U.S. banks
use for lending to U.S. residents was reduced to I per cent, and on Aug. 24, 1978, it was reduced to zero. For
details see Regulations D and M as described in "Record of Policy Actions of the Board of Governors," in previous
ANNUAL REPORTS.
J
Authority of the Board of Governors to classify or reclassify cities as central reserve cities was terminated
effective July 28, 1962.
4
Time deposits such as Christmas and vacation club accounts became subject to the same requirements as savings
deposits, effective Jan. 5, 1967. Negotiable orders of withdrawal (NOW) accounts were denned in the Board's
Regulation Q as savings deposits beginning Jan. 1, 1974.
The last three paragraphs of note 2 above are also relevant to time deposits
5
This rate had been established in the earlier structure. It remained the same in the new structure established
this date.
6
Effective Nov. 9, 1972, a new criterion was adopted to designate reserve cities, and on the same date requirements
for reserves against net demand deposits of member banks were restructured to provide that each member bank
will maintain reserves related to the size of its net demand deposits. The new reserve city designations are as follows:
A bank having net demand deposits of more than $400 million is considered to have the character of business of a
reserve city bank, and the presence of the head office of such a bank constitutes designation of that place as a
reserve city. Cities in which there are Federal Reserve Banks or branches are also reserve cities. Any bank, wherever
located, having net demand deposits of $400 million or less is considered to have the character of business of banks
outside of reserve cities and is permitted to maintain reserves at ratios set for banks not in reserve cities.
7
Beginning Nov. 2, 1978, a supplementary reserve requirement of 2 per cent was added to the existing requirements for time deposits of $100,000 or more and for certain other liabilities.
8
From June 21, 1973, through Dec. 11, 1974, member banks, except as noted below, were subject to a marginal
reserve requirement against increases in the aggregate of the following types of obligations: (a) outstanding time
deposits of $100,000 or more, (b) outstanding funds obtained by the bank through issuance by a bank's affiliate of
obligations subject to the existing reserve requirements on time deposits, and (c) beginning July 12, 1973, funds
from sales of finance bills. For the period June 21 through Aug. 29, 1973, (a) included only single-maturity time
deposits. The requirement applied to balances above a specified base, but was not applicable to banks having
obligations of these types aggregating less than $10 million. Including the basic requirement (5 per cent during the
entire period), requirements were as follows: 8 per cent for (a) and (b) from June 21 through Oct. 3, 1973, and for
(c) from July 12 through Oct. 3, 1973; 11 per cent from Oct. 4 through Dec. 26, 1973; and 8 per cent from Dec. 27,
1973, through Sept. 18, 1974. Beginning Sept. 19, the 8 per cent requirement applied only to those obligations in
(a), (b). and (c) with initial maturities of less than 120 days, and effective Dec. 12, 1974, the remaining marginal
reserve was removed on this type of obligation issued to mature in less than 4 months. For details, see "Record of
Policy Actions of the Board of Governors" in 1973 and 1974 ANNUAL REPORTS.
9
The I6V2 per cent requirement applied only for 1 week and solely to former reserve city banks. For other banks,
the 13 per cent requirement was contintued in this deposit interval.
10
The average of reserves on savings and other time deposits must be at least 3 per cent, the legal minimum.
410
Tables
14. Maximum Interest Rates Payable on Time and Savings Deposits
Per cent per annum
N o v . 1, 1933-July
19, 1966
Effective date
Type of deposit
N o v . 1,
1933
Savings deposits
12 m o n t h s or m o r e
Less t h a n 12 m o n t h s
Postal savings deposits
12 m o n t h s or m o r e
Less t h a n 12 m o n t h s
O t h e r time deposits 2
12 m o n t h s or m o r e
6—12 m o n t h s . . .
90 days to 6 m o n t h s
Less t h a n 90 days
(30-89 days)
F e b . 1,
1935
Jan. 1, Jan. 1, Jan. 1, July 17, Nov. 24, Dec. 6,
1936
1957
1962
1963
1964
1965
3
4
4
3
4
4
3V2
3
4
l
2V2
2V2
2V2
3
3
2
2Vi
1
2»/2
11 *
1 *
}*
4
4
5V4
4
July 20, 1966-June 30, 1973
Effective date
Type of deposit
Sept. 26,
1966
Apr. 19,
1968
Jan. 21,
1970
4
4
4
4%
4
4
4
4Vi
^
5
5
July 20,
1966
Savings deposits
Other time deposits 23
Multiple maturity
30-89 days
1
90 days to 1 year
1-2 years
i
2 years or more
]
Single-maturity
Less than $100,000
30 days to 1 year
1
1-2 years
2 years or more
$100,000 or more
30-59 days
60-89 days
90-179 days
180days to 1 year...
1 year or more
5
5Vi
5 3 /4
5
5V2
5
5 l /2
5 3 /4
5VS
5
53/4
6
(4)
(4)
(4)
(4)
(4)
I
5V4
J
Beginning July 1, 1973
Effective date
Type of deposit
Savings deposits
Other time deposits
(multiple- and singlematurity) 2- 8
Less than $100,000
30-89 days
90 days to 1 year
1-2V2 years.*
2Vi years or more
Minimum denomination of $1,000 5
4-6 years
6 years
8 years or more
Governmental units
Individual retirement accounts and
Keogh(H.R. 10) plans «
Money market time deposits 9
$100,000 or more
July 1,
1973
5
5'/2
6
Nov. 1, Nov. 23, Dec. 23,
1974
1973
1974
July 6,
1977
5
5
51/2
SVi
6
6V2
6
7>/ 4
1%
7V4
7%
I1A
IVi
73A
7%
6
6V1
6V2
73/4
(*)
June 1,
1978
(•)
"(4)"
73/4
8
8
(10)
1 Closing date for the Postal Savings System was Mar. 28, 1966.
2 For exceptions with respect to foreign time deposits, see ANNUAL REPORT for 1962, p. 129; 1965,
p. 233; 1968, p. 69.
• Multiple-maturity time deposits include deposits that are automatically renewable at maturity
without action by the depositor and deposits that are payable after written notice of withdrawal.
For
additional notes see opposite page.
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
Tables
15. Margin Requirements
411
]
Per cent of market value
Effective
date
11-01-37
2-05-45
7-05-45
1-21-46
2-01-47
3-03-49
1-17-51
2-20-53
1-04-55
4-23-55
1-16-58
8-05-58
10-16-58
7-28-60
7-10-62
11-06-63
3-11-68
6-08-68
5_06-70
12-06-71
11-24-72
l_03-74
1-01-77
For credit extended under Regulation T (brokers and dealers), U (banks),
G (others than brokers, dealers, or banks), and X (borrowers)
Margin
stocks
Convertible
bonds
40
50
75
100
75
50
75
Short sales,
T only
Writing options,
T only 2
50
50
75
100
75
50
75
50
50
60
70
60
70
50
50
70
90
70
90
70
50
70
50
70
70
80
65
55
65
50
60
50
50
50
70
70
80
65
55
65
50
50
50
50
50
50
30
Notes
to Table 14 on opposite page
4
The limit on rates on single-maturity time deposits of $100,000 or more has been suspended.
The maximum rates that became effective Jan. 21, 1970, and the dates when they were suspended are
as follows:
30-59 days
6% percent)
June 24, 1970
60-89 days
6V2 per cent/
90-179 days
63A per cent
180 days to I year
7 percent^
May 16, 1973
1 year or more
7Vi per cent]
Rates on multiple-maturity time deposits in denominations of $100,000 or more were suspended
July
16, 1973, when the distinction between single- and multiple-maturity deposits was eliminated.
5
The $1,000 minimum-denomination requirement does not apply to time deposits representing funds
contributed to an individual retirement account established pursuant to 26 U.S.C. (I.R.C. 1954),
Sec. 408, or to a Keogh (H.R. 10) plan established pursuant to 26 U.S.C. (I.R.C. 1954), Sec. 401.
These
exceptions were effective Dec. 4, 1975, and Nov. 8, 1976, respectively.
6
Between July 1, and Oct. 31, 1973, there was no ceiling for certificates maturing in 4 years or more
with minimum denominations of $1,000. The amount of such certificates that a bank could issue was
limited to 5 per cent of its total time and savings deposits. Sales in excess of that amount were subject
to the 6Y2 per cent ceiling that applies to time deposits maturing in 2Vz years or more.
Effective Nov. 1, 1973, a ceiling rate of 7VA per cent was imposed on certificates maturing in 4 years
or more with minimum denominations of $1,000. There is no limitation on the amount of these certificates
that banks may issue.
7
Prior to Nov. 27, 1974, no distinction was made between the time deposits of governmental units
and of other holders insofar as Regulation Q ceilings on rates payable were concerned. Effective
Nov. 27, 1974, governmental units were permitted to hold sayings deposits and could receive interest
rates on time deposits with denominations under $100,000, irrespective of maturity, as high as the
maximum rate permitted on such deposits at any Federally insured depositary institution. Effective
June 1, 1978, the maximum rate on such governmental-unit time deposits was set as high as the maximum permitted on such deposits maturing in 6 months (26 weeks) or more at any Federally insured
commercial bank, mutual savings bank, or savings and loan association.
8
Three-year minimum maturity.
9 These deposits must have a maturity of exactly 26 weeks and a minimum denomination of $10,000,
and
must be nonnegotiable.
10
Commercial banks were authorized to offer money market time deposits effective June 1, 1978.
The ceiling rate is the discount rate on most recently issued 6-month U.S. Treasury bills. The most
recent rates and effective dates are published monthly in the Federal Reserve Bulletin, p. A10.
NOTE. Maximum rates that may be paid by member banks are established by the Board of Governors under provisions of Regulation Q; however, a member bank may not pay a rate in excess of the
maximum rate payable by State banks or trust companies on like deposits under the laws of the State
in which the member bank is located. Beginning Feb. 1, 1936, maximum rates that may be paid by
nonmember insured commercial banks, as established bv the Federal Denosit Insurance Corporation.
412
Tables
16. Fees and Rates under Regulation V on Loans Guaranteed Pursuant to
Defense Production Act of 1950, December 31, 1978
Fees payable to guaranteeing agency by financing institution on guaranteed portion of loan
Percentage of loan guaranteed
70 or less
75
80
85
90
95
Over 95..
Guarantee fee
(percentage of
interest payable
by borrower) 1
Percentage of
any commitment
fee charged
borrower
10
15
20
25
30
35
40-50
10
15
20
25
30
35
40-50
Maximum rates financing institution may ch<irge borrower (per cent per annum) 2
Interest rate
Commitment rate
IVz
Vz
1
In any case in which the rate of interest on the loan is in excess of 6 per cent, the guarantee fee
shall
be computed as though the interest rate were 6 per cent.
2
The agency guaranteeing a particular loan may from time to time prescribe a higher rate if it
determines that the loan is necessary in financing any contract or other operation that the agency
deems essential to the national defense.
Tables
413
17. Principal Assets and Liabilities, and Number of Insured Commercial
Banks, by Class of Bank, September 30, 1978 and 1977 x
Asset and liability items shown in millions of dollars
Insured commercial banks
Insured
nonmember
banks
Member banks
Item
Total
Total
National
State
September 30, 1978
981,029
714,082
553,558
160,523
266,946
Investments
U.S. Treasury securities
Other
. .
Cash assets, total
717 174
692,724
263,855
95,068
168,787
158,379
532 801
515,552
181,280
65,763
115,516
134,955
414 220
400,334
139,337
49,199
90,138
91,224
118 581
115,218
41,942
16,564
25,378
43,730
184 372
177,171
82,574
29,304
53,269
23,424
Deposits total
Interbank
Other demand
Other time
Total equity capital
960,918
58,004
320,772
582,141
85,540
701,194
55,364
235,931
409,899
63,174
533,059
28,796
179,769
324,492
48,288
168,135
26,567
56,161
85,406
14,885
259,723
2,639
84,841
172 242
22,365
14,390
5,593
4,596
997
8,797
Loans and investments total...
Loans
Gross
Net
....
Number of banks
September 30, 1977
Loans and investments total
. Loans
Gross
Net
Investments .
U.S. Treasury securities
Other
Cash assets total
.
. . .
877,988
648,339
499,707
148,631
229,649
623,299
602,476
254,689
98,633
156,056
140,399
468,683
453,835
179,655
70,746
108,908
119,930
362,752
350,946
136,954
51,984
84,970
82,208
105,930
102,888
42 700
18,762
23,938
37,722
154,615
148,641
75 033
27,886
47,147
20,469
Deposits, total
Interbank
Other demand
Other time
Total equity capital
861,846
49,412
292,795
519,639
77,691
636,761
47,050
219,629
370,081
58,070
483,958
25,129
166,481
292,346
44,123
152,803
21 921
51.147
77,734
13,947
225,085
2 361
73 165
149,558
19,620
14,420
5,691
4,676
1,015
8,729
Number of banks
1
All insured commercial banks in the United States.
NOTE. Details may not add to totals because of rounding.
414
Tables
18. Member Bank Reserves, Federal Reserve Bank Credit, and Related
Items—Year-end, 1918-78 and Month-end, 1978
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
U.S . Government
securities
Total
Bought
outright
Held
under
repurchase
agreement
Loans
Float
Other
Federal
Reserve
assets
All
other
2
Gold
stock
Total
4
3
Special
drawing
rights
certificate
accounts
Treasury
currency
outstanding
5
1918. . .
1919. . .
239
300
239
300
1,766
2,215
199
201
294
575
2,498
3,292
2,873
2,707
1 795
1,707
1920. .
1921. . .
1922.. .
1923...
1924 .
287
234
436
134
540
287
234
436
80
536
2,687
1,144
618
723
320
119
40
78
27
52
262
146
273
355
390
3,355
1,563
1,405
1,238
1,302
2,639
3,373
3,642
3,957
4,212
1,709
1,842
1,958
2,009
2 025
1925...
1926
1927...
1928...
1929
375
315
617
228
511
367
312
560
197
488
643
637
582
1,056
632
63
45
63
24
34
378
384
393
500
405
1,459
1,381
1,655
1,809
1,583
4,112
4,205
4,092
3,854
3,997
1,977
1 991
2,006
2,012
2,022
1930...
1931. .
1932. . .
1933
1934...
729
817
1,855
2 437
2,430
686
775
1,851
2 435
2,430
8
3
57
31
23
43
42
4
2
251
638
235
98
7
21
20
14
15
5
372
378
41
137
21
1,373
1,853
2,145
2,688
2,463
4,306
4,173
4,226
4 036
8,238
2,027
2,035
2,204
2,303
2,511
1935
1936. . .
1937
1938. . .
1939
2 431
2,430
2 564
2,564
2 484
1
5
3
10
4
7
12
39
19
17
91
38
28
19
16
11
2,486
2,500
2,612
2,601
2,593
10,125
11,258
12,760
14,512
17,644
2,476
2,532
2,637
2,798
2,963
1940
2 184
1941.. . 2,254
1942
6 189
1943 . . 11,543
1944 . 18,846
2 430
2,430
2 564
2,564
2 484
2 184
2,254
6 189
11,543
18 846
3
3
6
5
80
80
94
471
681
815
8
10
14
10
4
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
1945.. .
1946 . .
1947
1948
1949. . .
24,262
23,350
22 559
23 333
18,885
24,262
23,350
22 559
23 333
18,885
249
163
85
223
78
578
580
535
541
534
2
25,091
24,093
23 181
24,097
19,499
20,065
20,529
22,754
24,244
24,427
4,339
4,562
4,562
4,589
4,598
1950
1951...
1952. . .
1953. . .
1954.. .
20 778
23,801
24,697
25,916
24,932
20 725
23,605
24,034
25,318
24,888
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
22,216
25,009
25,825
26,880
25,885
22,706
22,695
23,187
22,030
21,713
4,636
4,709
4,812
4,894
4,985
1955. . .
1956
1957. . .
1958...
1959.. .
24,785
24 915
24,238
26,347
26,648
24,391
24 610
23,719
26,252
26,607
394
305
519
95
41
108
50
55
64
458
1,585
1,665
1,424
1,296
1,590
29
70
66
49
75
26,507
26,699
25,784
27,755
28,771
21,690
21,949
22,781
20,534
19,456
5,008
5,066
5,146
5,234
5,311
1960...
1961
1962.. .
1963...
1964...
27,384
28 881
30,820
33,593
37,044
26,984
28 722
30,478
33,582
36,506
400
159
342
11
538
33
130
38
63
186
1,847
2 300
2,903
2,600
2,606
74
51
110
162
94
29,338
31,362
33,871
36,418
39,930
17,767
16,889
15,978
15,513
15,388
5,398
5,585
5,567
5,578
5,405
54
4
For notes see last two pages of table.
j
2
3
c
4
2
Tables
415
18.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Treasury
cash
hold-6
ings
Deposits, other
than member bank
reserves, with
Federal Reserve Banks
Other
Other Federal
Federal Reserve
Reserve
liaacbilities
With
counts 3
and 3 Federal
capital Reserve
Banks
Treasury
Foreign
Other
25
28
118
208
1,636
1,890
18
15
298
285
258
1,781
1,753
1,934
1,898
2,220
4,951
5 091
288
385
51
31
96
73
5 325
4,403
4,530
4 757
4,760
218
214
57
96
5
12
Member bank
reserves
Currency
and
coin 7
Required
8
Excess 8
1,585
1,822
51
68
1,654
99
i ,884
2,161
14
59
225
213
11
38
3
4
26
19
211
51
19
20
4,817
4,808
4 716
4,686
4,578
203
201
208
202
216
16
17
18
23
29
8
46
5
6
6
21
19
21
21
24
272
293
301
348
393
2,212
2,194
2,487
2,389
2,355
2,256
2,250
2,424
2,430
2,428
-44
-56
63
-41
-73
4,603
5 360
5,388
5,519
5,536
211
222
272
284
6
79
19
4
20
22
31
24
128
169
375
354
355
360
241
2,471
1,961
2,509
2,729
4,096
2,375
1 994
1,933
1,870
2,282
96
-33
576
859
3 029
19
54
8
3
121
1,814
5,882
6,543
6,550
6 856
7,598
2,566
2 376
3,619
2 706
2,409
544
244
142
923
29
99
172
199
226
160
235
242
253
261
263
260
634
397
256
251
5,587
6,606
7,027
8,724
11,653
2,743
4,622
5,815
5 519
6,444
2,844
1,984
1,212
3,205
5,209
8,732
11,160
15,410
20,449
25,307
2,213
2,215
2 193
2,303
2,375
368
1,133
599
284
867
799
579
440
774
793
1,360
1,204
586
485
356
394
291
256
339
402
14,026
12,450
13 117
12,886
14,373
7,411
9,365
11 129
11,650
12,748
6,615
3,085
1,988
1,236
1,625
28,515
28,952
28,868
28,224
27,600
2,287
2.272
1,336
1,325
1,312
821
862
508
392
642
767
446
314
569
547
750
495
607
563
590
706
15,915
16,139
17,899
20,479
16,568
14,457
15,577
16,400
19,277
15,550
1,499
1,202
1,018
27,741
29,206
30,433
30,781
30,509
1,293
1,270
.270
'761
796
668
247
389
895
526
550
565
363
455
714
746
111
493
441
839
907
17,681
20,056
19,950
20,160
18,876
16,509
19,667
20,520
19,397
18,618
31,158
31,790
31,834
32,193
32,591
32,869
33,918
35,338
37,692
39,619
977
393
870
1,123
276
275
346
563
423
490
767
394
402
554
925
775
761
683
441
481
358
322
356
272
426
246
391
901
998
1,122
841
19,005
19,059
19 034
18,504
18,174
310
18,903
19,089
19,091
18,574
18,619
941
1,044
1,007
1,065
1,036
17,081
17,387
17 454
17,049
18,086
2,544
2,823
3 262
4,099
4,151
18,988
20,114
20 071
20,677
21,663
391
504
377
422
380
485
465
597
217
279
247
533
320
393
361
612
880
820
171
229
291
321
345
For notes see last two pages of table.
694
1,458
562
1,172
389
-570
763
258
102
-30
-57
-70
-135
637
96
645
471
574
416
Tables
18. Member Bank Reserves, Federal Reserve Bank Credit, and Related
Items—Year-end, 1918-78 and Month-end, 1978—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
U.S Government
securities 8
Period
Total
1965
1966
1967...
1968
1969.
1970
1971...
1972...
1973...
1974...
1975. . .
1976...
1977.. .
1978.. .
1978
Jan.
Feb
Mar..
Apr..
May .
June .
July..
Aug..
Sept..
Oct..
40 768
44 ,316
49 ,150
5? ,937
57 ,154
Bought
outright 10
10
40 478
43 655
48, 980
52 937
57, 154
6? 14? 62
70 ,804 69, 481
71 ,230 71, 119
80 ,495 80, 395
85 ,714 84, 760
94 ,124 92, 789
104 ,093 100, 062
111 ,274 108, 922
118 ,591 117, 374
105 ,008 105 008
106 ,43? 106 43?
109 770
111 ,564
110 ,747
118 ,672
117 ,120
119 836
123 ,876
1?3 ,387
Nov
1?1
Dec.. 118 ,591
107
110
110
116
116
117
120
127
121
117
819
697
290
027
313
836
977
597
?04
374
Held
under
repurchase
agreement
290
661
170
1,323
111
100
954
1,335
4,031
2,352
1,217
1,951
867
457
2,645
807
2,000
2,899
790
1,217
Loans
Float
I
All
other
2
Other
Federal
Reserve
assets
Gold
stock
Total
4
3
137
173
141
186
183
?
,?48
2 ,495
2 ,576
3 ,443
3 ,440
335
39
4
4 |343
3 ,974
3 ,099
2 ,001
3 ,688
2 ,601
3 ,810
6 ,432
1 ,981
1 ,258
299
211
25
265
1 ,174
758
304
332
1 ,750
1 ,167
1 ,428
1 ,127
954
1 ,365
1 ,207
813
1 ,174
4 083
3 499
2 ,732
3 ,017
4 ,419
3 ,318
5 ,092
5 ,225
3 ,719
4 ,436
7 738
6 ,432
187
193
164
58
64 2,743
57
261
106
68
999
1,126
991
954
587
1,123
1,068
1,260
1,152
3,195
3,312
3,182
2,442
4,543
43,340
47,177
52,031
56,624
63,584
67 918
76,515
78,551
86,072
92,208
102,461
110,892
118,745
131,327
Special
drawing
rights
certificate
accounts
13,733
13,159
11,982
10,367
10,367
10,732
400
10,132
400
10,410
400
11,567
400
11,652
400
11,599
500
11,598 ,200
11,718 ,250
11,671 1,300
Treasury
currency
outstanding
&
5 575
6317
6 784
6 795
6 852
7 149
7,710
8,313
8,716
9,253
10,218
10,810
11,331
11,831
2,939 112,788 11,718 ,750 11,380
750 11,396
1,899 112,134 11,718
11,718 1,250 11,441
11,718 ,250 11,482
11,718 ,250 11,526
2,454 126,893 11,706 ,250 11,565
2,902 126,509 11,693 ,250 11,592
2,063 128,374 11,679 ,300 11,641
2,439 132,114 11,668 ,300 11,683
2,756 132,022 11,655 ,300 11,731
300 11,790
2,350 131,605 11,642
4,543 131,327 11,671 1,300 11,831
770 2,328 115,932
290 3,161 119,782
274 2,586 119,193
1,021
268
296
715
236
587
1 Beginning with 1960, figures reflect a minor change in concept; see Federal Reserve Bulletin, vol. 47
(Feb.
1961), p. 164.
2
Data consist principally of acceptances and, until Aug. 21,1959, industrial loans, authority for which
expired
on that date.
3
Before Apr. 16, 1969, this category includes the total of Federal Reserve Bank capital paid in,
surplus, other capital accounts, and other liabilities and accrued dividends less the sum of bank premises
and other assets, and was reported as "Other Federal Reserve accounts"; thereafter, "Other Federal
Reserve assets" and "Other Federal Reserve liabilities and capital" are shown separately.
* Before Jan. 30, 1934, data include gold held in Federal Reserve Banks and in circulation.
5
These figures include currency and coin (other than gold) issued directly by the Treasury. The
largest components are fractional and dollar coins. For details see the regular table, "Currency and
Coin
in Circulation," in the Treasury Bulletin.
6
This category consists of the coin and paper currency held by the Treasury, as well as any gold in
excess of the gold certificates issued to the Reserve Bank.
' Between Dec. 1, 1959, and Nov. 23, 1960, part of the amount was allowed as reserves; thereafter
all8was allowed.
These figures are estimated through 1958. Before 1929, they were available only on call dates (in
1920 and 1922, the call dates were Dec. 29). Beginning Sept. 12, 1968, the amount is based on close-ofbusiness figures for the reserve period 2 weeks previous to the report date.
• Beginning Dec. 1, 1966, these securities include Federal agency obligations held under repurchase
agreements and beginning Sept. 29, 1971, Federal agency issues bought outright.
Tables
417
18.—Continued
Factors absorbing reserve funds
Currency
in
circulation
42,056
44,663
47,226
50,961
53,950
Treasury
cash
hold-6
ings
760
1,176
1,344
695
596
Deposits, other
than member bank
reserves, with
Federal Reserve Banks
Treasury
Foreign
668
416
1,123
703
1,312
150
174
135
216
134
Other
Member bank
reserves
Other
Other Federal
Federal Reserve
liaReserve
bilities
acWith
and 3 Federal
counts 3
capital
Reserve
Banks
Currency
and
coin 7
Required
4,163
4,310
4,631
4,921
5,187
22,848
24,321
25,905
27,439
28,173
30,033
-460
32,496
1,035
32,044
H98
35,268 - 1 , 3 6 0
37,011 - 3 , 7 9 8
35,197 13-1,103
35,461 - 1 , 5 3 5
37,615 - 1 , 2 6 5
8
Excess
8. 11
1,919
18,447
19,779
21,092
21,818
22,085
148 1,233
999
294
840
325
251 «1,419
418 12 1,275
353 1,090
352 1,357
379 1,187
1,986
2,131
2,143
2,669
2,935
2,968
3,063
3,292
24,150
27,788
25,647
27,060
25,843
26,052
25,158
26,870
5,423
5,743
6,216
6,781
7,370
8,036
8,628
9,421
4,196
368
1,256
4,275
31,152
10,538
42,694
-893
11,228
3,615
4,705
7,177
2,398
11,614
10,331
12,068
16,647
15,467
6,587
4,196
422
445
352
481
454
288
347
309
325
305
379
368
871
698
740
684
660
773
771
691
628
531
567
1,256
4,109
3,933
3,860
4,080
4,235
4,193
4,247
4,329
4,372
4,560
4,545
4,275
19,301
26,047
27,900
28,321
30,135
27,920
28,461
27,705
26,830
26,260
31,919
31,152
9,893
9,085
8,935
9,247
9,215
9,513
9,881
9,578
9,904
9,861
10,056
10,538
37,292
36,012
36,291
37,608
36,529
38,324
37,705
37,295
38,746
38,295
41,138
42,694
-8,020
-794
623
35
2,899
-817
713
63
-1,937
-2,095
918
-893
57,093
61,068
66,516 .
72,497
79,743
86,547
93,717
103,811
431 1,156
460 2,020
345 1,855
317 2,542
185 3,113
483 7,285
460 10,393
392 7,114
114,645
240
100,819
101,369
102,392
103,114
105,443
106,288
106,577
107,588
107,663
109,307
112,072
114,645
387
388
393
376
365
337
313
299
299
276
267
240
355
211
588
-147
653
-773
747 - 1 , 3 5 3
807
-238
-232
-182
-700
-901
10
Includes, beginning 1969, securities loaned—fully guaranteed by U.S. Government securities
pledged with Federal Reserve Banks—and excludes (if any) securities sold and scheduled to be bought
back
under matched sale-purchase transactions.
11
Beginning with the week ending Nov. 15, 1972, figures include $450 million of reserve deficiencies
on which Federal Reserve Banks are allowed to waive penalties for a transition period in connection
with bank adaptation to Regulation J as amended, effective Nov. 9, 1972. Allowable deficiencies (beginning with first statement week of quarter) included are (in millions): 1973—Ql, $279; Q2, $172; Q3,
$112; Q4, $84; and 1974—Ql, $67, and Q2, $58. The transition period ended after the second quarter
of 121974.
Beginning July 1973, this item includes certain deposits of domestic nonmember banks and foreignowned banking institutions held with member banks and redeposited in full with Federal Reserve
Banks in connection with voluntary participation by nonmember institutions in the Federal Reserve
System's program of credit restraint.
As of Dec. 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch
deposits at Federal Reserve Banks that are associated with marginal reserves are no longer reported.
However, two amounts are reported: (1) deposits voluntarily held as reserves by agencies and branches
of 13foreign banks operating in the United States, and (2) Euro-dollar liabilities.
Beginning with the week ending Nov. 19, 1975, figures are adjusted to include waivers of penalties
for reserve deficiencies, in accordance with a change in Board policy that became effective Nov. 19, 1975.
NOTE. For a description of figures and discussion of their significance, see "Member Bank Reserves
and Related Items," Section 10 of Banking and Monetary Statistics, 1941-1970 (Board of Governors
of the Federal Reserve System, September 1, 1976), pp. 507-23.
418
Tables
19. Changes in Number of Banking Offices in the United States during 1978 '
Commercial banks (including stock savings
banks and nondeposit trust companies)
Type of office
and change
All
banks
Banks, Dec. 31, 1977.. 15,172 14,705
Changes during 1978
New banks:
Placed in receivership
Ceased banking
operations
Banks converted
into branches...
Other...
Interclass changes
Nonmember to
national
State member
State member to
nonmember. . .
National to nonmember
National to State
member
Noninsured to insured
Noninsured mutual to insured
mutual
Net change..
Dec. 31, 1978
182
180
Total
National
State
Non- Insured NonInsured insured
insured
5,669
4,655
1,014
8,729
307
323
54
37
17
94
32
2
-1
-158
-16
-1
-154
-16
-67
-8
-54
-8
3
12
3
-37
-1
-1
-62
-13
-87
-6
12
-3
-12
-37
37
-62
-7
-1
""-2
-3
61
7
3
-3
7
-105
- -91
-14
86
26
1
2
-1
-4
15,177 14,712
5,564
4,564
1,000
8,815
1333
325
140
4,588 10,613
54
1,979
335
2
239
-31
15
3
-1
5
Changes during 1978
De novo
2,058
Banks converted. ..
156
Discontinued
-310
Sale of branch
Interclass changes
Nonmember to
national
Nonmember to
State member
State member to
national
State member to
nonmember
National to State
member
National to nonmember
Noninsured mutual to insured
mutual
Noninsured to insured
Facilities reclassi5
fied as branches.
4
Other
Net change. . . 1,912
1,804
152
-279
-1
1,044
75
-219
-5
896
47
-150
-4
9
9
110
8
— 129
-37
-241
Changes during 1978
Dec. 31, 1978 «
148
28
-69
-1
758
77
-59
4
110
-110
_9
-8
-129
129
37
241
-241
4
5
5
1,686
3
1
648
3
-6
525
36,930 34,390 22,685 17,974
Banking facilities,
Dec. 31, 1977 »
Interclass changes
Facilities reclassified as branches.
Net change...
144
-1
-1
Branches and additional
offices, Dec. 31,
1977 2
35,018 32,704 22,037 17,449
Dec. 31, 1978 2
Nonmember
Member
Total
Mutual
savings
banks
-4
4
-4
2
4
1,041
-3
212
14
4,711 11,654
51
2,191
349
7
123
26
176
176
150
139
3
3
2
2
1
-5
-8
-5
-8
-3
-5
-3
-5
2
-3
168
168
145
134
11
11
23
Tables
419
20. Number of Par and Nonpar Banking Offices, December 31, 1978
Par
Nonpar
(nonmember)
Total
Total
Area
Banks
Branches
and
offices
anks
Member
Nonmember
Branches
Branches
Branches
Branches
and
Banks and
Banks and
Banks and
offices
offices
offices
offices
Federal Reserve district
Boston
New York....
Philadelphia. .
Cleveland
Richmond...
Atlanta
362
458
367
753
759
1,872
2,126
362
4,791
458
2,344
367
2,920
753
4,685
759
3,663 1,855
2,126
4,791
2,344
2,920
4,685
3,643
178
245
227
450
394
595
1,119
184
4,022
213
1,416
140
2,314
303
2,861
365
1,919 1,260
1,007
769
928
606
1,824
1,724
Chicago
St. Louis
Minneapolis.
Kansas City..
Dallas
San Francisco
2,759
1,444
1,419
2,262
1,558
536
3,781
1,813
627
1,039
457
6,534
3,781
1,813
627
1,039
456
6,584
918
407
512
796
701
141
2,292 1,841
834 1,037
343
907
632 1,466
167
851
395
4,961
1,489
979
284
407
289
TOTAL..
14,549
34,809 5,564
22,880 8,962
11,929
2,759
1,444
1,419
2,262
1,552
536
34,830 14,526
17
20
1
1,623
23
21
23
21
State
Alabama....
Alaska
Arizona
Arkansas....
California. ..
Colorado
Connecticut..
Delaware
District of
Columbia
Florida
55:
55:
312
12
20
260
229
299
65
17
31
1
20
260
229
299
65
1
n:
122
6
484
37:
3,897
81
587
147
484
372
3,897
81
587
14'
75
60
159
21
374
84
320
194
3,073
55
287
17
611
138
743
1
611
138
743
16
263
440
8
24
1,270
405
656
617
344
256
43
786
157
228
394
1,035
500
256
644
715
294
440
8
24
,270
405
656
617
344
233
43
786
157
228
394
1,035
500
256
644
694
294
Maryland
Massachusetts
Michigan
Minnesota
Mississippi....
Missouri
Montana
Nebraska
Nevada
New Hampshire
106
151
365
759
184
714
160
452
9
855
925
1,793
176
635
400
23
199
130
106
151
365
759
184
714
160
452
9
855
925
1,793
176
635
400
23
199
130
77
134
77
134
42
100
35
34
New Jersey...
New Mexico..
New York... .
North
Carolina..
North
Dakota...
Ohio
Oklahoma....
Oregon
Pennsylvania..
Rhode Island..
184
86
292
1,535
227
3,316
184
86
292
1,535
227
3,316
111
46
171
1,172
132
3,086
73
40
121
363
95
1230
88
1,683
1,683
29
810
59
873
172
482
483
63
376
16
117
1,942
216
525
2,426
226
117
1,942
216
525
2,426
226
46
327
207
7
23!
47
1,621
170
329
1,598
115
126
155
276
56
138
11
70
321
46
196
828
111
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
n:
172
482
483
63
376
16
190
6
17
185
169
140
44
1
178
28
164
178
1824
26
300
14:
136
360
348
383
73
2
10
486
162
143
170
89
61
20
42'
11
184
211
555
183
14:
348
335
155
367
6
14
784
243
513
447
255
172
23
359
146
44
183
480
31
111
296
359
139
40
80
208
237
42
153
101
125
5
462
514
1,354
87
268
105
15
144
108
66
71
15'
522
14:
561
59
327
4
393
411
439
89
367
295
8
55
22
420
Tables
20. Number of Par and Nonpar Banking Offices, December 31, 1978—Cont.
Par
Total
Total
Area
Banks
Member
Nonmember
Nonpar
(nonmember)
Branches
Branches
Branches
Branches
Branches
and
and
Banks
and
Banks
and
Banks
and
Banks
offices
offices
offices
offices
offices
State—Continued
South
Carolina..
South Dakota.
Tennessee.
Texas . ..
Utah
Vermont
Virginia
Washington.. .
West Virginia.
Wisconsin....
Wyoming
87
155
349
1,401
66
29
262
102
230
628
88
661
87
149
155
349
953
202 1,401
253
66
148
29
262
1,303
785
102
56
230
443
628
3
88
661
149
953
202
253
148
1,303
785
56
443
3
25
60
82
649
23
14
167
25
135
156
62
340
107
460
52
203
46
1,086
644
34
174
1
62
95
267
752
43
15
95
77
95
472
26
321
42
493
150
50
102
217
141
22
269
2
7
207
Other area
American 2
Samoa
Guam 2
Puerto Rico 3.
Virgin
Islands »..
3
19
1
12
232
3
19
1
12
232
5
25
3
19
6
24
6
24
24
6
1
Includes 1 Los Angeles branch and 19 New York City branches of 3 insured nonmember Puerto
R ican
banks.
2
American Samoa and Guam assigned to the San Francisco District for check-clearing and collection
purposes.
All member branches in Guam are branches of California and New York banks.
3
Puerto Rico and the Virgin Islands assigned to the New York District for check-clearing and collection purposes. All member branches in Puerto Rico are branches of banks located in California, New
York, and Pennsylvania. Certain branches of Canadian banks (2 in Puerto Rico and 5 in the Virgin
Islands) are included above as nonmember banks; and nonmember branches in Puerto Rico include 8
other branches of Canadian banks.
NOTE. Comprises all commercial banking offices on which checks are drawn, including 168 banking
facilities. Number of banks and branches differs from that in Table 19 because this table includes banks
in Guam, Puerto Rico, and the Virgin Islands but excludes banks and trust companies on which no
checks are drawn.
Tables 421
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978
Name of bank, type of transaction,
and other banks involved l
Apple Capital Bank, Mount Jackson, Va.
Merger
The Stonewall Jackson Bank and Trust
Company, Mount Jackson, Va.
Assets
(millions
of dollars)
Number of
banking offices
In
operation
To be
operated
426
2
1
The Bank of Mid-Jersey, Bordentown
Township, N.J.
Acquisition of assets and assumption of
' liabilities
The Hamilton Bank, N.A., Hamilton
Township, N.J.
128
7
25
3
Bank of Utah, Ogden, Utah
Merger
Bank of Brigham City, Brigham City, Utah
124
13
5
2
Bank of Utah, Ogden, Utah
Merger
Bank of Northern Utah, Clearfield, Utah
124
13
8.
1
Bank of Virginia—Richmond, Richmond, Va
Merger
Bank of Virginia, Richmond, Va.
Bank of Virginia—Eastern, Norfolk, Va.
Bank of Virginia—Eastern Shore,
Hallwood, Va.
Bank of Virginia—Loudoun, Sterling, Va.
Bank of Virginia—Petersburg,
Petersburg, Va.
Bank of Virginia—Potomac, Falls
Church, Va.
Bank of Virginia—Shenandoah,
Winchester, Va.
Bank of Virginia—Southwest, Roanoke, Va.
Bank of Virginia—Warren, Front
- Royal, Va.
•
425
j
430
J
|
429
I
431
40
25
1
7
48
1
3
230
23
6
1
330
32
33
2
Chemical Bank, New York, N.Y.
Merger
Chemical Bank of Binghamton,
Binghamton, N.Y.
Chemical Bank—Buffalo, Buffalo, N.Y.
Chemical Bank—Eastern, N.A.,
Greenwich, N.Y.
Chemical Bank of Rochester, Hilton, N.Y.
Chemical Bank of Syracuse, Syracuse, N.Y.
30,576
255
15
2
21
16
3
4
34
15
4
The Connecticut Bank and Trust Company,
Hartford, Conn.
Merger
The Connecticut Bank and Trust Company,
N.A., Norwalk, Conn.
1,981
83
16
3
!
10
691
293
31
For notes see p. 423.
Page for
Attorney
General's
and
Board's
actions
•
129
J
428
•
272
428
86
422
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
Name of bank, type of transaction,
and other banks involved l
The Connecticut Bank and Trust Company,
Hartford, Conn.
Merger
Liberty National Bank, Stamford, Conn.
The Conway Trust Company,
Conway, N.H.
Merger
The Carroll County Trust Company,
Conway, N.H.
The F.B.G. Bank of Mount Sterling,
Mount Sterling, Ohio
Merger
The Sterling State Bank, Mount
Sterling, Ohio
Assets
(millions
of dollars)
1,981
Number of
banking offices
In
operation
To be
operated
3
35
4
7
130
12
48
7
4
1
First State Bank of Miami, Miami, Fla.
Merger
Hialeah—Miami Springs First State Bank,
Hialeah, Fla.
North Hialeah First State Bank,
Hialeah, Fla.
Airport First State Bank, Miami, Fla.
Miami Lakes First State Bank,
Hialeah, Fla.
North Miami First State Bank, North
Miami, Fla.
143
1
113
1
35
1
25
26
1
1
8
1
First Virginia Bank, Falls Church, Va.
Merger
First Virginia Bank/Manassas National,
Manassas, Va.
527
49
For notes see opposite page.
4
1
65
First Virginia Bank—Eastern,
Warrenton, Va.
Merger
Bank of Warrenton, Warrenton, Va.
J
430
1
Merger
Fidelity American Bank, N.A., Tidewater,
Portsmouth, Va.
Fidelity American Bank, Hampton Roads,
Newport News, Va.
Fidelity American Bank, Williamsburg, Va.
86
428
17
Fidelity American Bank, Virginia
432
83
|
29
Page for
Attorney
General's
and
Board's
actions
39
10
427
27
431
6
434
59
429
2
3
2
Tables
423
21.—Continued
Name of bank, type of transaction,
and other banks involved l
Flagship Bank of Tampa, Tampa, Fla.
Merger
Flagship Bank of Town *N Country,
Tampa, Fla.
Flagship Bank of Tampa—East, Tampa, Fla.
Flagship Bank of Lutz, Lutz, Fla.
Hamilton Bank and Trust Company,
Bailey's Crossroads, Va.
Merger
The Bank of Arlington, Arlington, Va.
Metropolitan Bank and Trust Company,
Tampa, Fla.
Merger
American Guaranty Bank, Tampa, Fla.
Nova Bank and Trust Company,
Newport News, Va.
Merger
First City Bank of Newport News,
Newport News, Va.
Savannah Interim Bank, Savannah, Ga.
Merger
Savannah Bank and Trust Company of
Savannah, Savannah, Ga.
Assets
(millions
of dollars)
Number of
banking offices
In
operation
To be
operated
143
1
20
1
18
9
1
1
40
5
15
2
149
2
16
Page for
Attorney
General's
and
Board's
actions
427
4
]
]
424
425
3
1
433
4
20
4
225
11
Southern Bank and Trust Company,
Richmond, Va.
Merger
The Bank of Chesterfield, Chesterfield
County, Va.
231
11
17
4
Southern Bank and Trust Company,
Richmond, Va.
Merger
Williamsburg National Bank,
Williamsburg, Va.
231
14
16
2
Walker Bank & Trust Company, Salt
Lake City, Utah
Merger
American Bank of Commerce, Cedar
City, Utah
641
28
5
1
I-
424
426
15
431
16
424
29
1
Each proposed transaction was to be effected under the charter of the first-named bank. This table
is 2in alphabetical order; the notes appear in chronological order of approval.
This is a newly organized bank, not in operation.
424
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
Walker Bank & Trust Company, Salt Lake City, Utah, to merge with American Bank of Commerce, Cedar City, Utah
SUMMARY REPORT BY THE ATTORNEY GENERAL (12-29-77)
We have reviewed this proposed transaction and conclude that it would not
have a substantial competitive impact.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (2-6-78)
The sole office of the American Bank of Commerce (American Bank) is more
than 200 miles from an office of Walker Bank & Trust Company (Applicant),
and, under Utah law, Applicant could not open a de novo branch in Cedar
City. Aside from American Bank, Cedar City is served by a bank with deposits
of about $17 million and a branch of First Security Bank of Utah, N.A.,
Ogden, which has total deposits of $1 billion. American Bank holds about 7
per cent of the deposits in the Cedar City banking market. The proposed
merger would have no adverse competitive effects.
American Bank was established in 1974 and has experienced numerous problems. Financial factors thus weigh in favor of approval of the application. The
resulting bank will offer expanded banking services to present customers of
American Bank, and the convenience and needs factor weighs in favor of
approval.
Savannah Interim Bank, Savannah, Ga., to merge with Savannah Bank and
Trust Company of Savannah, Savannah, Ga.
SUMMARY REPORT BY THE ATTORNEY GENERAL (1-30-78)
The proposed merger is part of a plan through which Savannah Bank and Trust
Company of Savannah would become a subsidiary of SBT Corporation, a proposed bank holding company. The instant merger, however, would merely
combine an existing bank with a nonoperating institution [Savannah Interim
Bank]; as such, and without regard to the acquisition of the surviving bank by
SBT Corporation, it would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (2-7-78)
The proposal is a transaction to facilitate the acquisition of Savannah Bank and
Trust Company of Savannah by SBT Corporation, a proposed bank holding
company.
The proposed merger would, in itself, have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval
of the application.
Hamilton Bank and Trust Company, Bailey's Crossroads, Va., to merge with
The Bank of Arlington, Arlington, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (2-24-78)
The merging banks are both wholly owned subsidiaries of the same bank holding company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (3-16-78)
Both banks are wholly owned subsidiaries of Central National Corporation,
both having been acquired by that bank holding company in November 1974.
The merger would result in no change in the corporation's relative position in
Tables
425
21.—Continued
the State or in the banking markets involved, and would have no adverse effects
upon competition in the area.
The financial and managerial resources and prospects of the banks proposing
to merge and of the resulting institution are considered consistent with approval
of the application. Considerations relating to the convenience and needs of the
community to be served are likewise consistent with approval to the extent that
a pooling of resources within the merging banks and a reduction of duplicated
services should result in more efficient operations.
The Bank of Mid-Jersey, Bordentown Township, N.J., to acquire the assets
and assume the liabilities of The Hamilton Bank, N.A., Hamilton Township,
N.J.
SUMMARY REPORT BY THE ATTORNEY GENERAL (3-14-78)
We have reviewed this proposed transaction and conclude that it would not
have a substantial competitive impact.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (3-29-78)
The Bank of Mid-Jersey (Applicant) is requesting approval to acquire The
Hamilton Bank, N.A. (Hamilton Bank). Applicant operates 6 offices in
Burlington County and 1 in Ocean County, while Hamilton Bank has 3 offices,
all in Mercer County. All offices of the 2 banks are located in the Trenton
banking market; Applicant holds 4.1 per cent of the market deposits and
Hamilton Bank 1.6 per cent. Although the nearest offices of the 2 banks
are 3V2 miles apart, in view of the condition of Hamilton Bank, as discussed
below, this bank cannot be considered competitive within the market. Moreover, because numerous banking facilities will still remain in the Trenton banking market if this proposal is approved, it is concluded that the competitive
effects of the proposed merger would not be adverse.
Although the general condition of Applicant is satisfactory, Hamilton Bank,
which was established in 1970, has been considered a problem bank since 1974.
This bank has never shown an operating profit, and its capital funds have declined almost $400,000 from 1974 to September 1977.
The condition of the resulting bank, which plans to increase its capital funds
by the sale of $1.5 million in capital notes, is expected to be generally satisfactory. In addition, the range and quality of banking services provided to
customers of Hamilton Bank would be increased.
Banking factors and the convenience and needs factor support approval of
the application, and the proposal would not have adverse competitive effects.
Metropolitan Bank and Trust Company, Tampa, Fla., to merge with American
Guaranty Bank, Tampa, Fla.
SUMMARY REPORT BY THE ATTORNEY GENERAL (2-24-78)
We have reviewed this proposed transaction and conclude that it would not
have a substantial competitive impact.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (4-27-78)
Metropolitan Bank and Trust Company (Applicant) is the 4th largest bank in
the Tampa banking market and holds 5.6 per cent of the total deposits of commercial banks in that market: American Guaranty Bank (American Bank) is the
20th largest and holds 0.8 per cent of the total deposits.
Consummation of the proposed merger would increase Applicant's share of
bank deposits in Florida and in the Tampa banking market by less than 1 per
426
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
cent, and would not change its rank among banking organizations in the State
or in the same market. It would, however, eliminate some direct competition
between Applicant and American Bank, but apparently not by a significant
amount in view of the structure of the market. Many of the State's largest
holding companies are represented in the Tampa market, and collectively there
are 26 banking organizations operating 42 banks. In addition, the Tampa banking market is only moderately concentrated and has experienced a significant
reduction in the concentration of deposits in recent years. The Board therefore
concludes, for the reasons discussed and also based on the record, that consummation of the proposed transaction would have only slight adverse effects
on competition in the relevant market.
Considerations relating to financial and managerial resources are regarded as
consistent with approval of the application. Consummation of the proposed
transaction should lead to the introduction of new and improved services for
customers of American Bank because Applicant plans to introduce a trust department, credit cards, safe deposit boxes, and new consumer services at that
Bank's facility. While these services are now available from Applicant in the
Tampa market, their availability at American Bank's location would increase
the banking services available in the market.
In light of the convenience and needs factors discussed above, the Board
finds that considerations relating to the convenience and needs of the community to be served lend weight toward approval and are sufficient to outweigh
any slight adverse competitive effects that might result from the merger.
Apple Capital Bank, Mount Jackson, Va., to merge with The Stonewall Jackson Bank and Trust Company, Mount Jackson, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (2-24-78)
The proposed merger is part of a plan through which The Stonewall Jackson
Bank and Trust Company would become a subsidiary of F & M National
Corporation, a bank holding company. The instant merger, however, would
merely combine an existing bank with a nonoperating institution [Apple Capital
Bank]; as such, and without regard to the acquisition of the surviving bank by
F & M National Corporation, it would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (5-10-78)
The proposal is a transaction to facilitate the acquisition of The Stonewall
Jackson Bank and Trust Company by F & M National Corporation, Winchester,
Virginia, a bank holding company.
The proposed merger in itself, would have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval of
the application.
Southern Bank and Trust Company, Richmond, Va., to merge with The Bank
of Chesterfield, Chesterfield County, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL
(No report received.)
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (5-31-78)
Southern Bank and Trust Company (Applicant) proposes to merge with The
Bank of Chesterfield (Chesterfield Bank). Applicant is a subsidiary and the lead
bank of Southern Bankshares. Inc., a holding company that owns 3 other banks
and has total deposits of $253 million. Applicant has its main office and 5
Tables
427
21.—Continued
branches in Richmond, 3 branches in Henrico County, and 2 in Chesterfield
County. All 4 offices of Chesterfield Bank are in Chesterfield County.
Offices of both banks are located in the Richmond standard metropolitan
statistical area, which is the relevant market in this case. Applicant's parent
holding company holds 9 per cent of the deposits in its market area and, upon
consummation of the merger, would hold 9.6 per cent. Applicant has 2
branches in Chesterfield County, about 5 miles from offices of Chesterfield
Bank. Some competition does exist between the banks involved in this proposal, but the competitive effect of the merger would be only slightly adverse.
The banking factors are satisfactory and consistent with approval of the
merger. Upon consummation, Chesterfield Bank's offices, as branches of
Applicant, will offer automated teller machines, individual retirement accounts,
overdraft credit, and trust and investment services. The convenience and needs
factor lends weight to approval and outweighs the slight adverse competitive
effects.
Fidelity American Bank, Virginia Beach, Va., to merge with Fidelity American
Bank, N.A., Tidewater, Portsmouth, Va.; Fidelity American Bank, Hampton
Roads, Newport News, Va.; and Fidelity American Bank, Williamsburg, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (4-27-78)
The merging banks are all wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (7-5-78)
All 4 banks involved in this proposal are subsidiaries of Fidelity American
Bankshares, Inc., Lynchburg, Virginia, a bank holding company. Fidelity American Bank, Virginia Beach (Applicant), has also filed a membership application,
and the resulting bank will be a new State member bank with deposits of about
$213 million.
Applicant is the 7th largest holding company in Virginia and controls 5 per
cent of banking deposits in the State.
The proposal would have no adverse competitive effects, and banking factors
and the convenience and needs factor are consistent with approval of the application.
Flagship Bank of Tampa, Tampa, Fla., to merge with Flagship Bank of Towr
'N Country, Tampa, Fla., Flagship Bank of Tampa—East, Tampa, Fla.; ant
Flagship Bank of Lutz, Lutz, Fla.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-14-78)
The merging banks are all wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (8-10-78)
Flagship Bank of Tampa (Applicant), a subsidiary of Flagship Banks, Inc.,
Miami Beach, a bank holding company, proposes to merge with 3 other subsidiaries of Flagship Banks, Inc. The proposed transaction is essentially a
corporate reorganization and, as such, would have no effect on competition.
The application does not involve the acquisition of an additional bank by the
holding company, and, thus, the financial and managerial resources of the
institutions involved are consistent with approval of the application.
428
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
Chemical Bank, New York, N.Y., to merge with Chemical Bank of Binghamton, Binghamton, N.Y.; Chemical Bank—Buffalo, Buffalo, N.Y.; Chemical
Bank—Eastern, N.A., Greenwich, N.Y.; Chemical Bank of Rochester, Hilton,
N.Y.; and Chemical Bank of Syracuse, Syracuse, N.Y.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-14-78)
The merging banks are all wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (8-11-78)
Chemical Bank (Applicant), a subsidiary of Chemical New York Corporation,
a bank holding company, proposes to merge with 5 upstate New York banks
that are also subsidiaries of Chemical New York Corporation. The proposed
merger is essentially a corporate reorganization and, as such, raises no competitive issues. The application does not involve the acquisition of an additional
bank by the holding company, and thus the financial and managerial resources
of the institutions involved are consistent with approval of the application.
The Connecticut Bank and Trust Company, Hartford, Conn., to merge with
The Connecticut Bank and Trust Company, N.A., Norwalk, Conn.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-14-78)
The merging banks are both wholly owned subsidiaries of the same bank holding company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (8-15-78)
The Connecticut Bank and Trust Company (Applicant) and The Connecticut
Bank and Trust Company, N.A. (CBT), are both subsidiaries of CBT Corporation, Hartford, a bank holding company. Since both banks involved in this
transaction are subsidiaries of the same holding company, its consummation
would not eliminate any existing or future competition, or increase the concentration of banking resources; it does not appear that approval of the application would have any adverse effect on other banks within the relevant banking
market.
The financial and managerial resources and prospects of both banks and the
resulting bank are consistent with approval. It is anticipated that the proposed
merger will result in operational economies and a more efficient use of management skills and resources by CBT Corporation. In addition, public convenience in the service area of CBT may be enhanced as a result of access to
services provided by Applicant, including trust and lending facilities. Accordingly, considerations relating to the convenience and needs of the communities
to be served are consistent with approval.
The Conway Trust Company, Conway, N.H., to merge with The Carroll
County Trust Company, Conway, N.H.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-14-78)
The proposed merger is part of a plan through which The Carroll County Trust
Company would become a subsidiary of Indian Head Banks, Inc., a bank
holding company. The instant merger, however, would merely combine an
existing bank with a nonoperating institution [The Conway Trust Company];
Tables
429
21.—Continued
as such, and without regard to the acquisition of the surviving bank by Indian
Head Banks, Inc., it would have no effect on competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (8-25-78)
The proposal is a transaction to facilitate the acquisition of The Carroll County
Trust Company by Indian Head Banks, Inc., a bank holding company.
The proposed merger would, in itself, have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval of
the application.
Bank of Utah, Ogden, Utah, to merge with Bank of Northern Utah, Clearfield,
Utah
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-20-78)
We have reviewed this proposed transaction and conclude that it would not
have a significantly adverse effect upon competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (9-6-78)
Bank of Utah (Applicant) operates 13 offices in the State of Utah but has no
branches in Clearfield, where the sole office of Bank of Northern Utah (BNU)
is located. Applicant's nearest offices are a branch located in Roy City, 6 miles
north of Clearfield, and another in East Lay ton, 7 miles southeast of Clearfield.
There appears to be a slight overlap of the service areas of BNU and the Roy
City office of Applicant. Therefore, consummation of the proposal may result
in the elimination of a minimal amount of competition.
Competition, however, does not appear to be an issue. Utah operates under
home office protection laws, which prohibit Applicant from branching de novo
into the Clearfield banking market. Thus, Applicant's only means of entering
this market appears to be through the proposed merger. Stockholders who own,
directly or indirectly, 78.6 per cent of the outstanding shares of Applicant also
own 68 per cent of the outstanding shares of BNU; Tennessee Homestead
Company owns 48.3 per cent of the outstanding shares of Applicant as well as
24 per cent of those of BNU. Furthermore, 3 directors and 3 officers of Applicant hold the same positions in BNU. Although common ownership may
have resulted in the elimination of some competition, considerations relating to
competitive effects of this proposal are, at most, only slightly adverse. Moreover, it appears unlikely that denial of this application would disrupt the affiliation between these banks.
The range and quality of banking services provided to customers of BNU
would be increased by the merger. To the extent that Applicant's trust department operations, credit card services, check protective service, increased
lending limits, and interbranch banking capabilities would become available to
BNU's customers, public benefit considerations weigh in favor of approval of
the application.
First Virginia Bank—Eastern, Warrenton, Va., to merge with Bank of
Warrenton, Warrenton, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (8-8-78)
The proposed merger is part of a plan through which Bank of Warrenton
would become a subsidiary of First Virginia Banks, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank
with a nonoperating institution [First Virginia Bank—Eastern}; as such, and
without regard to the acquisition of the surviving bank by First Virginia Banks,
Inc., it would have no effect on competition.
430
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (9-6-78)
The proposal is a transaction to facilitate the acquisition of Bank of Warrenton
by First Virginia Banks, Inc., Falls Church, Virginia, a bank holding company.
The proposed merger would, in itself, have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval of
the application.
Bank of Utah, Ogden, Utah, to merge with Bank of Brigham City,
Brigham City, Utah
SUMMARY REPORT BY THE ATTORNEY GENERAL (8-8-78)
We have reviewed this proposed transaction and conclude that it would not
have a significantly adverse effect upon competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (9-20-78)
Bank of Utah (Applicant) is the 8th largest bank in the State and the 3rd
largest in the Ogden metropolitan banking market. Bank of Brigham City
(Brigham Bank) operates 1 branch office in Garland, 20 miles northwest of
Brigham City. The 2 banks serve different banking markets, with the nearest
offices 17 miles apart. They have substantial common ownership and management: 78.6 per cent of the outstanding shares of Applicant are held by owners
of 69 per cent of the outstanding shares of Brigham Bank. The 2 banks also
have 6 directors and 3 officers in common.
The Brigham City banking market, consisting of the counties of Box and
Elder, is served by 4 banking institutions; Brigham Bank's market share of 5
per cent is the smallest. Under the State's home office protection laws, Applicant
is prohibited from branching directly into Brigham City. The Board concluded
that the merger would have no adverse effects on competition.
The area served by both banks has an exceptionally strong economic base,
which should contribute to the continued growth and prosperity of the resulting
bank. And the range and quality of banking services provided to Brigham
Bank would be increased through the proposed merger.
The F.B.G. Bank of Mount Sterling, Mount Sterling, Ohio, to merge with
The Sterling State Bank, Mount Sterling, Ohio
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-31-78)
The proposed merger is part of a plan through which The Sterling State Bank
would become a subsidiary of First Bank Group of Ohio, Inc., a bank holding
company. The instant merger, however, would merely combine an existing
bank with a nonoperating institution [The F.B.G. Bank of Mount Sterling]; as
such, and without regard to the acquisition of the surviving bank by First
Bane Group of Ohio, Inc., it would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (9-20-78)
The proposal is a transaction to facilitate the acquisition of The Sterling State
Bank by First Bane Group of Ohio, Inc., Columbus, Ohio, a bank holding
company.
The proposed merger would, in itself, have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval of
the application.
Tables
431
21.—Continued
Southern Bank and Trust Company, Richmond, Va., to merge with
Williamsburg National Bank, Williamsburg, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (8-28-78)
The merging banks are both wholly owned subsidiaries of the same bank
holding company. As such, their proposed merger is essentially a corporate
reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (9-29-78)
Both banks are subsidiaries of Southern Bankshares, Inc., Richmond, Virginia,
a bank holding company, and thus consummation of the proposed merger
would have no adverse competitive effects.
Banking factors are consistent with approval of the application, as is the
convenience and needs factor. The merger is expected to result in more efficient
operations and additional services.
First State Bank of Miami, Miami, Fla., to merge with Hialeah—Miami Springs
First State Bank, Hialeah, Fla.; North Hialeah First State Bank, Hialeah, Fla.;
Airport First State Bank, Miami, Fla.; Miami Lakes First State Bank, Hialeah,
Fla.; and North Miami First State Bank, North Miami, Fla.
SUMMARY REPORT BY THE ATTORNEY GENERAL (8-30-78)
The merging banks are all wholly owned subsidiaries of the same bank holding
company. As such, their proposed merger is essentially a corporate reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (10-3-78)
The proposed merger involves 5 subsidiaries of First State Banking Corporation, Miami, Florida, a bank holding company, and First State Bank of Miami,
also a subsidiary of First State Banking Corporation. Since all the banks involved are subsidiaries of the same holding company, the transaction would
have no effect on competition. The banks are generally in satisfactory condition
and the banking factors are consistent with approval of the application. While
the merger would have little effect on the convenience and needs of the communities to be served, this factor is also consistent with approval.
Bank of Virginia—Richmond, Richmond, Va., to merge with Bank of Virginia,
Richmond, Va.; Bank of Virginia—Eastern, Norfolk, Va.; Bank of VirginiaEastern Shore, Ha 11 wood, Va.; Bank of Virginia—Loudoun, Sterling, Va.; Bank
of Virginia—Petersburg, Petersburg, Va.; Bank of Virginia—Potomac, Falls
Church, Va.; Bank of Virginia—Shenandoah, Winchester, Va.; Bank of Virginia—Southwest, Roanoke, Va.; and Bank of Virginia—Warren, Front Royal,
Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (7-31-78)
The proposed merger is part of a plan through which Bank of Virginia—
Potomac, Bank of Virginia—Warren, Bank of Virginia—Eastern Shore, Bank
of Virginia—Loudoun, Bank of Virginia—Eastern, Bank of Virginia—Petersburg, Bank of Virginia, Bank of Virginia—Southwest, and Bank of Virginia—
Shenandoah would become subsidiaries of Bank of Virginia Company, a
bank holding company. The instant merger, however, would merely combine
the existing banks with a nonoperating institution [Bank of Virginia—Richmond]; as such, and without regard to the acquisition of the surviving banks
by Bank of Virginia Company, it would have no effect on competition.
432
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (10-6-78)
Bank of Virginia—Richmond is a newly organized bank, which was formed as a
vehicle to merge together the 9 banking subsidiaries of Bank of Virginia Company, Richmond, Virginia, a bank holding company. The resulting bank will
operate under the charter of Bank of Virginia—Richmond and under the title of
Bank of Virginia.
Relative to this proposal, Bank of Virginia Company has submitted an
application for prior approval of the acquisition of Bank of Virginia—Richmond.
The proposed merger is merely a consolidation of the 9 existing banking
subsidiaries of Bank of Virginia Company and, as such, would have no adverse
competitive effects. All the banks involved are generally in satisfactory condition, and the banking factors are consistent with approval. Considerations
relating to the convenience and needs of the communities to be served are also
consistent with approval, to the extent that a pooling of resources within the
merging banks and a reduction of duplicated services should result in more
efficient operations.
The Connecticut Bank and Trust Company, Hartford, Conn., to merge with
Liberty National Bank, Stamford, Conn.
SUMMARY REPORT BY THE ATTORNEY GENERAL (10-13-78)
The closest offices of the 2 institutions are 4.5 miles apart. Although, according
to the application, the primary service areas of the 2 institutions do not overlap,
the parties derive deposits and loans from each service area. As of June 1,
1978, Bank [Liberty National] drew 5.8 per cent of its deposits; 12.1 per cent
of its instalment loans; 14.7 per cent of its residential mortgage loans; and
10.7 per cent of its commercial loans from Applicant's [The Connecticut Bank
and Trust Company] service area. As of the same date, Applicant drew 0.4 per
cent of its deposits from Bank's primary service area. (Information on loans
drawn from Bank's primary service area was not sufficient.) Thus, it appears
that the proposed acquisition would eliminate some direct competition between
the 2 institutions.
Applicant is the second largest bank in Connecticut, with 19.7 per cent of
total deposits, while Bank ranks 35th with 0.2 per cent of total deposits. Although
there are 21 commercial banks in Fairfield County, the market is highly concentrated, with the 4 largest commercial banks holding 71.4 per cent of total
deposits. Applicant and Bank had market shares of 2.2 per cent and 0.6 per
cent, respectively. The Stamford SMSA is also highly concentrated, with the
2 largest banks controlling 63.4 per cent of commercial bank deposits. Applicant
and Bank have market shares of 2.5 per cent and 1.5 per cent, respectively.
Thus, the proposed acquisition would result in slight increases in concentration
in Connecticut, Fairfield County, and the Stamford SMSA.
Connecticut banking law precludes Applicant from branching into Stamford
as a result of the home office protection provision of Connecticut's branching
law (CGSA, Section 36-59). Applicant could enter the Stamford area through
the establishment of a new bank owned by its parent holding company. Given
Applicant's size and economic health, the continued growth of the Stamford
area, and Applicant's presence in contiguous areas of Fairfield County, it
appears to be a primary candidate for de novo entry into Stamford. Such would,
of course, be more competitive since it would introduce a new competitor into
the market, rather than eliminating an existing competitor via merger.
In sum, the proposed acquisition would have a slightly adverse effect on
competition.
Tables
433
21.—Continued
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (11-1-78)
The Connecticut Bank and Trust Company (Applicant) and a Norwalk-based
bank, with deposits of $16 million, are the only 2 banking subsidiaries of
CBT Corporation, a bank holding company. Permission to merge these subsidiaries was recently granted by the Federal Reserve Bank of Boston under
delegated authority. Liberty National Bank (Liberty), which was established
in 1972, operates 3 offices, all in Stamford. Applicant's nearest office to
Liberty's is in Darien, 4.5 miles distant; there are 8 offices of other commercial
banks in the intervening area. The home office protection feature of the Connecticut statutes prevents Applicant from entering Stamford through de novo
branching. There is an insignificant amount of competition existing between
the proponents.
Liberty's offices are in the Stamford-Norwalk section of the New York
metropolitan banking market. Among the 16 commercial banking organizations
represented in the Stamford-Norwalk area, CBT Corporation ranks 8th with
3.2 per cent of area deposits, while Liberty ranks 13th, with 1.1 per cent. In
the New York metropolitan banking market, CBT Corporation would hold less
than 1 per cent of market deposits following consummation of the instant
proposal.
In Connecticut, Applicant now ranks 1st, based on deposit size, among the
State's 61 commercial banking organizations and controls slightly more than
18 per cent of the deposits held by such organizations. Liberty holds only about
0.2 per cent of such deposits. Connecticut also has 65 mutual savings banks.
The over-all effect of the proposed merger on competition is considered
slightly adverse.
Banking factors are consistent with approval, and the convenience and needs
factor lends some weight to approval. For instance, although the area served
by Liberty is also served by several other commercial banks, the proposed
merger would result in an increase in the number of services available at the
offices now operated by Liberty. In addition, the interest rate payable on savings
accounts at Liberty's offices would be increased by 0.5 per cent.
Nova Bank and Trust Company, Newport News, Va., to merge with First
City Bank of Newport News, Newport News, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (10-13-78)
The proposed merger is part of a plan through which First City Bank of
Newport News would become a subsidiary of New Virginia Bancorporation, a
bank holding company. The instant merger, however, would merely combine
an existing bank with a nonoperating institution [Nova Bank and Trust Company]; as such, and without regard to the acquisition of the surviving bank by
New Virginia Bancorporation, it would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (11-29-78)
The proposal is a transaction to facilitate the acquisition of First City Bank
of Newport News by New Virginia Bancorporation, Springfield, Va., a bank
holding company.
The proposed merger would, in itself, have no adverse competitive effects.
The financial and convenience and needs factors are consistent with approval
of the application.
434
Tables
21. Mergers, Consolidations, Acquisitions of Assets or Assumptions of
Liabilities Approved by the Board of Governors during 1978—Cont.
First Virginia Bank, Falls Church, Va., to merge with First Virginia Bank/
Manassas National, Manassas, Va.
SUMMARY REPORT BY THE ATTORNEY GENERAL (11-13-78)
The merging banks are both wholly owned subsidiaries of the same bank
holding company. As such, their proposed merger is essentially a corporate
reorganization and would have no effect on competition.
BASIS FOR APPROVAL BY FEDERAL RESERVE BANK (11-29-78)
Both banks are subsidiaries of First Virignia Banks, Inc., Falls Church, Virginia, a bank holding company that is the State's 6th largest banking organization, with 6.8 per cent of Statewide deposits. Because of common ownership,
the merger would result in no change in the relative position of First Virginia
Banks, Inc., in the State or in the relevant banking markets, and would have no
adverse effects on existing or potential competition in the areas.
The financial and managerial resources and future prospects of the 2 banks
proposing to merge and of the resulting institution are satisfactory and are
considered to be consistent with approval of the application. Considerations
relating to the convenience and needs of the community lend support to
aoproval because the proposed merger would enable First Virginia Bank/
Manassas National to make larger loans without participations; in addition,
there should be a pooling of resources within the merging banks and a reduction
of duplicated services, resulting in more efficient operations and improved
customer services.
* System
BOUNDARIES OF FEDERAL RESERVE DISTRICTS
AND THEIR BRANCH TERRITORIES
1
. 1
I ••
I!
'':-"
Boundaries of Federal Reserve Districts
Boimdairies of Federal Resein/e Brands Territories
Board of Governors of tine Federal Reserve System
Federal llesein/© Bsimk CM©§
Federal Reserve Branch Cities
Federal Reserve
Directories and Meetings
438
Directories and Meetings
Board of Governors of the Federal Reserve System
December 31, 1978
Term expires
G. WILLIAM MILLER, of California, Chairman1
PHILIP E. COLDWELL, of Texas
January 31, 1992
January 31, 1980
Vacant
January 31, 1982
NANCY H. TEETERS, of Indiana
J. CHARLES PARTEE, of Virginia
HENRY C. WALLICH, of Connecticut
January 31, 1984
January 31, 1986
January 31, 1988
Vacant
January 31, 1990
OFFICE OF BOARD MEMBERS
THOMAS J. O'CONNELL, Counsel to
the Chairman
JOSEPH R. COYNE, Asst. to the Board
KENNETH A. GUENTHER, Asst.
to the Board
SIDNEY L. JONES, Asst. to the
Board
JAY PAUL BRENNEMAN, Special Asst.
to
the Board
FRANK O'BRIEN, JR., Special Asst. to
the Board
JOSEPH S. SIMS, Special Asst. to the
Board
DONALD J. WINN, Special Asst. to
the Board
OFFICE OF STAFF DIRECTOR FOR MONETARY AND FINANCIAL
POLICY
STEPHEN H. AXILROD, Staff Director
EDWARD C. ETTIN, Deputy Staff
Director
MURRAY ALTMANN, Asst. to the
PETER M. KEIR, Asst. to the Board
STANLEY J. SIGEL, Asst. to the Board
NORMAND R. V. BERNARD, Special
Asst. to the Board
Board
OFFICE OF STAFF DIRECTOR FOR MANAGEMENT
JOHN M. DENKLER, Staff Director
ROBERT J. LAWRENCE, Deputy Staff
Director
DONALD E. ANDERSON, Asst. Director
for Construction Management
JOSEPH W. DANIELS, SR., Director
of Equal Employment Opportunity
OFFICE OF STAFF DIRECTOR FOR FEDERAL RESERVE BANK
ACTIVITIES
WILLIAM H. WALLACE, Staff Director
OFFICE OF THE SECRETARY
THEODORE E. ALLISON, Secretary
GRIFFITH L. GARWOOD, Deputy
Secretary
LEGAL DIVISION
NEAL L. PETERSEN, General Counsel
ROBERT E. MANNION, ASSOC.
General Counsel
JOHN M. WALLACE, Asst. Secretary 2
RICHARD H. PUCKETT, Manager,
Regulatory Improvement Project
ALLEN L. RAIKEN, ASSOC. General
Counsel
CHARLES R. MCNEILL, Asst. to
the General Counsel
DIVISION OF RESEARCH AND STATISTICS
JAMES L. KICHLINE, Director
JOSEPH S. ZEISEL, Deputy Director
JOHN H. KALCHBRENNER, ASSOC.
Director
JOHN J. MINGO, Senior Research
Division Officer
ELEANOR J. STOCKWELL, Senior
Research Division Officer
JAMES R. WETZEL, Senior Research
Division Officer
JAMES M. BRUNDY, ASSOC. Research
Division Officer
1
The designation as Chairman expires Mar. 7, 1982, unless the services of this member
of the Board shall have terminated sooner.
2
On loan from the Federal Reserve Bank of Atlanta.
Directories and Meetings 439
DIVISION OF RESEARCH AND STATISTICS—Continued
ROBERT A. EISENBEIS, ASSOC.
ROBERT M. FISHER, Asst. Research
Research Division Officer
JARED J. ENZLER, ASSOC. Research
Division Officer
FREDERICK M. STRUBLE, Asst.
Division Officer
J. CORTLAND G. PERET, ASSOC.
Research Division Officer
STEPHEN P. TAYLOR, Asst. Research
Research Division Officer
MICHAEL J. PRELL, ASSOC. Research
Division Officer
LEVON H. GARABEDIAN, Asst.
Division Officer
Director
HELMUT F. WENDEL, ASSOC.
Research Division Officer
DIVISION OF INTERNATIONAL FINANCE
EDWIN M. TRUMAN, Director
DALE W. HENDERSON, Asst.
ROBERT F. GEMMILL, ASSOC. Director
GEORGE B. HENRY, ASSOC. Director
International Division Officer
LARRY J. PROMISEL, Asst.
CHARLES J. SIEGMAN, ASSOC. Director
SAMUEL PIZER, Senior International
International Division Officer
RALPH W. SMITH, JR., Asst.
Division Officer
International Division Officer
JEFFREY R. SHAFER, ASSOC.
International Division Officer
DIVISION OF FEDERAL RESERVE BANK OPERATIONS
JAMES R. KUDLINSKI, Director
WALTER ALTHAUSEN, Asst. Director
BRIAN M. CAREY, Asst. Director
HARRY A. GUINTER, Asst. Director
LORIN S. MEEDER, Asst. Director
DIVISION OF FEDERAL RESERVE BANK EXAMINATIONS AND
BUDGETS
ALBERT R. HAMILTON, Director
CLYDE H. FARNSWORTH, JR., ASSOC.
Director
JOHN F. HOOVER, Asst. Director
P. D. RING, Asst. Director
RAYMOND L. TEED, Asst. Director
CHARLES W. BENNETT, Asst. Director
DIVISION OF BANKING SUPERVISION AND REGULATION
JOHN E. RYAN, Director
FREDERICK C. SHADRACK, Deputy
Director
3
FREDERICK R. DAHL, ASSOC. Director
WILLIAM W. WILES, ASSOC. Director
DON E. KLINE, Asst. Director
ROBERT S. PLOTKIN, Asst. Director
THOMAS A. SIDMAN, Asst. Director
SAMUEL H. TALLEY, Asst. Director
WILLIAM TAYLOR, Asst. Director
JACK M. EGERTSON, Asst. Director
DIVISION OF CONSUMER AFFAIRS
JANET O. HART, Director
NATHANIEL E. BUTLER, ASSOC.
JERAULD C. KLUCKMAN, ASSOC.
Director
Director
DIVISION OF PERSONNEL
ANNE GEARY, Asst. Director
DAVID L. SHANNON, Director
CHARLES W. WOOD, Asst. Director
~OHN R. WEIS, Asst. Director
DIVISION OF ADMINISTRATIVE SERVICES
WALTER W. KREIMANN, Director
JOHN L. GRIZZARD, Asst. Director
JOHN D. SMITH, Asst. Director
OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller
EDWARD T. MULRENIN, Asst.
Controller
DIVISION OF DATA PROCESSING
CHARLES L. HAMPTON, Director
UYLESS D. BLACK, Asst. Director
BRUCE M. BEARDSLEY, ASSOC.
GLENN L. CUMMINS, Asst. Director
Director
3
ROBERT J. ZEMEL, Asst. Director
On loan from the Federal Reserve Bank of New York.
440
Directories and Meetings
Federal Open Market Committee
December 31, 1978
MEMBERS
G. WILLIAM MILLER, Chairman (Board of Governors)
PAUL A. VOLCKER, Vice Chairman (elected by Federal Reserve Bank of New
York)
ERNEST T. BAUGHMAN (elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas)
PHILIP E. COLDWELL (Board of Governors)
DAVID P. EASTBURN (elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond)
J. CHARLES PARTEE (Board of Governors)
NANCY H. TEETERS (Board of Governors)
HENRY C. WALLICH (Board of Governors)
MARK H. WILLES (elected by Federal Reserve Banks of Minneapolis, Kansas
City, and San Francisco)
WILLIS J. WINN (elected by Federal Reserve Banks of Cleveland and Chicago)
OFFICERS
MURRAY ALTMANN,
Secretary
NORMAND R. V. BERNARD,
Assistant Secretary
THOMAS J. O'CONNELL,
General Counsel
EDWARD G. GUY,
Deputy General Counsel
ROBERT E. MANNION,
Assistant General Counsel
STEPHEN H. AXILROD,
Economist
JOSEPH BURNS,
Associate Economist
JOHN M. DAVIS,
RICHARD G. DAVIS,
Associate Economist
EDWARD C. ETTIN,
Associate Economist
IRA KAMINOW,
Associate Economist
PETER M. KEIR,
Associate Economist
JAMES L. KICHLINE,
Associate Economist
JOHN D. PAULUS,
Associate Economist
EDWIN M. TRUMAN,
Associate Economist
JOSEPH S. ZEISEL,
Associate Economist
Associate Economist
ALAN R. HOLMES, Manager, System Open Market Account
PETER D. STERNLIGHT, Deputy Manager for Domestic Operations
SCOTT E. PARDEE, Deputy Manager for Foreign Operations
During 1978, meetings of the Federal Open Market Committee were generally held at monthly intervals. (See "Record of Policy Actions of the Federal
Open Market Committee" in this REPORT.)
Directories and Meetings 441
Federal Advisory Council
December 31, 1978
MEMBERS
District No. 1—HENRY S. WOODBRIDGE, President, Rhode Island Hospital Trust
National Bank, Providence, R.I.
District No. 2—WALTER B. WRISTON, Chairman of the Board, Citibank, N.A.,
New York, N.Y.
District No. 3—WILLIAM B. EAGLESON, JR., Chairman and President, Girard
Bank, Philadelphia, Pa.
District No. 4—M. BROCK WEIR, Chairman and Chief Executive Officer, Cleveland Trust Company, Cleveland, Ohio.
District No. 5—JOHN H. LUMPKIN, Chairman and Chief Executive Officer, The
South Carolina National Bank, Columbia, S.C.
District No. 6—FRANK A. PLUMMER, Chairman of the Board, First Alabama
Bank of Montgomery, N.A., Montgomery, Ala.
District No. 7—EDWARD BYRON SMITH, Chairman of the Board, Northern Trust
Co., Chicago, 111.
District No. 8—CLARENCE C. BARKSDALE, Chairman of the Board and Chief
Executive Officer, First National Bank in St. Louis, St. Louis, Mo.
District No. 9—RICHARD H. VAUGHAN, President, Northwest Bancorporation,
Minneapolis, Minn.
District No. 10—J. W. MCLEAN, Chairman of the Board, The Liberty National
Bank and Trust Company of Oklahoma City, Oklahoma City, Okla.
District No. 11—JAMES D. BERRY, Chairman of the Board and Chief Executive
Officer, Republic of Texas Corporation, Dallas, Tex.
District No. 12—GILBERT F. BRADLEY, Chairman and Chief Executive Officer,
Valley National Bank, Phoenix, Ariz.
OFFICERS
GILBERT F. BRADLEY, President
J. W. MCLEAN, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Associate Secretary
EXECUTIVE COMMITTEE
GILBERT F. BRADLEY
FRANK A. PLUMMER
J. W. MCLEAN
EDWARD BYRON SMITH
WALTER B. WRISTON
Meetings of the Federal Advisory Council were held on February 2-3, May
4-5, September 7-8, and November 2-3, 1978. The Board of Governors met
with the Council on February 3, May 5, September 8, and November 3. The
Council, which is composed of 12 representatives of the banking industry, one
from each Federal Reserve district, is required by law to meet in Washington
at least four times each year, and is authorized by the Federal Reserve Act
to consult with and advise the Board on all matters within the jurisdiction of
the Board.
442
Directories and Meetings
Consumer Advisory Council
December 31,1978
LEONOR K. SULLIVAN, St. Louis, Missouri, Chairman
WILLIAM D. WARREN, LOS Angeles, California, Vice Chairman
ROLAND E. BRANDEL,
San Francisco, California
AGNES H. BRYANT,
Detroit, Michigan
JOHN G. BULL,
Fort Lauderdale, Florida
ROBERT V. BULLOCK,
Frankfort, Kentucky
LINDA M. COHEN,
Washington, D.C.
ANNE G. DRAPER,
Washington, D.C.
CARL FELSENFELD,
New York, New York
JEAN A. Fox,
Pittsburgh, Pennsylvania
MARCIA A. HAKALA,
Omaha, Nebraska
JOSEPH F. HOLT III,
Los Angeles, California
RICHARD H. HOLTON,
Berkeley, California
EDNA DECOURSEY JOHNSON,
Baltimore, Maryland
ROBERT J. KLEIN,
New York, New York
PERCY W. LOY,
Portland, Oregon
R. C. MORGAN,
El Paso, Texas
REECE A. OVERCASH, JR.,
Dallas, Texas
RAYMOND J. SAULNIER,
New York, New York
E. G. SCHUHART II,
Amarillo, Texas
BLAIR C. SHICK,
Cambridge, Massachusetts
JAMES E. SUTTON,
Dallas, Texas
THOMAS R. SWAN,
Portland, Maine
ANNE GARY TAYLOR,
Alexandria, Virginia
RICHARD D. WAGNER,
Simsbury, Connecticut
RICHARD L. WHEATLEY, JR.,
Stillwater, Oklahoma
RICHARD F. KERR,
Cincinnati, Ohio
Meetings between the Consumer Advisory Council and members of the
Koard of Governors were held on March 8-9, May 31-June 1, September
13-14, and December 6-7, 1978. The Council, which is composed of creditors,
consumers, and others, is authorized by the Equal Credit Opportunity Act to
meet periodically to advise the Board on consumer-related matters.
Directories and Meetings
443
Federal Reserve Banks and Branches
December 31, 1978
CHAIRMEN AND DEPUTY CHAIRMEN
OF BOARDS OF DIRECTORS
Federal Reserve
Bank
Boston
New York ..
Philadelphia
Cleveland ..
Richmond . . .
Atlanta
Chicago . . . .
St. Louis . . . .
Minneapolis .
Kansas City .
Dallas
San Francisco
Chairman and
Federal Reserve Agent
Deputy Chairman
Louis W. Cabot
Robert H. Knight
John W. Eckman
Robert E. Kirby
E. Angus Powell
Clifford M. Kirtland, Jr
Robert H. Strotz
Arm and C. Stalnaker
James P. McFarland
Harold W. Andersen
Irving A. Mathews
Joseph F. Alibrandi
Robert M. Solow
Boris Yavitz
Werner C. Brown
Otis A. Singletary
Maceo A. Sloan
William A. Fickling, Jr.
John Sagan
William B. Walton
Stephen F. Keating
Joseph H. Williams
Charles T. Beaird
Cornell C. Maier
CONFERENCE OF CHAIRMEN
The Chairmen of the Federal Reserve Banks are organized into a Conference
of Chairmen that meets from time to time to consider matters of common
interest and to consult with and advise the Board of Governors. Such meetings,
attended also by Deputy Chairmen of the Reserve Banks, were held in Washington on June 13 and November 30-December 1, 1978.
E. Angus Powell, Chairman of the Federal Reserve Bank of Richmond, who
was elected Chairman of the Conference and of its Executive Committee in
December 1977, served in that capacity until the close of the 1978 meetings.
Joseph F. Alibrandi, Chairman of the Federal Reserve Bank of San Francisco,
and Harold W. Andersen, Chairman of the Federal Reserve Bank of Kansas
City, served with Mr. Powell as members of the Executive Committee; Mr.
Alibrandi also served as Vice Chairman of the Conference.
On December 1, 1978, Mr. Alibrandi was elected Chairman of the Conference and of its Executive Committee to serve for the succeeding year; Harold
W. Andersen, Chairman of the Federal Reserve Bank of Kansas City, was
elected Vice Chairman of the Conference and a member of the Executive Committee; and John W. Eckman, Chairman of the Federal Reserve Bank of Philadelphia, was elected as the other member of the Executive Committee.
444
Directories and Meetings
DIRECTORS
Class A and Class B directors are elected by the member banks of the district. Class C directors are appointed by the Board of Governors of the Federal
Reserve System. One term in each class of directors expires each year. Directors are chosen without discrimination as to race, creed, color, sex, or national
origin.
The Class A directors are chosen as representatives of member banks and,
as a matter of practice, are active officers of member banks. Class B and
Class C directors represent the public and are selected with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services,
labor, and consumers. Class B and C directors may not be officers, directors,
or employees of any bank, nor may Class C directors be stockholders of any
bank. Annually, the Board of Governors designates one Class C director of
each Reserve Bank to serve as Chairman of the Bank and one to serve as
Deputy Chairman.
Federal Reserve Bank branches have either five or seven directors, of whom
a majority are appointed by the board of directors of the parent Federal
Reserve Bank. The others are appointed by the Board of Governors of the
Federal Reserve System. The Chairmen of branch Bank boards are selected
from among directors appointed by the Board of Governors.
Term
expires
Dec. 31
District 1—BOSTON
Class A
John Robinson
John Hunter, Jr
Richard D. Hill
Farmington, Maine
President, Vermont National Bank, Brattleboro, Vt
Chairman of the Board, First National Boston
Corporation, Boston, Mass
Class B
A. W. Van Sinderen .. President, The Southern New England Telephone Company, New Haven, Conn
Carol R. Goldberg... President, Stop & Shop Manufacturing Company, Boston, Mass
Weston P. Figgins.... Chairman of the Board, Wm. Filene's Sons
Company, Boston, Mass
1978
1979
1980
1978
1979
1980
Class C
Louis W. Cabot
Chairman of the Board, Cabot Corporation,
Boston, Mass
Kenneth I. Guscott... President, Ken Guscott Associates, Boston,
Mass
Robert M. Solow
Institute Professor, Massachusetts Institute of
Technology, Cambridge, Mass
1978
1979
1980
Directories and Meetings
District 2—NEW YORK
445
Term
expires
Dec. 31
Class A
James Whelden
President, Ballston Spa National Bank, Ballston Spa, N.Y
1978
Ellmore C. Patterson.. Chairman of the Executive Committee,
Morgan Guaranty Trust Company of New
York, New York, N.Y
1979
Raymond W. Bauer... Chairman and President, United Counties
Trust Company, Elizabeth, N J
1980
Class B
John R. Mulhearn.... President, New York Telephone Company,
New York, N.Y
Maurice F. Granville.. Chairman of the Board, Texaco Inc., White
Plains, N Y
William S. Sneath.... Chairman of the Board, Union Carbide Corporation, New York, N Y
Class C
G. G. Michelson . . . . Senior Vice President, Macy's New York,
New York, N.Y
Boris Yavitz
Dean, Graduate School of Business, Columbia
University, New York, N.Y
Robert H. Knight
Partner, Shearman & Sterling, New York,
NY
1978
1979
1980
1978
1979
1980
BUFFALO BRANCH
Appointed by Federal Reserve Bank
Robert J. Donough. .. President and Chief Executive Officer,
Liberty National Bank and Trust Company,
Buffalo, N.Y
M. Jane Dickman
Partner, Touche Ross & Co., Buffalo, N Y . . .
William W. Webber. . Vice Chairman of the Board, Lincoln First
Bank N.A., Rochester, N.Y
William S. Gavitt.... President, The Lyons National Bank, Lyons,
N.Y
Appointed by Board of Governors
Donald R. Nesbitt
Owner, Silver Creek Farms, Albion, N Y . . ..
Frederick D. Berkeley. Chairman of the Board and President, Graham
Manufacturing Company, Inc., Batavia,
NY
Paul A. Miller
President, Rochester Institute of Technology,
Rochester, N Y
1978
1979
1979
1980
1978
1979
1980
446
Directories and Meetings
District 3—PHILADELPHIA
Term
expires
Dec. 31
Class A
James Patchell
President and Chief Executive Officer, National Bank and Trust Company of Gloucester County, Woodbury, N.J
1978
Donald J. Seebold
President, The First National Bank of Danville, Danville, Pa
1979
Wilson M. Brown, Jr.. President and Chief Executive Officer, Southeast National Bank of Pennsylvania, Malvern, Pa
1980
Class B
Harold A. Shaub
President and Chief Executive Officer, Campbell Soup Co., Camden, N J
1978
William S. Masland.. .President and Chief Executive Officer, C. H.
Masland & Sons, Carlisle, Pa
1979
Jack K. Busby
Chairman and Chief Executive Officer, Pennsylvania Power & Light Company, Allentown, Pa
1980
Class C
John W. Eckman
Chairman and President, Rorer Group Inc.,
Fort Washington, Pa
1978
Jean Crockett
Chairman, Department of Finance, University
of Pennsylvania, Philadelphia, Pa
1979
Werner C. Brown.... Chairman, Hercules Incorporated, Wilmington, Del
1980
District 4—CLEVELAND
Class A
Richard P. Raish
John W. Alford
John A. Gelbach
Class B
John J. Dwyer
President, First National Bank, Bellevue,
Ohio
1978
President, The Park National Bank, Newark,
Ohio
1979
Chairman of the Board, Central National
Bank of Cleveland, Cleveland, Ohio
1980
President, Oglebay Norton Co., Cleveland,
Ohio
1978
Charles Y. Lazarus... Chairman, The F. & R. Lazarus Co., Columbus, Ohio
1979
Hays T. Watkins
Chairman and President, Chessie System, Inc.,
Cleveland, Ohio
1980
Directories and Meetings
District 4—CLEVELAND—Cont.
447
Term
expires
Dec. 31
Class C
Otis A. Singletary . . . . President, University of Kentucky, Lexington,
Ky
1978
Robert E. Kirby
Chairman and Chief Executive Officer, Westinghouse Electric Corp., Pittsburgh, Pa. .. 1979
Arnold R. Weber . . . . Provost, Carnegie-Mellon University, Pittsburgh, Pa
1980
CINCINNATI BRANCH
Appointed by Federal Reserve Bank
Robert A. Kerr
Chairman and Chief Executive Officer, Winters National Bank and Trust Co., Dayton,
Ohio
Lawrence Hawkins... .Senior Vice President, University of Cincinnati, Cincinnati, Ohio
William N. Liggett. .. .Chairman of the Board and Chief Executive
Officer, The First National Bank of Cincinnati, Cincinnati, Ohio
W. W. Hillenmeyer, Jr. Chairman and Chief Executive Officer, First
Security National Bank and Trust Company, Lexington, Ky
1978
1978
1979
1980
Appointed by Board of Governors
Martin B. Friedman. . .President, Formica Corporation, Cincinnati,
Ohio
1978
J. L. Jackson
President, Falcon Coal Company, Inc., Lexington, Ky
1979
L. H. Rogers II . . . . President and Chief Executive Officer, Omega
Communications, Inc., Cincinnati, Ohio... 1980
PITTSBURGH BRANCH
Appointed by Federal Reserve Bank
R. Burt Gookin
Vice Chairman and Chief Executive Officer,
H. J. Heinz Co., Pittsburgh, Pa
William E. Midkiff III. Chairman of the Board, The First National
Bank in Steubenville, Steubenville, Ohio..
Peter Mortensen
President, F.N.B. Corporation, Sharon, Pa.. .
William E. Bierer
President, Equibank N.A., Pittsburgh, Pa...
1978
1978
1979
1980
448
Directories and Meetings
District 4—CLEVELAND—Cont.
Term
expires
Dec. 31
PITTSBURGH BRANCH—Cont.
Appointed by Board of Governors
William H. Knoell. . . . President, Cyclops Corporation, Pittsburgh,
Pa
1978
G. Jackson Tankersley. President, Consolidated Natural Gas Company, Pittsburgh, Pa
1979
Lloyd M. McBride.... President, United Steelworkers of America,
Pittsburgh, Pa
1980
District 5—RICHMOND
Class A
J. Owen Cole
Chairman of the Board, First National Bank
of Maryland, Baltimore, Md
1978
Frank B. Robards, Jr. .President, Rock Hill National Bank, Rock
Hill, S.C
1979
Frederic H. Phillips. . . President, New Bank of Roanoke, Roanoke,
Va
1980
Class B
Paul E. Reichardt.... Chairman of the Board and Chief Executive
Officer, Washington Gas Light Company,
Washington, D. C
1978
Andrew L. Clark
President, Andy Clark Ford, Inc., Princeton,
W. Va
1979
Thomas A. Jordan
Secretary-Treasurer, Stuart Furniture Industries, Inc., Asheboro, N.C
1980
Class C
Maceo A. Sloan
E. Angus Powell
Steven Muller
Executive Vice President, North Carolina Mutual Life Insurance Co., Durham, N.C
1978
Partner, Midlothian Company, Midlothian,
Va
1979
President, The Johns Hopkins University, Baltimore, Md
1980
Directories and Meetings
District 5—RICHMOND—Cont.
449
Term
expires
Dec. 31
BALTIMORE BRANCH
Appointed by Federal Reserve Bank
Pearl C. Brackett
Assistant/Deputy Manager, Baltimore Regional Chapter of American Red Cross,
Baltimore, Md
Lacy I. Rice, Jr
President, The Old National Bank of Martinsburg, Martinsburg, W. Va
A. R. Reppert
President, The Union National Bank of Clarksburg, Clarksburg, W. Va
Joseph M. Gough, Jr.. President, The First National Bank of St.
Mary's, Leonardtown, Md
1978
1979
1979
1980
Appointed by Board of Governors
David W. Barton, Jr.. President, The Barton-Gillet Company,
Baltimore, Md
1978
I. E. Killian
President, Killian Enterprises, Inc., Gibson
Island, Md
1979
Catherine B. Doehler . Baltimore, Md
1980
CHARLOTTE BRANCH
Appointed by Federal Reserve Bank
William W. Bruner . .Chairman and President, First National Bank
of South Carolina, Columbia, S.C
1978
Thomas L. Benson . . . President, The Conway National Bank, Conway, S.C
1979
W. B. Apple, Jr
President, First National Bank of Reidsville,
Reidsville, N.C
1979
John T. Fielder
President, J. B. Ivey and Company, Charlotte,
N.C
1980
Appointed by Board of Governors
Robert C. Edwards . . President, Clemson University, Clemson, S.C. 1978
Naomi G. Albanese . . Dean, School of Home Economics, University
of North Carolina at Greensboro, Greensboro, N.C
1979
Robert E. Elberson . . President, Chief Executive Officer and Director, Hanes Corporation, Winston-Salem,
N.C
1980
450
Directories and Meetings
District 6—ATLANTA
Term
expires
Dec, 31
Class A
Sam I. Yarnell
Chairman, American National Bank and Trust
Co., Chattanooga, Tenn
John T. Oliver, Jr. . . . President, First National Bank of Jasper,
Jasper, Ala
Hugh M. Willson . . . . President, Citizens National Bank, Athens,
Tenn
1978
1979
1980
Class B
George W. Jenkins . . Chairman, Publix Super Markets, Inc., Lakeland, Fla
1978
Jean McArthur Davis. President, McArthur Dairy, Inc., Miami, Fla. 1979
Executive Vice President, Southern National
Ulysses V. Goodwyn . Resources, Inc., Birmingham, Ala
1980
Class C
Fred Adams, Jr
President, Cal-Maine Foods, Inc., Jackson,
Miss
1978
C. W. Kirtland, J r . . . . President, Cox Broadcasting Corporation,
Atlanta, Ga
1979
Wm. A. Fickling, Jr. . President and Chairman, Charter Medical
Corp., Macon, Ga
1980
BIRMINGHAM BRANCH
Appointed by Federal Reserve Bank
R. H. Woodrow, Jr. . . Chairman of the Board and Chief Executive
Officer, First National Bank of Birmingham, Birmingham, Ala
Drury Flowers
Chairman, First Alabama Bank of Dothan,
Dothan, Ala
Martha H. Simms
Huntsville, Ala
George S. Shirley
President, The First National Bank of Tuscaloosa, Tuscaloosa, Ala
1978
1979
1979
1980
Appointed by Board of Governors
Frank P. Samford, Jr.. Chairman of the Board, Liberty National Life
Insurance Co., Birmingham, Ala
1978
William H. Martin III. President and Chief Executive Officer, Martin
Industries, Inc., Sheffield, Ala
1979
Harold B. Blach, Jr.. .President, Blach's Inc., Birmingham, Ala. . . . 1980
Directories and Meetings
District 6—ATLANTA—Cont.
451
Term
expires
Dec. 31
JACKSONVILLE BRANCH
Appointed by Federal Reserve Bank
John T. Cannon III .. President, Barnett Bank of Cocoa, N.A.,
Cocoa, Fla
Richard E. Ehlis . . . . Chairman of the Board and President, Florida
National Bank of Lakeland, Lakeland, Fla.
Wm. E. Arnold, Jr. .. President, William E. Arnold Company, Jacksonville, Fla
DuBose Ausley
President and Chief Executive Officer, Capital
City First National Bank, Tallahassee, Fla.
Appointed by Board of Governors
James E. Lyons
President, Lyons Industrial Corporation, Winter Haven, Fla
Copeland D. Newbern Chairman of the Board, Newbern Groves,
Inc., Tampa, Fla
Joan W. Stein
Partner, Regency Square Shopping Center,
Jacksonville, Fla
1978
1979
1979
1980
1978
1979
1980
MIAMI BRANCH
Appointed by Federal Reserve Bank
Sherrill E. Woods
President, First National Bank and Trust
Company of Naples, Naples, Fla
Jane C. Cousins
President, Cousins Associates, Inc., Miami,
Fla
Aristides R. Sastre . . . President, The Republic National Bank of
Miami, Miami, Fla
Fred R. Millsaps . . . . Chairman and President, Landmark Banking
Corporation, Fort Lauderdale, Fla
Appointed by Board of Governors
Alvaro Luis Carta . . . President, Gulf + Western Americas Corporation, Vero Beach, Fla
Castle W. Jordan . .. .President, Aegis Corporation, Coral Gables,
Fla
David G. Robinson .. President, Edison Community College, Fort
Myers, Fla
1978
1978
1979
1980
1978
1979
1980
452
Directories and Meetings
District 6—ATLANTA—Cont.
Term
expires
Dec, 31
NASHVILLE BRANCH
Appointed by Federal Reserve Bank
John W. Andersen . .. President, The First National Bank of Sullivan County, Kingsport, Tenn
1978
Virgil H. Moore, Jr... President, First Farmers and Merchants National Bank, Columbia, Tenn
1979
Frank C. Thomas . . . . President, Stearns Coal and Lumber Company, Knoxville, Tenn
1979
James R. Austin
Chairman and Chief Executive Officer,
Peoples National Bank, Shelbyville, Tenn. 1980
Appointed by Board of Governors
John C. Bolinger, Jr.. . Management Consultant, Knoxville, Tenn . . 1978
Cecelia Adkins
Executive Director, Sunday School Publishing
Board of the National Baptist Convention,
U.S.A., Inc., Nashville, Tenn
1979
Robert C. H.
Mathews, Jr
President, R. C. Mathews, Contractor, Inc.,
Nashville, Tenn
1980
NEW ORLEANS BRANCH
Appointed by Federal Reserve Bank
Wilmore W. Whitmore President and Chief Executive Officer, First
National Bank of Houma, Houma, La. . ..
Martin C. Miler
Chairman of the Board and President, The
Hibernia National Bank, New Orleans, La.
Geo. P. Hopkins, Jr. .. President, George P. Hopkins, Inc., Contractor-Engineers, Gulfport, Miss
Wm. E. Howard, Jr. . . Chairman of the Board, Commercial National
Bank and Trust Company of Laurel,
Laurel, Miss
1978
1979
1979
1980
Appointed by Board of Governors
Edwin J. Caplan . . . . President, Caplan's Men's Shops, Inc., Alexandria, La
1980
Levere C. Montgomery President, Time Saver Stores, Inc., New
Orleans, La
1979
Geo. C. Cortright, Jr. . Partner, George C. Cortright Co., Rolling
Fork, Miss
1980
Directories and Meetings
District 7—CHICAGO
453
Term
expires
Dec. 31
Class A
A. Robert Abboud . .Chairman of the Board, The First National
Bank of Chicago, Chicago, 111
1978
Jay J. Delay
President, Huron Valley National Bank, Ann
Arbor, Mich
1979
John F. Spies
President, Iowa Trust and Savings Bank,
Emmetsburg, Iowa
1980
Class B
Oscar G. Mayer
Paul V. Farver
Arthur J. Decio
Chairman of the Executive Committee, Oscar
Mayer & Co., Inc., Madison, Wis
1978
Vice Chairman, Rolscreen Company, Pella,
Iowa
1979
Chairman of the Board and Chief Executive
Officer, Skyline Corporation, Elkhairt, Ind. 1980
Class C
Edward F. Brabec . . . Business Manager, Chicago Journeymen
Plumbers, Local Union 130, U.A., Chicago,
111
1978
Robert H. Strotz . . . . President, Northwestern University, Evanston,
111
1979
John Sagan
Vice President-Treasurer, Ford Motor Company, Dearborn, Mich
1980
DETROIT BRANCH
Appointed by Federal Reserve Bank
Joseph B. Foster . . . . Chairman of the Board, Ann Arbor Bank,
Ann Arbor, Mich
1978
Chas. R. Montgomery. President, Michigan Consolidated Gas Company, Detroit, Mich
1978
Rodkey Craighead . .. Chairman and Chief Executive Officer,
Detroitbank Corporation, Detroit, Mich. . . 1979
Lawrence A. Johns . .. President, Isabella Bank and Trust, Mount
Pleasant, Mich
1980
Appointed by Board of Governors
Herbert H. Dow . . . . Director and Secretary, The Dow Chemical
Company, Midland, Mich
1978
Jordan B. Tatter . . . . President and Chief Executive Officer, Southern Michigan Cold Storage Co., Benton
Harbor, Mich
1979
Howard F. Sims
President, Sims-Varner Associates, Inc., Detroit, Mich
1980
454
Directories and Meetings
District 8—ST. LOUIS
Class A
Wm. E. Weigel
Term
expires
Dec. 31
Executive Vice President and Chief Executive
Officer, First National Bank & Trust Co.,
Centralia, 111
1978
Raymond C.
Burroughs
President and Chief Executive Officer, The
City National Bank of Murphysboro, Murphysboro, 111
1979
Donald N. Brandin . . Chairman and Chief Executive Officer, The
Boatmen's National Bank, St. Louis, Mo.. . 1980
Class B
Tom K. Smith, Jr. . . . Senior Vice President, Monsanto Company,
St. Louis, Mo
1978
Virginia M. Bailey . . . Owner, Eldo Properties, Little Rock, Ark. . . 1979
Ralph C. Bain
Vice President, Wabash Plastics, Inc., Evansville, Ind
1980
Class C
William B. Walton . .. Vice Chairman of the Board, Holiday Inns,
Inc., Memphis, Tenn
1978
Armand C. Stalnaker. Chairman and President, General American
Life Insurance Co., St. Louis, Mo
1979
William H. Stroube . . Associate Dean of Faculty Programs, Western
Kentucky University, Bowling Green, Ky. 1980
LITTLE ROCK BRANCH
Appointed by Federal Reserve Bank
T. G. Vinson
President, The Citizens Bank, Batesville, Ark.
Field Wasson
President, First National Bank, Siloam
Springs, Ark
B. Finley Vinson . . . . Vice Chairman of the Board, The First National Bank in Little Rock, Little Rock,
Ark
Thos. E. Hayes, Jr. . . President and Chief Executive Officer, The
First National Bank of Hope, Hope, Ark..
1978
1978
1979
1980
Appointed by Board of Governors
G. Larry Kelley
President, Pickens-Bond Construction Co.,
Little Rock, Ark
1978
E. Ray Kemp, Jr
Vice Chairman of the Board and Chief Administrative Officer, Dillard Department
Stores, Inc., Little Rock, Ark
1979
Ronald W. Bailey . . . Executive Vice President and General Manager, Producers Rice Mill, Inc., Stuttgart,
Ark
1980
Directories and Meetings
District 8—ST. LOUIS—Cont.
455
Term
expires
Dec. 31
LOUISVILLE BRANCH
Appointed by Federal Reserve Bank
Tom G. Voss
President, The Seymour National Bank, Seymour, Ind
1978
Fred B. Oney
President, The First National Bank of Carrollton, Carrollton, Ky
1978
Howard J. Brenner . . Vice Chairman of the Board, Tell City National Bank, Tell City, Ind
1979
J. David Grissom . .. Chairman and Chief Executive Officer, Citizens Fidelity Bank and Trust Company,
Louisville, Ky
1980
Appointed by Board of Governors
James H. Davis
Chairman and Chief Executive Officer, Porter
Paint Company, Louisville, Ky
James F. Thompson . . Professor of Economics, Murray State University, Murray, Ky
Richard O. Donegan. .Vice President and Group Executive, Major
Appliance Business Group, Louisville, Ky.
1978
1979
1980
MEMPHIS BRANCH
Appointed by Federal Reserve Bank
Wm. W. Mitchell . . . . Chairman, First Tennessee Bank N.A., Memphis, Tenn,
Stallings Lipford . . . . President, First-Citizens National Bank of
Dyersburg, Dyersburg, Tenn
Earl L. McCarroll . . .President, The Farmers Bank & Trust Co.,
Blytheville, Ark
Chas. S. Youngblood . President and Chief Executive Officer, First
Columbus National Bank, Columbus, Miss.
1978
1978
1978
1980
Appointed by Board of Governors
Jeanne L. Holley . . . . Associate Professor of Business Education
and Office Administration, University of
Mississippi, University, Miss
Vacancy
Frank A. Jones, Jr. . . President, Cook Industries, Inc., Memphis,
Tenn
1978
1979
1980
456
Directories and Meetings
District 9—MINNEAPOLIS
Term
expires
Dec. 31
Class A
John S. Rouzie
Chairman, First National Bank of Bowman,
Bowman, N. Dak
1978
Nels E. Turnquist
President, National Bank of South Dakota,
Sioux Falls, S. Dak
1979
James H. Smaby . . . . President, Commercial National Bank & Trust
Co., Iron Mountain, Mich
1980
Class B
Russell G. Cleary . . . Chairman, President and Chief Executive
Officer, G. Heileman Brewing Company,
Inc., LaCrosse, Wis
1978
James P. McFarland .Secretary-Treasurer, General Manager, Two
Dot Land & Livestock Co., Harlowton,
Mont
1979
Donald P. Helgeson .. Secretary and Vice President, Jack Frost,
Inc., St. Cloud, Minn
1980
Class C
James P. McFarland. .Retired Chairman, General Mills, Inc., Minneapolis, Minn
Sister Generose
Gervais
Administrator, St. Mary's Hospital, Rochester,
Minn
Stephen F. Keating . .Vice Chairman of the Board, Honeywell,
Inc., Minneapolis, Minn
1978
1979
1980
HELENA BRANCH
Appointed by Federal Reserve Bank
George H. Selover .. . President and General Manager, Selover
Buick-Jeep, Inc., Billings, Mont
William B. Andrews .. President, Northwestern Bank of Helena,
Helena, Mont
Lynn D. Grobel
President, First National Bank of Glasgow,
Glasgow, Mont
1979
Appointed by Board of Governors
Patricia P. Douglas .. Vice President-Fiscal Affairs, University of
Montana, Missoula, Mont
Norris E. Hanford .. .Fort Benton, Mont
1978
1979
1978
1978
Directories and Meetings
District 10—KANSAS CITY
457
Term
expires
Dec. 31
Class A
James M. Kemper, Jr.. Chairman and President, Commerce BaneShares, Inc., Kansas City, Mo
1978
Philip Hamm
President, First National Bank & Trust Company, El Dorado, Kans
1979
Craig Bachman
President, First National Bank of Centralia,
Centralia, Kans
1980
Class B
Alan R. Sleeper
Rancher, Alden, Kans
1978
John A. McKinney . . President and Chief Executive Officer, JohnsManville Corp., Denver, Colo
1979
James G. Harlow, Jr. President, Oklahoma Gas and Electric Co.,
Oklahoma City, Okla
1980
Class C
Harold W. Andersen . . President, Omaha World-Herald Company,
Omaha, Nebr
1978
Paul H. Henson
Chairman and Chief Executive Officer, United
Telecommunications, Inc., Westwood, Kans. 1979
Joseph H. Williams . . . Chairman, The Williams Companies, Tulsa,
Okla
1980
DENVER BRANCH
Appointed by Federal Reserve Bank
William H. Vernon . . Director, and Retired Chairman and Chief
Executive Officer, Santa Fe National Bank,
Santa Fe, N. Mex
1978
Delano E. Scott
President and Chairman, The Routt County
National Bank of Steamboat Springs,
Steamboat Springs, Colo
1978
Felix Buchenroth, Jr. . President, The Jackson State Bank, Jackson,
Wyo
1979
Appointed by Board of Governors
Vacancy
1978
A. L. Feldman
President and Chief Executive Officer,
Frontier Airlines, Inc., Denver, Colo
1979
458
Directories and Meetings
District 10—KANSAS CITY—Cont.
Term
expires
Dec. 31
OKLAHOMA CITY BRANCH
Appointed by Federal Reserve Bank
V. M. Thompson, Jr., . Chairman and Chief Executive Officer, Utica
National Bank and Trust Co., Tulsa, Okla. 1978
W. L. Stephenson, Jr.,. Chairman of the Board, Central National
Bank & Trust Co. of Enid, Enid, Okla. . . . 1978
J. A. Maurer
Chairman, Security National Bank & Trust
Co., Duncan, Okla
1979
Appointed by Board of Governors
Harley Custer
General Manager, National Livestock Commission Association, Oklahoma City, Okla.
Christine H. Anthony. Oklahoma City, Okla
1978
1979
OMAHA BRANCH
Appointed by Federal Reserve Bank
F. Phillips Giltner . . . President, First National of Nebraska, Inc.,
Omaha, Nebr
1978
Roy G. Dinsdale . . . . Chairman of the Board, Farmers National
Bank of Central City, Central City, Nebr. 1979
Joe J. Huckfeldt
President, Gering National Bank & Trust Co.,
Gering, Nebr
1979
Appointed by Board of Governors
Edward F. Owen
President, Paxton & Vierling Steel Company,
Omaha, Nebr
Durward B. Varner .. Chairman and Chief Executive Officer, University of Nebraska Foundation, Lincoln,
Nebr
1978
1979
District 11—DALLAS
Class A
Robert H. Stewart III . Chairman of the Board, First International
Bancshares, Inc., Dallas, Tex
Gene D. Adams
President, The First National Bank of Seymour, Seymour, Tex
Frank Junell
Chairman of the Board, The Central
@FedFRASER